News Column

Contributory Pension - Scheme Weakened By a 'Toothless' PenCom

August 25, 2014

Geoff Iyatse

BEFORE the contributory pension scheme (CPS) came on board through the instrumentality of the Pension Act of 2004, retirees lived under the mercy of their employers, who had absolute control over their benefits. To no avail, different strategies were adopted to streamline pension matters and curb corrupt practices that sucked allocated funds, leading to the birth of the CPS under the President Olusegun Obasanjo administration. CPS received a legal by the Pension Act of 2004.

Unlike the old system, which was secured by mere government promises, CPS thrives on shared responsibilities, as employers make monthly deductions channeled to the custodian through Pension Fund Administrators (PFAs), while the National Pension Commission (PenCom) implements guidelines, sanction offenders and provide the needed support. And unlike the previous format where employees knew little or nothing about the modality of computing their pensions, the contributory model is as transparent as a conventional bank account, hence it is often described as pension savings

As at last month, the pool hit N4.21 trillion, even as the10-year-old scheme is considered to have recorded a modest achievement, necessitating further review to identify area it could be strengthened.

Against the hearty testimonies, the Pension Act of 2004 had its shortcomings. Employers had blatantly undermined provisions of the act. Also, state and local governments were not legally bound to participate, a deficiency that raises fear about the future of workers of the two tiers of government, considering the dwindling trend of public resources.

Some labour activists also noticed some lacuna in the Act, among which was its seeming silence on the qualification and character of the head of PenCom. The key misgiving is the patronising nature of public appointment. The dominance of patronage over merit in public appointment has been a major issue many feared could creep into the all-important pension supervising authority. The Act, ordinarily, should have clearly specified the criteria for appointing the chief executive and board chairman of the PenCom, but it does not.

There are also cases of ambiguities, such as the specific role of the Pension Fund Custodians (PFC) and what the act implies by the life insurance policy employers are to maintain on behalf of employees. Is the policy supposed to be different from pension or is it just another way of emphasising the pension? In any case, government did little or nothing to compel companies to give employees life policy, supposing it was another employee benefit.

Besides, the Act did little to compel employers to comply with its provisions, while employees could not do much to secure a fair bargain. At its best, it fuelled (and this appeared the biggest 'achievement') the perennial employer-employee distrust.

Many people and advocacy bodies said there was no sufficient deterrent against non-compliance, the major cause of poor implementation of the scheme. Overall, organisations chose whether it would comply or not, while the toothless PenCom relied on moral suasion and empty threats.

There were other sundry limitations. But after a decade of debate over the necessity of reviewing the Act to accommodate new opportunities and strengthen the framework, stakeholders agreed on an amended version, which was, July 1, signed into a law by President Goodluck Jonathan. The advancement of pension scheme and the new industry it creates will depend largely on the enforceability of the amended law. But, in the meantime, does the new Act offer hope? Does it address the loose ends in the original act?

Dr. Ken Ife, a trade consultant, said the reviewed version has made adequate provisions to penalise those that breach the law, arguing that the ammendment sets it apart from the old template. This, he said, would increase compliance while guaranteeing the future of a Nigerian worker.

Whereas the original Act provided for minimal punishment, leading to a record of about 40 million working class people who are yet to register with the scheme, the new version imposes stiffer punishments. For instance, it imposes a fine of N10 million on any PFA, which fails to meet its obligations to contributors. Apart from the imposition on corporate entities, a director of affected firm is to pay a fine of N5 million.

And the Act gives PenCom the power, subject to the Attorney General of the Federation's fiat, to institute criminal proceedings against employers who persistently fail to deduct/or remit pension contributions. Meanwhile, the law says employers have seven working days, counting from the date an employee receives salary, to forward remittance to the appropriate PFA.

Unlike the previous era, employers are to operate what the new law describes as Temporary Retirement Savings Account (TRSA) on behalf of employees who have spent three months on their new job but cannot provide Retirement Savings Accounts (RSA). The TRSA serves as a provisional annuity account pending when the employee provides a permanent account.

Before now, some employers would wait for employees to threaten legal action before they made remittance if they ever did. And in many cases, it was usually after months of grumbling. Unfortunately, the affected employee would have lost potential interest and the savings would have accrued for the period it was warehoused before it would be released.

