By Kenneth Amaeshi
There is an ongoing debate on reforming pensions, yet again, in Nigeria. Since 2004, Nigeria has largely adopted the contributory pension scheme. But as years go by, this system has continued to be gradually chipped away.
One of the currently debated bills, which is making its way into an Act, seeks to amend the 2014 Pension Reform Act to exclude the following members from the contributory pension scheme: the Nigeria Police Force, the Nigerian Security and Civil Defence Corps, the Nigeria Customs Service, the Nigerian Prison Service, Nigerian Immigration Service, and the Economic and Financial Crimes Commission.
This debate builds on the precedence that the military and the Department of State Services – in particular – and some other organisations have, in the last few years, been exempted from the contributory pension scheme.
The argument in favour of the proposed amendments suggests that the personnel of the named organisations above need to be under the defined benefit scheme, where they should receive 100 per cent pension guarantee from the Federal Government. The argument further suggests that this is important given the nature and intensity of the jobs these military and paramilitary professionals do. However, that’s not all to the current squabbles.
Another bill making the rounds at the same time seeks to amend the 2014 Pension Reform Act to allow a retiree withdraw up to 75 per cent of his or her contributions, as a lump sum, upon retirement. This means that only 25 per cent of a retiree’s contribution who chooses this option would be in the pension pot and available for the retiree for life.
It is obvious that these are not slight amendments. If they are realised, the consequences on the pension system, practice, and industry will be far-reaching. They are very likely to dangerously unwind some of the recent benefits of the contributory pension scheme.
One of the key elements of a good pension system is to guarantee fair returns (i.e. to ensure that the returns properly reflect the time value of money) and safety of funds (i.e. to ensure payment of pensions as when due). A good national pension system also guarantees good living and minimises the risks of poverty in retirement. These are some essential points upon which the proposed amendments to the existing system and practice sought to be assessed, in order to properly situate them.
In the first instance, to suggest that some personnel of paramilitary organisations should be exempted from the contributory pension scheme in order to grant them a befitting retirement package is to suggest that the contributory pension scheme is inferior to the defined pension scheme. But how true is this assumption?
Regarding the safety of pension funds, empirical evidence and experience suggest that the defined benefit scheme in Nigeria has in many cases been abused. There have been instances of fraud and brazen embezzlement of funds in a scale unknown to the contributory pension scheme. In addition, there is the possibility of politicians playing politics with the defined benefit scheme by promising pension packages they cannot deliver – a feat they cannot achieve under the contributory pension scheme.
The defined benefit scheme has, also, historically saddled the government with extraordinary debt burdens. In the end, pensioners suffer and bear the burden of such recklessness. The contributory pension scheme, in contrast, protects pensioners from such drastic consequences and empowers them to proactively participate in building their pension portfolios for a rewarding retirement. Given this scenario, it is fair to say that the defined benefit scheme is less safe than the contributory pension scheme.
Furthermore, although the defined benefit scheme promises 100 per cent pension to the pensioner, it may not necessarily guarantee the time value of money in retirement. For instance, a guaranteed pension of N20,000 per month today, may not necessarily have the same value as N20,000 per month in 2030, if not indexed against inflation. It could be more or less. Going by the trend in Nigeria, one can bet that the chances of it being higher in value are very slim factoring in inflation and other factors. In other words, the defined benefit scheme is not as risk-free as it often appears and has been presented.
In comparison, the contributory pension scheme is based on market realities. If properly managed, it can easily be adjusted against inflation, and with proper regulation, it can be well calibrated against risks. From experience, the market remains a better guarantor of fair returns on pension and is more efficient than the government. This is evidence-based and is reflected in some of the recent and ongoing changes in pension practices and systems in many developed economies.
The defined benefit scheme, beyond being riskier and less safe than the contributory pension scheme, introduces the problem of unfairness in employment conditions. Assuming for once that the defined benefit scheme is better than the contributory benefit scheme, why would a responsible government place some employees on it and not all? Assuming that it is worse than the contributory pension scheme, again, why place some employees on it and not all? If so, why would it be necessary for a government to create a two-tier system for her employees?
Either way, the proposed bill is trapped in a web of unfairness, which could undermine the current pension system. This unfairness can never be a solution to the perceived challenges of the current pension system.
As has been advocated by some people, if the lawmakers think that the personnel they are interested in need to be properly remunerated, then, that’s a different matter from the one they are pursuing. They should, for instance, make the argument for their salaries and other rewards to be reviewed. That way, they can have an enlarged pension pot.
They can also increase the minimum monthly pension contributions to, perhaps, 20 per cent of employees’ salaries and bear the financial burden of the total monthly contributions; such that there are no monthly pension deductions from such employees’ monthly salaries.
These options can be done without necessarily changing the current pension arrangement.
Secondly, but briefly, the argument for 75 per cent of pension contributions to be accessed as lump sum at retirement is equally dangerous. Although it may sound attractive and appealing, it may not make much sense in an environment where pension literacy, in particular, and financial literacy, in general, are at their lowest ebb. While it comes across as a way to empower contributors to be in control of their money and possibly make better use of it, the proposed amendment could actually plunge them into an unimaginable retirement poverty, given that the risks of mismanagement of the funds, primarily due to low literacy, are currently high.
There is, also, the tendency to live longer, which the proposed amendment tends to take for granted. Poverty in retirement is a scourge. The current arrangement of the contributory pension scheme is better equipped to minimise the risks of poverty in retirement than the amendment proposed. At least, it leaves a larger proportion of the funds under management and takes the possibility of longer living seriously. However, the government may want to change the current practice of 25 per cent of pension contribution, as lump sum, to 35 per cent or 40 per cent – but this needs to be evidence-based.
From the foregoing, it is fair to conclude that the current pension system is robust enough to accommodate any changes within in, as opposed to threatening to dismantle it. Despite the seeming appeal of the defined benefit scheme, it simultaneously comes across as a backward journey into history and an unprepared leap into the future. This is dangerous.
History is full of hindsight, which should guide present and future choices. There is no point reinventing the wheel.
In all things, virtue lies in the middle, according to Aristotle. Hopefully, the lawmakers can take solace in this ancient wisdom as they press forward.