Presented By
Dr. Pius Apere (PhD
/ FCII)
(Actuarial Scientist/Chartered Insurer)
Deputy Managing
Director
Linkage Assurance
Company PLC
Email: p_apere@hotmail.com
Tel:
+234(0)7086438525
August 2015
Introduction
Nigerian Pensionershave
high expectations on the new Government to ensure an effective implementation of pension regulations existing in the country.
These expectations arise from the need to have sustainable standard of living
in retirement and their benefits paid as at when due.
The different pension
regimes operating in Nigeria,Defined Benefit (DB) and Contributory Pension
(CPS) Schemes, give rise to varyingset of
problems that limit the capacity of key stakeholders within the Nigerian
pension industry to meet pensioners’ expectations.
The key stakeholders
in the pension industry can be grouped into four categories, namely the
regulator (National Pension Commission (PENCOM)), pension operators (Pension
Fund Administrators (PFAs) and Pension Fund Custodians (PFCs)), contributors
(employers including the Government and employees) and beneficiaries (Pensioners).
This paper highlights
the key challenges facing the stakeholders in the pension industry and the
possible solutions from an actuarial perspective.In broad terms, the challenges
arising from different areas of pension management include but not limited to
the following: Transitional Pension Management, Guaranteed Minimum Pension, Additional
Voluntary Contributions, Pension Protection Fund, Investment Guidelines, Public
Education and Enlightenment, Pension Database, Risk Management and Human
capacity development.
Transitional Pension Management
Key Challenges
The current problems
that beleaguered pensioners from Pay-As-You-Go (PAYG) defined benefit (DB) scheme
in Nigeria (which have always been to the fore) include, inter alia:
·
Delayed
or non-payment of pension entitlements.
·
Misappropriation
of existing pension funds(existence of ghost pensioners).
·
Low
standard of living or high poverty incidence among pensioners due to pension increases
not in line with salary inflationin the economy or no pension increase at all.
·
PENCOM
has mandated Pension Transitional Arrangements Directorate (PTAD)(section
42 of PRA 2014) to regularly verify the pensioners registered on its
database with a view to determining their ‘Alive Status’. That is, to conduct,
at least annually, continuous verification of already verified pensioners. Too
frequent verification of pensioners leading to pensioners dying during
verification exercises.
·
Inadequate,
incomplete, misleading pension information being provided to pensioners.
·
Inadequate Enforcement of Pension Regulation–
Over 10 years of existence of CPS, not all State Governments had enacted their
pension Laws to establish CPS which is a sign of regulatory weakness. The
actuarial valuations required by PENCOM at the point to disengage the old DB
scheme in order to implement the CPS have not been carried out even for those
Government public service schemes that have already established their CPS.
Possible Solutions
The establishment of
PTAD and various penalties for pension funds mismanagement introduced by PRA
2014 would address some of the lingering challenges of pensioners in the public
service pension administration in the country.
However, below are
other ways to address the problems described above:
·
Create
pensioners’ biometric database that is suitable for future actuarial valuation,
demographic and financial projections, which would also eliminate ghost
pensioners.
·
Adopt
a pragmatic approach to pensioners’biometric verification process
(a system of self-verification by pensioners capable of automatically updating
the pensioners’ database) having conducted an initial face-to-face verification
in order to minimize the frequency of subsequent face-to-face verification
exercise.
·
An
automation of pension/gratuity calculation and payment system to ensure thatpension
increases are implemented on a timely basis relative to increase in workers’
salaries and also allowingpensioners to receive their pensions/gratuities as at
when due. The Integrated Personnel and Payroll Information System (IPPIS) for
the Federal public service should be emulated at the State and local Government
levels,
·
A
periodic actuarial valuation of the old DB pension scheme as required by law
needs to be carried out in order to ascertain the value of the pensioners’
liabilities at a given date as the scheme runs off. This will enable a
realistic annual pension budget estimate to be made for the Government(s) which
will reduce the insufficient funds being allocated for
pension payment. This would help in the administration of PTAD in minimizing
the delays and arrears in pension payment.
·
PTAD should set up a realistic pension
stabilization fund (to be invested) with the primary aim to stabilize the
pension/gratuity payment system which is always in arrears. This will ensure
that money is readily available to pay the arrears of pension liability.
In
summary, the relevance of professional actuaries and information technology
experts cannot be ignored in the implementation of the above suggested
solutions.
Guaranteed
Minimum Pension (GMP)
Key Challenges
Theguaranteed
minimumpension (GMP), which will be specified from time to time by PENCOM, is a
provision for protecting all Retirement Savings Account (RSA) holders who have
contributed to a licensed Pension Fund Administrator (PFA) for a number of
years but have not accumulated enough to have a decent standard of living in
retirement (Section 84(1) of PRA 2014). Thus, it is anincome support from
the government, which can be considered as a variant of social security policy
that ensures redistribution of resources, to act as a safety net for pensioners.
