IT was a painful report: No African country ranked among the top 10 in global pension.
Worse still, Nigeria ranked 64th in the globe in the first Allianz Group survey entitled: “Global Pension Report”.
Allianz is a world leading insurer and asset manager with over 100 million customers in more than 70 countries.
Nigeria has the Contributory Pension Scheme (CPS). Established by the Pension Reform Act (PRA) 2004, replaced by the PRA 2014, the CPS is funded, but managed by the Pension Fund Administrators (PFAs), licensed by the National Pension Commission (PenCom).
The fund, which stood at N10.52 trillion at February 2020, is based on private Retirement Saving Accounts (RSA).
The report was based on Allianz Pension Indicator (API) and three pillars,which took into account 30 parameters, rated on a scale of one to seven.
According to the report, Sweden, Belgium, and Denmark are the best pension systems. Nigeria ranked 64th after South Africa’s 41st, Kenya 55th and Morocco 60th, especially because of the insufficiency of its system.
The coverage of the pension system is still very low and limited access to financial services hampers the build-up of sufficient private old-age savings to cushion the lack of the public pension pillar.
On sustainability, Nigeria ranks also in the bottom third. The harmonisation of the retirement ages of the various professions and adjusting the retirement age in line with future gains in life expectancy would improve the long-term sustainability of the pension system further.
Nigeria’s youngest population, however, puts it at advantage.
The report stated that among the analysed countries, Nigeria has by far the most comfortable starting position, especially because it has one of the youngest populations worldwide.
Nevertheless, the number of people aged 65 and older is set to increase from 5.6 million to around 16 million in 2050. Thus, there is a need for a pension system with a broad coverage.
Chief Economist, Allianz Ludovic Subran said demographics and pensions have been eclipsed by other policies, which include climate change and the fight against Covid-19 pandemic.
He said: “But you ignore demographics at your own peril, demographic change will soon be back with a vengeance.
“For instance, it will be faster than in the last 70 years since 1950. In many emerging economies the ratio is going to more than double within the next three decades, that is, in less than half of the time this development took in Europe and Northern America.
The most prominent example is China where the ratio is going to increase from 17 per cent to 44 per cent. For industrialised countries, however, the absolute level of this ratio is the main reason for concern, reaching, for example, 51 per cent in Western Europe.
The report further stated that this development is reflected in the first pillar of the API, called the starting points, which combine demographic change and the public financial situation or financial leeway.
It states: “Not surprisingly, many emerging countries in Africa score rather well as the population is still young and public deficits and debts are rather low.
On the other hand, many European countries, such as Italy and Portugal, are among the worst performers: Old populations meet high debts.”
Author of the report, Michaela Grimm said for most industrialised countries, the old Scottish joke applies: “If I were to build a stable pension system, I certainly wouldn’t start from here.”
“And that is the situation before the coronavirus and its tsunami of new debt. One of the legacies of the current crisis will certainly be that we have to double our efforts to reform our pension systems. What had remained of financial leeway has gone for good.
“The second pillar of the API is sustainability, measuring how systems react to demographic change: Are there built-in stabilisers or will the system be blown apart when the number of contributors fall while that of beneficiaries keeps rising? The third pillar of the API rates the adequacy of a pension system, questioning whether it provides an adequate standard of living in old age.
Important levers are the coverage ratio. However, capital-funded retirement solutions are under increasing pressure in the persisting low interest rate environment. The pandemic has further exacerbated this trend by further pushing down yields.’’
Head of Global Retirement Proposition at Allianz SE, Cameron Jovanovic added that the low-yield environment has forced pension funds and life insurers to explore alternative asset classes.
“Another strategy is to offload risk rather than chasing returns as longevity swaps, pension risk transfers and creative reinsurance set-ups become means of optimising the exposure taken on by pension funds and insurers.”
