Government Should Sanction Pension Fund Defaulters — Sogunle

The Chief Executive Officer, Stanbic IBTC Pension Managers, Dr. Demola Sogunle, in this interview with Chris Ugwu, says that the government should enforce the Pension Reform Act to ensure that the contributory pension scheme succeeds. He also notes that recapitalisation of Pension Fund Administrators (PFAs) will result in better services to clients.

What is your take on the pension scam uncovered by the National Assembly?
The investigation that was carried out by the Senate Committee investigating the administration of pensions in the country has certainly shed a lot of light on the inner machinery within the old pension scheme.

The scandals have magnified some of the flaws in the administration of the defined benefits scheme and buttressed the need for the Contributory Pension Scheme with its inbuilt system of checks and balances.

Ultimately, if the recommended solutions to the issues besetting the administration of benefits under the old scheme are implemented, it would result in better pension administration for existing old scheme pensioners.
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Will the recapitalisation of the PFAs to N1 billion give the industry the necessary leverage to underwrite pension properly in the country?

The recapitalisation of the industry will definitely result in better services to clients as the new system is better able to finance the information technology dependent structure of a PFA.

Underwriting the pension industry is an entirely different issue as PFAs are not custodians of pension funds.? Pension Fund Custodians (PFCs) or their parent companies (where the parent company is a licenced financial institution) are required by the Pension Reform Act (PRA) 2004 to issue a guarantee to the full sum and value of pension funds held by them or to be held by them. This requirement to guarantee pension funds in custody is one of the requirements for the grant of licences to PFCs.

Do you think the industry will embrace merger arrangement like what happened in other financial institutions, considering the downturn of the economy?
It is expected that the recapitalisation exercise should result in some mergers; however, the extent to which mergers are embraced in the industry would largely depend on the business strategy of individual PFAs.

What are the benefits of the new pension scheme?
One is the freedom to choose a PFA. Under the new contributory scheme, the choice of a PFA rests solely on the employee, and he has the option to remain with the fund manager even when he changes jobs.

The scheme is also designed in such a way that employees can transfer their RSAs to other PFAs if they are dissatisfied with any PFA’s services. However, this aspect of the scheme is yet to be implemented.

It is more user-friendly. The new system allows contributors access to their account balances through the Internet and other technology-driven platforms.

Efficient customer service and good investment returns are at the heart of the scheme, and the PFAs have had to put systems in place, as well as personnel and services that will ensure that contributors can gain easy access to their accounts, maximise returns to be earned on their retirement benefits over time, and receive their retirement benefits with ease.

What this signifies for the Nigerian worker is the absence of queues. It also means that they do not have to travel long distances to get their pension payments or even to present themselves for periodic pay parades since pension payments are made directly to retirees’ accounts through banks of their choice on a monthly basis. In addition, PFAs are required to have offices across the nation to enable clients to have easy access to their PFAs.

There are other social and economic benefits. The new scheme enhances labour mobility, as workers can move freely from one employer to another without their retirement benefits being negatively impacted.

The PRA 2004 has instilled a savings culture among Nigerians which has created a pool of long-term investible funds for the development of our financial markets and the economy as a whole. The life insurance cover for employees also improves staff welfare, and promotes workers’ commitment and loyalty, while providing adequate cover for a worker’s family should he or she die in service.

Fund withdrawals are protected. Fund withdrawals before the prescribed retirement age of 50 years are protected by the PRA 2004. There are various instances where this can occur – a programmed withdrawal for life, the purchase of an annuity for life, and a lump sum withdrawal.

These requirements ensure that retirement benefits are only available to workers during their old age, except for situations of disability and ill-health. It also ensures that adequate funds are available on a continuous basis to meet recurrent expenditure of retirees throughout their lives.

The Act also enables employees who have been out of employment by way of termination or redundancy and have not secured alternative employment after six months, to access a portion of their retirement savings.

Invested funds are secure. The PRA 2004 stipulates investment guidelines for the management of pension fund assets and requires that PFAs adhere strictly to these guidelines that seek to ensure the security and quality of pension fund assets.

PenCom has also released investment guidelines which generally specify the broad asset categories that are permissible and include maximum exposure limits for each asset category. The guidelines stipulate that assets be invested in investment grade securities issued by institutions with a track record of performance and quality ratings.