The modalities for
implementing GMP are yet to be finalized by PENCOMfor more than 10 years after
the CPS was established in Nigeria. The above could be attributed to the
computational complexities involved in determining the GMPthat require
actuarial techniques which might not have been considered importanton the
grounds that such pension funds (DC schemes) are seen as pure investment
accumulation vehicles.
Possible Solutions
The
assessment of the level of GMP to be paid and the cost of guarantees requires stochastic
modelling techniques. This is clearly a
task which should be under the control of an actuary and as such PENCOM should
obtain the relevant actuarial services. There should be regular revision of the
level of GMP in the future.
Additional
Voluntary Contributions (AVC)
Key
Challenges
There is lack of
valuation of an individual member’s DC plan (individual projectionsof likely
pension benefit at retirement) by PFAs with a clear objective to measure
sustainable retirement income (using metrics such as replacement ratio which
represents a sensible estimate of the standard of living in retirement) before
allowing an individual to make his/her choice of AVC. The concept of
replacement ratio provides an effective connection between the accumulation and
de-accumulation phases of a DC plan member’s life cycle.
With the exception of
tax benefit, there is also no incentive for additional savings (AVC) towards
retirement, particularly where there is a minimum guaranteed pension to be
funded by the Government. Thus, there are relatively small RSA balances of some
retirees pending the implementation of GMP. This results in a growing sense of
disenchantment with the token monthly pension benefit being received by
pensioners under the new CPS relative to the huge gains (from investment
returns and dividends) the Pension Fund Administrator (PFAs) are currently
making.
The above arises from
the expectation that all returns on invested funds belong to contributors (employees)
except for the minimal fees/chargesexpected for the pension operators. The lack
of frequent review of fees/charging structure (including the stipulated fees by
PENCOM representing the maximum amounts) chargeable by operators and possible
non-disclosure of hidden charges, interests and commissions accruable to
pension assets might also be the cause of above dissatisfaction.
Possible Solutions
The fees/charging
structure needs to be constantly reviewed by PENCOM in order to eliminate any
hidden charges in order to increase the RSA balances.
There is also a need
for sensitization of potential benefits to workers in making AVC having
considered the expected living standard in retirement.PENCOM should engage Independent Financial Advisers (such
the actuaries) in the sensitization programme.
Pension
Protection Fund (PPF)
Key Challenges
PENCOM had been
mandated to establish and maintain a fund to be known as the Pension Protection
Fund (PPF) for the benefits of eligible pensioners approved or recognized under
section
82(1) of PRA 2014. The PPF requires funding by the Government, PENCOM and Pension Operators but the specific ratio
of funding had not yet been fully worked out for the operators (section
82(2) of the PRA 2014).
Indeed, the funding
of GMPis the responsibility of the government in other jurisdictions (such as
in the UK and Chile, just to mention a few) to ensure that pensioners will not
have less than a certain amount to live on. In Chile the cost of fundingthe GMP
is expressed in terms of the nation’s Gross Domestic Product (GDP). This metric
is more appropriate than a percentage of total monthly wage bill of employees
in the Public Service of the Federation (section 82(1)(a) of PRA 2014) since
private sector employees in CPS who retiree may also qualify for GMP.
On the other hand, the
adequacy of the PPF will be tested if the GMP is fully implemented to take
effect retrospectively, therebyallowing all those who have retired since the
contributory pension scheme was established in 2004 to qualify for the GMP
provided the level of pension in payment is below the GMP to be set by PENCOM.
As employees of
organizations with less than three employees as well as self-employees shall be
entitled to join the CPS (section 2(3) of PRA 2014), the
number of future retirees qualifying for GMP is likely to increase exponentially
over time. Thus, there will be a corresponding increase in futureGMP liability which
is also likely to put a strain on PPF, having considered the funding
methodology in section 82(2) of PRA 2014 in the light of present economic
situation in Nigeria.
Possible Solutions
There is likely to be
an accrued GMP liability already in existence prior to initial funds being set
aside in the Pension Protection Fund leading to an immediate shortfall in PPF. Thus,
a periodic actuarial valuation of the fund would be required to ascertain the
right level of contribution/levy to be imposed in order to meet the future GMP
liabilities.
The assessment of the
cost of guaranteesbecomes an issue for capital adequacy and financial
management of the PPF and the test of capital adequacy will be carried out on
regular basis in line with generally accepted actuarial practice (GAAP).
The number of retirees qualifying for GMP will be reduced
if many employees are encouraged to make AVC and this will reduce the strain on
PPF.
