Wednesday, September 26, 2018 / 09:12 AM / FDC Research
It is becoming more and more apparent that Nigerian workers are not preparing for retirement. Of the 69 million people in the Nigerian labor force, only seven million have pension accounts. This represents approximately 10% of the labor force, leaving 90% potentially reliant on future generations – or the government – to take care of them when they are older. Moreover, most pension account holders in the country are aged between 30 and 49.
In a country where over half the population is below 30, you would expect that age group to account for a considerable proportion of pension accounts. In contrast, the US pensioned population accounts for more than 50% of its working age population and the number is over 70% in the United Kingdom.17,18 While saving for one’s future may seem like a necessary activity, a lack of confidence in the Nigerian system - due to issues of governance and corruption, employers' inability to contribute to pensions, and poor performance on pension returns – significantly constrains pension penetration in Nigeria.
Sharp Practices by Employers
The inadequate and untimely release of funds by employers has dampened confidence in the system and resulted in the delay or outright denial of pension rights in Nigeria. The accumulating arrears and unsustainable payments have subjected retirees to undue hardships, while many have died without being able to get their entitlements. The Pension Commission is in the process of introducing biometric authentication, while the Central Bank of Nigeria is rolling out digital identification. This should go a long way to boost confidence in the system.
Another major reason for low pension penetration is the poor provision by businesses. Private sector businesses often believe they do not have to provide their employees with pension plans, preferring not to accumulate the extra cost of putting a plan in place. However, the law deems it mandatory if you have over 15 employees.19 For employers that do have pension plans, there are several anecdotes of private employers failing to remit their contributions to employee pension accounts. Most are confident that they will not be penalized, even though the law stipulates a 2% penalty on unremitted funds.
This might reflect the historically high level of impunity in the country and lax enforcement by regulators. Recently, however, the National Pension Commission has attempted to penalize companies. In April 2018, it reported that employers were forced to pay over N6 billion in penalties for deducting funds from employees' salaries and not remitting them to their retirement accounts. This is a step in the right direction, but there are still a lot of organizations that are yet to remit their employees’ funds.
Return on Pension Investments
While corruption and impropriety on the part of employers is certainly a problem, the elephant in the room when it comes to Nigeria's pension industry is returns on investment. Returns have barely covered the high inflation rate over the years, meaning that people's savings are effectively losing value. The challenge is that pension fund administrators (PFAs) have traditionally invested in safe but low-yielding government securities. As at April 2018, 70% of PFA funds were put in government securities.
The hope is that new pension legislation would encourage PFAs to diversify their investments in order to get higher returns.20 The 2014 Pension Reform Act gave PFAs the permission to invest in alternative assets. A multi-fund system was also recently introduced, allowing PFAs to manage their assets according to the savers’ ages. Fund managers investing for younger members are allowed to take on more risk and invest in equities, real assets and private equity. Furthermore, funds aimed at younger savers can place up to 75% of assets in instruments other than government securities. Another way of getting higher returns would be by funding Nigeria's infrastructure.
The idea of pension fund investment has gained grounds in recent years as pension fund managers seek to expand their investment frontier beyond the traditional asset classes in a bid to diversify risk and returns. Given the high risk associated with long gestation period infrastructure projects, returns on this type of investment are typically high.
The country's infrastructure deficit has been discussed at length, and it would be reasonable to dedicate a portion of pension funds to plug this infrastructure deficit, particularly as pensions are long term investments allowing the funds to be retained for years. This will provide a huge pool of long term funds available for investments, which will lead to national economic development. In order to boost pension penetration, awareness about the benefits of having a pension fund needs to be raised.
This presents a challenge because low enrolments levels are largely due to the large informal structure of the Nigerian economy. However, the outlook is bright. Since July 2016, the Federal Government has implemented a slew of reforms aimed at making it more attractive for small scale entrepreneurs to register their businesses.
Policies that make it easier for small firms to enter the market, improve access to finance, pay taxes and improve electricity connections, could go a long way in formalizing the informal sector and ultimately boosting pension penetration. In terms of attracting higher returns of investment, the new multi-fund system is expected to prompt a gradual shift away from investing in low-yielding assets.