Some employers hid under the cloak of "no RSA account" to lodge remittances to rob their employees of the benefits. With the new law, employers who indulge in such delayed remittance will be treated as criminals.

As the myriad of excuses for non-compliance gives way, Ife said, employers had no other choice than to conform. He observed that the judicious procedure favours employees, whose costs of litigation would possibly be offset by employers who refuse to explore arbitration option in the event of industrial dispute. He said courts might need to adopt a United Kingdom practice, where firms are compelled to deflate legal bills of their employees even when they win through litigations.

According to him, the emphasis on arbitration by the Act is a big plus to Nigerian workforce, as it would save them from throttlehold of litigation, which is a major challenge to the labour movement. He said employees would not be scared, unlike before, to take up employers over pension disputes.

Despite the improvement, the old talk about having sufficient guarantee in event of liquidation of PFAs may continue. Ife said the right thing would be to have something in the mould of the Nigerian Deposit Insurance Commission (NDIC) to safeguard the savings. He noted that extra safety nets are key to achieving the objective and that if there is no such provision, such as adequate capitalisation of PFAs that must be another costly oversight in the Act.

The pension regime is set for phenomenal growth for two reasons. First, it moved up the minimum rate of contribution from 15 to 18 per cent, while maintaining the prevailing joint responsibility arrangement. But in this case, the employer takes the lion share while employees counter fund the savings to the tune of eight per cent. Where an employer wishes to bear the entire burden, the law says it should remit 20 per cent in favour of the employees.

Many people do not seem to make any sense from the two per cent 'top-up' for benevolent employers. But Ife said the provision was an invitation to companies to show their employees they truly care about their welfare, and that it could be explored for mutual benefits. He pointed out that whereas many companies compensate staff in form of taxable bonuses, retirement savings provide for opportunity to sincerely give succour to workers' since they are tax-free.

And because returns on the savings are not taxed, he noted, employees would be more motivated towards retirement incentives than bonuses.

Now, an individual also has chance to use the 'waiver' clause in the retirement savings to minimise tax exposure. What is required is to divert other savings to RSA, thereby dodging taxes that would be imposed on returns on direct investments. Stakeholders said this provision plus the fact that those who suffer momentary job loss can access 25 per cent of their savings to cushion the impact makes the scheme a robust one.

It also expands the coverage of the contributory scheme to include private sector employers with minimum of three staff. It would be recalled that the old regime was only mandatory for firms with minimum of five employers. With the expansion, PenCom is looking at the N4 billion plus pension fund at over 30 per cent yearly.

Ladi Smith of SIAO Partner, an accounting firm, said the new pension regime, with the cocktail of control, offers robust opportunities for growth and expansion.

Meanwhile, stakeholders are at loss, as government is yet to communicate clearly the implementation date. When contacted, at the weekend, Head of Corporate Communications of PenCom, Emeka Onourah, said could not confirm the date, as the gazette has just been released.

Partner and Head of Tax and Corporate Advisory at PricewaterhouseCoopers Nigeria (PwC), Taiwo Oyedele, had noted that the new Act does not make adequate provision for transition window from the old law except a gazette clearly specifies date different from July 1 when it was assent.

"The Interpretation Act provides that where no date of commencement is contained in an Act, the commencement day shall be the day the Act is passed or signed into law. Unless a commencement date is inserted before the Act is gazetted, the commencement date will be July 1, 2014. This does not give room for transition arrangement and proper planning by affected employers," he noted.

However, he commended the new law for expanding the investment platform of the fund. Apart from the statutory investment options such stocks, real estate and infrastructure, the law empowers PenCom to identify other areas and provide guidelines for investing PFAs.

He also observed that the newly created pension protection fund guarantees a minimum benefit to contributors in the event of shortfall in the investment.

But Henry Boyo, a renowned economist, has a different and upsetting opinion about the entire savings scheme. He noted in his analysis that it would take the country's close-to-10 percent inflation less than 15 years to wipe out any money being saved for the future senior citizen via CPS.

He said the present economic reality does not offer any hope that returns on pension would be attractive enough to compensate for the inflation.

The first step towards guaranteeing the future of Nigerians, including pensioners, is to confront issues that aggravate inflation, Boyo said.

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Source: AllAfrica

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