Investment
Guidelines
Key Challenges
Section 86 PRA 2014 makes provision for permissible
investment instruments including real estate development investmentsand
specialist investment funds (e.g. include infrastructure development), subject to guidelines issued by PENCOM. The
dearth of investment outlets is a major problem facing the pension operators,
as it will be difficult to determine an optimal investment mix consistent with
risk profile as required by section 78(3)(b) of PRA 2014.
Thus,
PENCOM should expedite actions on the proposed amendment to the guidelines on
investment of pension assets in order to facilitate the investment of parts of
the over N4.5 Trillion pension funds in
a bankable infrastructure projects in the country. Expediting actions on the
institution of this guideline by PENCOM would, however, ensure adequate
protection and safety of pension funds at all times.
Empirical evidence
shows that Pension Fund Administrators (PFAs)have continued to invest bulk of
pension funds in Federal Government securitiesand money market instruments
relative to equities, leading
to having investment portfolios that are too risk averse.
In other words, most
PFAs are adopting low risk investment strategies without taking into account the
individual members’ risk profiles and therefore, in the long term, are likely
to result in lower emerging pensions than might have been expected of life-style
investment strategies for investment portfolios with different risk
profiles. Furthermore, it has been argued that the over concentration of
pension funds in debt instruments might be limiting the growth potential of the
retirement fund for young pension contributors with long term investment
horizon.
The
dearth in wide range of investible instruments currently being experienced in
the pension industry will hamper diversification within PFAs investment
portfolios with the aim to maximize their investment returns, leading to an
increase in total pension assets. However, the growth in total pension assets
in recent times was as a result of new entrants into the CPS which will lead to
consistent guarantee of pension income from older entrants. Furthermore, the
yield on investment in real terms has been wiped off by the rising inflation
and the devaluation of the national currency.
Possible
Solutions
An actuarial advice
might be needed by the Investment Strategy Committee, which is to be
established by every PFA under section 78 of PRA 2014, in
carrying out its functions. Actuaries should typically have a part to play in
strategic investment decision-making, bringing to bear skills in
asset-liability modelling and stochastic modelling of investment portfolios. In
addition, actuaries can also provide PENCOM with an independent assessment of
the appropriateness of PFAs investment strategies.
There is also the need
to research, structure, develop and invest in alternative asset classes that
have the potential to beat inflation sustainably and this has made a case for
the use of pension fund to finance infrastructure developmental projects.
Public education and enlightenment
Key
Challenges
Actuarial
Involvement in CPS
The traditional
thinking has been that members in DC schemes bear all the risks and rewards and
receive whatever outcomes are produced at retirement. These DC schemes may have
the legal ability to adjust member liabilities including contribution rates
automatically, as asset values move up or down,therefore limiting the need to
immunize asset/liability movements. It is normally assumed that such schemes
have limited or no actuarial involvement.
On the other hand, a DCsystem
such as CPS operating in Nigeria that forces compulsory contribution rates (section
4(1) of PRA 2014) and entails significant tax concessions (section
10 of PRA 2014) should not, under reasonable circumstances, be left to
require members to bear all risks over many decades of membership. Thus, the
introduction of guaranteed minimum pension (GMP) in section 84(1) of PRA 2014
is quite appropriatewith the aim to reduce the risk of volatility of standard
of living in retirement facing the pensioners.Conceptually, the determination
of the GMP and investment strategies to meetaccrued GMP liability requiresan actuarial
methodology.
Knowledge
Gap
The CPS has been
characterized by general misconceptions and knowledge gap. The contributors
(particularly employees with low financial literacy level) are either reluctant
to contribute to the scheme due to lack of investment knowledge (many workers
misunderstand investment returns, expenses, and how each investment vehicle
works) or just because they are unaware of the benefits of such scheme.
Lack
of professional advice
PFAs and insurance
companies are misinforming newly retirees in order to gain undue patronage
under the CPS (i.e. de-marketing each other) instead of allowing the retiring
workers to freely choose their mode of withdrawing their benefits as required
in section
7(1) of PRA 2014.
Thus, lack of
professional advice on the choice of pension benefit options at retirement has
led to more retirees still opting for programmed withdrawal (94,097 retirees) than
life annuity (8,479 retirees) in February 2014. The PFAs have failed in their
duty to enlighten the retirees professionally simply because the programmed
withdrawal is a product of the PFAs (the preferred withdrawal option
recommended) while the life annuity is a product of a licensed Life Insurance
Companies.
Furthermore, the lack
of professional advice has also led to few workers make AVCs and this will
affect their standard of living in retirement.
Provision
of inadequate information
Section 55 (d) of PRA 2014 requires PFAs to
provide regular information on investment strategy, market returns and other
performance indicators to PENCOM and employees or beneficiaries of the
retirement savings accounts and yet this is not fully complied with.
Possible Solutions
There
should be a regular awareness Campaign/Education to sensitize the RSA holders
of the benefits of the CPS by PFAs and the PENCOM.