PFAs are required to be prudent in the management of pension funds, and Pension Fund Custodians (PFCs) are expected to diligently monitor the investment decisions of the PFAs and provide a guarantee as to the security of pension fund assets.

These guidelines will ensure that contributors’ funds are securely invested and will yield sufficient returns to meet the retirement needs of the workers as pension assets are invested in a manner to ensure reasonable diversification to reduce the risk of long-term investment.

They also ensure that asset allocation among the broad asset classes of fixed income, equities and real estate reflects the need to create liquidity to meet regular withdrawal requirements at retirement.

What differentiates the new pension scheme from the previous scheme?
The new pension scheme is known as a contributory pension scheme and it was established by the Pension Reform Act in 2004. It is a method that ensures that workers’ retirement contributions are remitted regularly by employers, both in the private and public sectors.

In the past, only a few institutions operated the contributory pension scheme, and a good many private sector operators did not institute any sort of retirement scheme for their staff.

The major success of a contributory pension scheme is regularising the process of remitting funds to retirees. Also, under the new pension scheme, no matter what happens to the employer, the contributors’ funds are protected because they are not impacted by the liquidity of the business.

Typically in an unfunded non-contributory scheme, retiree benefits may or may not be remitted, depending on the liquidity of the business. However, in a funded contributory pension scheme, this risk is eliminated, and it can be ascertained early on in the employee’s work life.

Usually, defaulting employers can be compelled to fund the Retirement Savings Accounts of the affected staff. In a funded contributory pension scheme, workers are guaranteed retirement benefits which consist of the contributions made over time and the investment income and appreciation accruing to their RSAs.

Managing and remitting funds under the new scheme has resulted in reduced delays because each retirement savings account is managed separately, which means no undue bottlenecks will be created when it is time for the benefits to be paid out.?????????????????????????????????????????????????????????

What are the major challenges?
One of the major challenges to the success of the scheme in the private sector is the fact that many employees are yet to register with a PFA while some employers fail to remit or are defaulting in remitting contributions into their employees’ RSAs.

The issue of defaulting poses a major challenge to the success of the contributory pension scheme, since it influences the adequacy of benefit payments to participants.? As a result, PFAs are required to report defaulting employers on a monthly basis.

In addition, PenCom, in recognition of its role in enforcing compliance with the provisions of the PRA 2004, has recently licenced recovery agents to ensure collection of outstanding remittances due to employees from defaulting employers.?

A lot of enlightenment is required to ensure that employers and employees understand the benefits of keying into the contributory pension scheme, especially as it is mandatory by law.

Another key challenge to the success of the contributory pension scheme is that 5% of the total monthly wage, which was deemed adequate under the non-contributory scheme to service outstanding pension liabilities of the public sector, turns out not to be so under the new scheme.

Indeed, plans are currently in the offing to amend the law to allow for periodic review of this figure to ensure that the government is able to meet its pension liabilities as and when due.

In what way do you think government can assist, especially those companies that are yet to comply with the scheme?
The major way the government can assist to ensure the success of the scheme is to engender strict enforcement of the provisions of the PRA 2004. The Nigerian government needs to enforce stricter sanctions against defaulting employers.?

Also, as an incentive to contributing employers, the government could?? consider the option of instituting tax incentives to encourage participation in the scheme.

Finally, the eventual phasing out of the non-contributory scheme as anticipated under the Act is also critical to the success of the contributory pension scheme.

What impact will the new scheme have on the nation’s economy?
The new scheme has introduced a nation-wide mass savings culture, which allows PFAs accumulate assets that can be invested in financial markets. This is expected to potentially promote depth and liquidity in the financial markets which is critical to the success of any economy.

Pension fund activities are capable of inducing financial market development through their substituting and complementary roles with other financial institutions, specifically commercial and investment banks.

Worldwide, pension funds are noted to be competing intermediaries for household savings and corporate financing which foster competition and may improve the efficiency of the loans and primary securities markets, resulting in a lower spread between lending rates and deposit rates, and lower costs to access capital markets.?

PFAs also complement banks by purchasing long-term debt securities and investing in long-term bank deposits.

What is the future outlook of IBTC Pension Managers in the next three years?
We intend to remain the number one PFA in the industry in terms of number of clients as well as assets under management. In order to do this, service remains our focal point in the drive for expansion. We will continually work on serving our customers in the best way we can.
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