Nigeria: Trust and transparency central to pension reform

With the country in the middle of a population boom, planned reforms to Nigeria’s pension system are timely. The legislative overhaul is expected to boost coverage, inject new capital into productive investments and increase accountability. However, implementation may be tricky, both in terms of ensuring compliance with the scheme and finding trained personnel to staff asset management funds.

Under the proposed legislation, which would update the 2004 Pension Reform Act, combined employer and employee contributions to the compulsory pension scheme would rise from 15% to 20% of the employee’s salary. The number of workers in the system is also likely to grow, as firms with as few as three employees will be required to participate, down from the previous five.

These changes will bring more funds into the system, which can then be directed toward long-term investments in the economy, proponents of the new law say, including Senate President David Mark.

“We think that this money could be usefully invested or channeled to a better use so that the nation can benefit. We cry of lack of infrastructure all the time while there are so many funds sitting down there idle for people to embezzle,” he told lawmakers in late May.

This in part highlights the comparatively modest household savings rate in the country, as well as the low levels of buy-in to retirement schemes, but fraud has also been a problem in the past. Employees from a couple of public sector pension funds, including the Police Pension Fund, have been subject to investigations by the Economic and Financial Crimes Commission, which has alleged the illegal diversion of billions of naira. The new law would increase penalties for fraud or misuse of funds, with jail terms of up to 10 years for those found guilty.

Despite these changes, the public may remain sceptical for some time, Adeniyi Falade, managing director of Crusader Sterling Pensions, told OBG. “The mistrust of fund managers still lingers among certain individuals. Stakeholders burned under the old schemes will not be convinced with words. These contributors need to see consistent performance and transparency over a span of time,” he said.

While encouraging public trust and increasing savings may take time, the eventual accumulated capital will certainly help provide the country with a large pool of funds for investment. Given the long-term horizons of traditional pension fund investments, infrastructure works offer a particularly salient opportunity.

Most agree that Nigeria’s infrastructure is in need of an additional capital injection, with the electricity network in particular requiring further investment – given that the 160m person country by some estimates generates less electricity than a large European city – although the new legislation prudently limits contributions to such projects at 20% of assets under management, and additional safety net regulations have been set up.

These types of rules can help reduce the risk of future retirees losing their money, but there is still a need for more qualified pension fund managers, according to Senator Mark. Along with strengthened legislation, the industry requires a deeper pool of trained and experienced managers, he told lawmakers. “I think the problem we’ve had is that we have all sorts of rookies,” he said. “People who have no idea about managing funds, not to talk of very huge pension funds… I think it’s a very specialised area where you cannot just wake up tomorrow morning and be appointed to manage the pension fund.” Educational and training resources for the sector are key for the reforms to succeed.

Equally important is the need to reverse low participation levels. According to Demola Sogunle, CEO of Stanbic IBTC Pension Managers, the number of Nigerians not covered by any form of pension scheme stands at around 54m, out of a work force of about 80m.

This gap is at least in part due to an unwillingness of state governments to comply with the federal system. According to local media reports, “not more than 10 states” out of 36 have enacted their own pension laws, as required by the 2004 legislation, despite the fact that the issuance of state bonds – a lively market in Nigeria – is tied to participation in the pension scheme.

Federal authorities are now taking additional steps to encourage the states to join. The National Pensions Commission, the sector’s regulator, is making a point of visiting state officials to educate them regarding the benefits of the pension scheme for their workers.

The industry is doing its part, having launched public awareness campaigns to attract new contributors, using multiple forms of media, including radio. “Pitching these concepts at the right level is key to addressing those groups in Nigeria with a lower financial literacy, Falade told OBG.

If even a fraction of those not covered by the system were to enrol, this would provide ample opportunities for pension fund managers, both established and new, to build a strong position in the Nigerian market and provide a healthy injection of long-term funds.

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