PENCOM should require Independent
financial advisers (IFAs)to advise the RSA holders at retirement date on the
choice of benefit options. The advice to take either programmed withdrawal or
life annuity should be based on individual circumstances in order to eliminate
the asymmetric nature of retirees’ decision making process of being influenced
by PFAs to buy more of a programmed withdrawal than a life annuity. Regulators
should factor into the overall charges the cost of advice retirees received
from IFAs.
Pension database
Key Challenges
Lack of biometric
database for RSA holders would not enable the take-off of the transfer window
as specified in sections 13 and 14 of PRA 2014. The biometrics capturing
project is aimed at ensuring the integrity of data by eliminating multiple
registrations, a serious challenge to the pension industry.
Many RSA clients’
profiles on PFA biometric databases were outdated and also not complaint with
Automated Finger Identification System (AFIS) standards and specifications.
This makes it difficult for RSA holders to move their accounts from one PFA to
another and/or also for PFAs to seamlessly treat transactions on such RSAs or
communicate with RSA clients.
Section 23(e) of PRA 2014mandates PENCOM to
maintain a biometric database on contributors and retirees in a national data
bank (NDB) domiciled in-house and verification exercise on the RSA clients’
National Databank is carried out on a regular basis in addition to databases
being kept by PFAs for the same clients. Stakeholders are worried about a
possible information overload as a result of the multiple biometric and
verification exercises that Nigerians were being forced to do (such as those
conducted by National Identity Card management commission, Bank verification,
Permanent Voters card etc.).
Possible Solutions
PENCOM
should be able to link up with thePFAs databases from their data bank and
aggregate to give it the desired security identification. The main concern is
the verification of information which has been leveraged on the use of cards
similar to permanent voters card (PVC). The possibility could be explored in
the future to improve on the databank.
PENCOM database needs
to be relevant, credible, reliable andappropriate for pension scheme management
decisions making process as well as for actuarial computations which would
require projections of economic and demographic factors. Therefore, actuarial
inputs are necessary elements in the creation of such a database.
Risk Management
Key
Challenges
Some pension
operators face operational risks associated with receipt of contributions
without appropriate schedule, litigations and non-funding of RSA by
employers.All licensed pension fund operators are mandated to development,
implement and maintain a sound and prudent risk management framework that
comprises policies, procedures and processes, appropriate to nature, scale and complexity
of their operations.
The overall objective
of the risk management framework is to manage the risk of volatility of the
standard of living (which could be measured in terms of replacement ratio or
real income) that each employee can maintain in retirement by virtue of being a
member of the CPS. Thus, the management of this risk is crucial and it is
important that PFAs understand this message clearly.
Possible Solutions
An actuarial advice
would assist the Risk management Committee (which is to be established by every
PFA, as stated in section 78(2) of PRA 2014) in carrying out its functions. In
particular, there is a role for the actuaries in projecting the range of
pension benefits which could be reasonably and/or realistically expected to
emerge from a given contribution rate, taking into account the investment funds
selected.
Human
Capacity Development
Key
Challenges
PENCOM has warned the
PFAs and PFCsbased on section 23(g) of PRA 2014to desist
from employing contract staff (or use of outsourced staff from third parties
who are not properly trained) to perform critical functions such as: pension
administration; benefits administration; fund management and accounting;
settlement, as well as custodial services, in order to avoid fraudulent activities
from third parties.
The
regulator (PENCOM) should also have access to actuarial advice in order to be
properly equipped to monitor and understand the financial and actuarial
conditions of the CPS and pension operator (PFAs), in line with section
24(m) of PRA 2014.
Possible Solutions
Pension operators
should set aside sufficient funds from profits in order to invest more in the
training of their employees. They need to develop a training programme/calendar
on a yearly basis. Thus, indicating the training needs of the employees as well
as ensuring that relevant courses are identified for each employee relating to
their own areas of operation/expertise.
A well trained work
force will help reduce the risk of potential errors, improved the service
delivery that adequately meets the needs of clients and improve the morale of
employees as he/she will have a sense of belonging, ultimately promote loyalty.
The importance of
actuarial expertise required in the management and regulation of pension
schemes whether DB or DC schemes cannot be overemphasized and thus, PENCOM
should initiate/sponsor actuarial training programmes to solve the problem of
dearth of actuaries,as their services are valuable for the management of both
pension regimes in Nigeria.
Conclusion
Thekey challenges facing the pension industry and the
possible solutions highlighted above (if considered and implemented by all
stakeholders) would form the basis for transforming the Nigeria pension
industry to meet the expectation of pensioners and also contribute
significantly to the nation’s economic development, leading to an increase in
the GDP.
Dr.
Pius Apere (FCII, PhD in Actuarial Science), Deputy Managing Director, Linkage Assurance Company PLC
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