Nigeria’s abysmal Pension System, where only 12% of workers have pension accounts

Despite having an estimated population of 190 million people, 70 million of whom are actively involved in the labour force, only 8.41 million Nigerians currently make contributions into the country’s Contributory Pension Scheme.

According to the latest report by the National Pension Commission (PenCom), this represents a meagre 12% of the entire working population in Nigeria.

Understanding PenCom’s pension scheme– the Contributory Pension Scheme, which commenced in 2004, focuses on assisting Nigerians with their retirement plans. This is done through the compulsory contribution of a fraction of employees’ monthly salaries, with uniform rules and regulations that ease administration and payment of such retirement benefits.

A breakdown of how Nigerians are using the scheme

Older Nigerians won the least number of accounts – The PenCom report reveals that out of the 8.4 million registered pension account holders, workers above 65 years old make up only 224,258. This represents only 2.67% of the total number of account holders.

Those between 30 and 39 hold the most accounts – Notably, over 36% of all the account holders in the scheme are within the age bracket of 30 and 39 years.

A quick look at the implications of this

Based on the foregoing, it can be seen that a greater proportion of the country’s current retirees (in both the public and private sectors) are not captured in the Nigeria pension scheme.

More so, with only 12% of the country’s entire working population currently contributing to the pension scheme, the remaining 82% will most probably become reliant on the future generations (or government) to take care of them at old age.

Understanding the situation: How PFA invests pension funds 

A Pension Fund Administrator (PFA) is any company licensed by the National Pension Commission, whose responsibility is basically to invest the pension funds in the employee’s Retirement Savings Account (RSA). Statistics have shown that over 73% of the pension funds with the PFA in Nigeria are invested in FGN securities. Similarly, 52% of the funds were invested in FGN bonds, while 19% were invested in treasury bills. Also, PFA invested a meagre 2.7% pension funds in real estate properties and 7% in banks securities.

While it is necessary to save for one’s future, the reluctance of most employers to contribute to employees’ pension scheme and corruption that is endemic in the Nigerian work system has stifled the penetration of pension scheme in Nigeria.

Public-Private Sectors continue their pension sharp practices

Some of the major lacunas in the Nigerian Pension Scheme range from impunity, and the lack to stern enforcement of the Nigerian Pension Commission (NPC) guidelines in order to effectively penalise defaulters in both private and public sectors. Over the years, the Nigerian Government and its pension agency have almost adopted a cosmetic and window dressing approach towards improving the lots of Nigeria’s working population.

PenCom has recently made effort at addressing some of problems – Just recently, after noticing the decay in housing deficit, reports revealed that PenCom (in collaboration with Central Bank of Nigeria and other agencies) is planning to allow pension contributors access 25% of savings in their respective Retirement Savings Accounts (RSA) for mortgage financing.

But how many people will benefit? – While these plans are somewhat laudable, the important question remains – how many workers would this policy benefit? The Nigeria work environment is laced with different boycotts ranging from tax, pension and so on. Most private organisations have their pension boycott plans, by failing to remit their own contributions to employee pension accounts.

The private sector isn’t making contributions to the scheme – Even though the law is stated very clearly, those private entities who default in contributing to employees’ pension accounts are penalised with 2% of funds not remitted. Sadly, there are still several companies failing to remit contributions to the supposed employees’ Pension funds without sanctions meted out against them.

The public sector is also defaulting – Just like the private sector, the public sector is also in the defaulters’ league. It is a known fact that most states and federal owned institutions in Nigeria are culprits to a greater degree. Little wonder Government retirees are constantly protesting, claiming that they are ignored and deprived.

The need for PFA to diversify Pension Fund in order to grow the economy

As earlier stated, Statistics have revealed that 73% of the pension fund is invested in FGN Securities. Indeed, FGN securities are stable investments with low risk. However, they are low yielding. Moreover, the concentration of pension funds in FGN securities implies that some sectors in the economy will continue to nosedive.

Need to diversify PFA investment

Analysts have called for diversification of pension fund into other areas such as infrastructure and real estate. For while report has shown that the Nigerian Government’s bond currently yield 16% interest, it has little or no positive spill-over effect on the overall economy.

Real estate is a good sector to focus attention– Recall that Nairametrics recently predicted windfall for investors in the sector in 2019, despite the challenges facing the sector. Moreover, investments in real estate will have a dual effect on the economy; first, more returns to PFA, and secondly, more houses for Nigerians. This is a good reason why more of the pension funds should be targeted at the real estate sector.

Infrastructure also deserves more attention – Another sector that should be explored  is infrastructure. Currently, PFA investment in infrastructure is just 0.21% of the total pension fund. Investing in infrastructure will yield higher returns both in the short and long term. For instance, investment in a toll-gate infrastructure bond would give higher returns to PenCom.

Lastly, Bonds and Fixed income are adjudged safe instruments because of the sensitivity of the pension funds but going forward, PFA’s need to design new products to suit the customer’s risk appetite.

Source: Nairametrics

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