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Fears over amendment of Pension Reform Act

By on September 25, 2017

Presently, there are some bills before the National Assembly, aiming to amend some sections of the Pension Reform Act 2014.

One of the bills which seek to exclude members of the Nigeria Police Force, the Nigeria Security and Civil Defence Corp, Nigeria Custom Service, Nigerian Prison Service, Nigeria Immigration Service and the Economic and Financial Crimes Commission from the Contributory Pension Scheme and other related matters was sponsored by Mr. Oluwole Oke.

If exempted, these groups will go back to the Defined Benefits System, where pension liabilities would be fully borne by the Federal Government from budgetary allocations.

It would be recalled that the military, the Department of State Security and the Nigeria Intelligence Agency exited the CPS in 2011.

The National Pension Commission had decried that the DBS was not sustainable as exempting the military, DSS and NIA had resulted in very high allocation of resources to fund their retirement benefits.

According to the figures from the commission, various Appropriation Acts since their exemptions revealed that their combined allocations were 49.4 per cent, 49.1 per cent, 45.1 per cent, 41.99 per cent and 43.1 per cent of total allocations for pensions in the 2013, 2014, 2015 and 2016 Appropriation Acts as well as in the 2017 Appropriation Act respectively.

The commission noted that these figures were staggering and clearly unsustainable if the personnel of the police and other paramilitary agencies were to be exempted, in view of the fact that the number of police personnel was significantly higher than the number of the personnel of the three exempted agencies combined.

According to the commission, the exemption of the police and paramilitary agencies will lead to the dismantling of the institutions, systems and processes that government had put in place in the last few years towards the implementation of the pension reform programme, including the culture of national savings as well as the efforts to eradicate the structures that encouraged corruption during the pre-pension reform era.

It added that an immediate negative impact of the exemption of the police and other paramilitary agencies is that it will unsettle the government’s fiscal policy and financial system stability.

PenCom noted that about 70 per cent of the N6.4tn pension assets have been invested in Federal Government Securities; Exempting some government agencies would therefore lead to divestment from the FGN securities before maturity, which would have ripple effects on not only the finances of the government but also on the entire financial system.

The pension regulatory body noted that another immediate negative impact of exempting these agencies is the erosion of the pool of long term investible funds accumulated under the CPS, which is suitable for economic development of any nation as obtainable in other developed economies.

It noted that this would undermine the process of attainment of development initiatives in the infrastructure, housing and real sectors of the economy, which are largely hinged on the utilisation of a portion of the pool of pension fund assets.

The commission said the pension industry had actively participated in the establishment of the Nigeria Mortgage Refinancing Company and had already invested N83.36bn in its securities and other mortgage refinancing initiatives of the Federal Government.

According to the Head, Research, and Strategy Management, PenCom, Dr. Aminu Farouk, the PRA was introduced in 2004 in order to address the myriad of problems bedevilling the pension system in Nigeria and to provide stable, predictable and adequate source of retirement income for each pensioner.

He noted that within 12 years of its implementation, the CPS had stemmed the growth of outstanding pension liabilities of the Federal Government.

Farouk said, “The CPS has already reduced fiscal cost to the government, stimulated domestic savings, generated pool of long term funds for developmental projects and increased private investment in Nigeria.”

PenCom, however, noted that due to some implementation challenges, there had been clamour among certain Federal Government agencies for exemption from the CPS, but that the issues were essentially on the quantum of retirement benefits which they believed should be enhanced.

The commission faulted the bill seeking to exempt the police and other paramilitary organisations because it is unable to present clear justifications on affordability and sustainability of the proposal.

On the contrary, it said, the bill seeks to increase pension liability to the already overstretched and overburdened resources of the Federal Government.

“Currently, 26 state governments that adopted the CPS and pension funds had invested in bonds issued by these states, which means that any shock would break the confidence that drove these states to adopt the scheme and would have a crippling effect on their ability to raise finances to execute their developmental programmes through bonds, which are cheaper and long term than borrowing from banks,” the commission stated.


Figures obtained from the commission also revealed that the Federal Government’s annual pension liabilities may rise above N474.12bn if the police and other paramilitary agencies exit from the CPS.

According to the figure on the 2016 Appropriation Act which made a provision under the service wide vote of N200.17bn as total pension and gratuities allocation under the DBS, the Federal Government is already overburdened with the payment of pension.

Pension operators have said that the allocation is still insufficient to fund the pension liabilities of the Federal Government.

The 2016 Pension Transitional Arrangement Directorate’s budget proposal indicated that a total annual pension liability of N388.32bn constituted unfunded liability, which was inherited by PTAD mostly due to outstanding payments for 33 per cent pension arrears to pensioners under the DBS.

PTAD had indicated that there had been no provisioning for the unfunded liabilities in the past, which now forms part of its core pension obligation.

According to the figures from PenCom, the Federal Government’s pension liability burden under the DBS is much higher than the PTAD proposals in view of the provisioning of about N74.5bn for the military Pension Board, N7.4bn for the State Security Service and N3.7bn for the National Intelligence Agency.

Instead of breaking away from the CPS, experts in the pension industry have said the agitations of contributors could still be addressed within the framework of the CPS.

Lump sum

Another proposed amendment to the pension law is a bill to further amend the Pension Reform Act CAP LFN 2004 to provide for definite percentage a retiree can withdraw from their Retirement Savings Account and for other matters related thereto, a bill sponsored by Senator Aliyu Wamako.

The Pension Fund Operators Association of Nigeria noted that section 7(1) of the PRA 2014 deals with the modes of accessing the RSA upon retirement or attaining the age of 50 years, whichever is later.

It noted that the new bill seeks to amend a section of the act by allowing retirees to withdraw up to 75 per cent as lump sum, irrespective of whether or not the balance would be sufficient to procure a programmed withdrawal or annuity for life.

The Chairman, PenOp, Mr. Eguarekhide Longe, noted that one of the objectives of the CPS was to assist imprudent individuals by ensuring that they saved enough to cater for their living during old age.

He said that the proposed amendment would mean leaving only 25 per cent to be spread over the lifespan of a retiree, which may be longer than 20 years, thus, giving a meagre monthly pension below the current replacement ratio of a minimum of 50 per cent of last pay.

“It is doubtful if the 25 per cent balance in a retiree’s RSA after deduction of 75 per cent lump sum would, if spread across the retiree’s expected lifespan, be adequate to reasonably cater for their living during old age,” he said.

According to him, the amendment will only result in the depletion of the RSA without regard for the retiree’s continued subsistence, thereby impoverishing the pensioner, which may defeat the objective of the CPS.