Tuesday, August 13, 2019 / 01:09PM /
By Feyi Fawehinmi for Faye & Fraser Briefing Note / Header Image
This is a short story about Nigerian Pensions, seeking to answer the question: what does the future hold for the Nigerian pension industry?
Quick trip down memory lane
Pensions administration in Nigeria dates back to pre-independence when the British Colonial Government created a superannuation (pension) scheme for African staff in 1946. The legal structure for this scheme, called the Pensions Ordinance, was enacted in 1951 with retroactive implementation to 1946. With a legal structure in place for public sector workers, private schemes soon began to spring up with the establishment of a pension scheme for staff of Nigerian Breweries in 1954 and the United Africa Company (UAC) in 1957. This was followed in 1961 with the establishment of the National Provident Fund (NPF) to provide retirement savings for private sector employees. The NPF operated on a mandate that both the employee and employer would contribute a sum of four N4 on a monthly basis with the payment of one-off lump sum benefits at retirement. Further administrative reforms were undertaken in 1979 with the passage of the Pension Reform Act 102, and in 1993 when the Nigeria Social Insurance Trust Fund (NSITF) was established to replace the NPF Scheme.
However, the Nigerian pension system across both public and private spheres was beset by chronic underfunding which came to a head in 2001 during the several failed attempts by the Bureau of Public Enterprise (BPE) to privatise the erstwhile state telecommunications monopoly (NITEL). According to Nasir El-Rufai, the then BPE Director General and now Kaduna state governor, a key stumbling block to the NITEL sale for US$500 million was the size of estimated pension liabilities (N45 billion) owed to NITEL workers. A quick survey across other public corporations revealed significant pension liabilities of N2 trillion which drove the Obasanjo Administration to undertake pension reforms with the passage of the Pension Reform Act 2004, mandating the establishment of a new contributory system along the lines of the Chilean model.
As ever the Nigerian environment repeatedly throws up challenges towards the effective function of the scheme led by none other than the government. In 2014, the Goodluck Jonathan administration via a new law raised the monthly contribution rate to 18 percent - 10 percent for employers and 8 percent for employees.
At state level, compliance is a different ball game as while the legal coverage has improved to 27 out of 36 states, actual pension remittance is behind for most states except Lagos, Edo, Kaduna and the FCT as at the end of 2018. For the remainder…..
Recently, owing to the discovery of a large number of individuals with dual pension fund accounts, the National Pension Commission (PENCOM) mandated that pension fund administrators undertake a data recapture process.
Another issue the industry grapples with is the loss of assets under management to insurance companies with the annuity option.
Going forward, the pension industry will need to deal with the increasing concentration in fixed income, weak compliance at state level and potential loss of money to the insurance industry.
Overall, the outlook speaks to reduced profitability which can only suggest a reduced attractiveness of one of Nigeria’s brightest reform stories of the last 20 years.