“Nigeria ranks on the 64th place, especially because of the insufficient adequacy of its pension system.The coverage of the pension system is still very low and limited access to financial services hampers the build-up of sufficient private old-age savings to cushion the lack of the public pension pillar.With respect to sustainability, Nigeria ranks also in the bottom third.
The harmonisation of the retirement ages of the various professions and adjusting the retirement age in line with future gains in life expectancy would improve the long-term sustainability of the pension system further.
Among the analysed countries Nigeria has by far the most comfortable starting position, especially due to the fact that it has one of the youngest populations worldwide. But nevertheless, the number of people aged 65 and older is set to increase from 5.6 million to around 16 million in 2050.
Thus, there is a need for the introduction of a pension system with a broad coverage and for further improvement of the access to financial services. ‘’
Director, Centre for Pension Right Advocacy, Ivor Takor noted: “This is not surprising because Nigeria, like other emerging economies in Africa, has a young and active population, while public deficits and debts are rather low, compared with other countries.
That Nigeria was scored 4.6 on the second pillar, which is sustainability, has to do with retirement age and minimum contributions.
The analysis was carried out at a time Nigeria pension system is struggling with compliance with the Pension Reform Act 2014.
“The N10.51 trillion pension fund assets as welcome and heart-warming as, it cannot be the sole determinant of sustainability of Nigeria’s pension system.
Most states are yet to key into the Contributory Pension Scheme. Those that have keyed in are not complying with their laws. The Federal Government, a major employer, is also not complying with the provisions of the law.
There are workers who have retired from the federal public service and for over a year, are yet to be paid their pensions because the Federal Government is yet to make money available for the payment of their accrued rights.
‘’Accrued rights is pension benefits accrued to several public servants who were employed before the take-off of the CPS in 2004.
The long- term sustainability of the pension system is determined by the minimum contributions and how long a worker will draw pension from the scheme after retirement. The retirement age of an employee adjusting to life expectancy is a determining factor here.
“In Nigeriathere is no harmonised retirement age. The PRA recognises the retirement age in the conditions of service of the employee. The age of retirement in both federal and states public services is 60 or 35 years of pensionable service.
The few exceptions being lecturers in universities, polytechnics and Colleges of Education as well as research scientists in Research Institutes that are permitted to retire at 65 or 70 as the case may be.
In all the first 10 countries in the report, the age of retirement is 65 and adjusted upward based on improved life expectancy. There is a need to move upward the retirement age in the Nigeria.”
The pension expert disclosed that the third pillar, which is adequacy, is the weakest assessment obtained by Nigeria, put at 6.3.
“This has to do with coverage, benefits and standard of leaving. Nigeria’s pension coverage is extremely low. Only workers in the formal sector are covered by pension scheme.
In a proactive measure to bring workers of the informal sector into the CPS, the National Pension Commission (PenCom) introduced the Micro Pension Scheme – a scheme designed to cater for the peculiarity of workers in the informal sector.
In other countries, especially most, if not all the 10 top countries in the report, pension is not limited to occupational pension.
“There is a second pension plan that caters for old age pension, which is based on need assessment to take care of old age poverty.
South Africa also has this pension plan in addition to the occupational pension plan. The closest to this plan in Nigeria is the administration’s conditional cash transfer to poor households.
This is a policy that has not been fine-tuned and it is not backed by any extant law and therefore subject to reversion by subsequent administrations or jettisoned even by the current government as a result of its criticism.
Pension benefits under the scheme are still very low, although the Act makes provision for guaranteed minimum pension as may be specified from time to time by PenCom.
To improve the benefits of the scheme, the rates of contributions of the scheme were increased from seven and a half percent to ten percent by the employer and from seven and a half percent to eight percent by the employee with effect since June 2014.
“Six years later, the line the law is yet to be implemented by the Federal Government. The standard of leaving in old age remains poor as there are no social safety nets, such as old age pension based on need assessment, housing remains an issue, which informed the review of the pension law to make provision for the application of a percentage of the pension assets in the RSA towards payment of residential mortgage by the holder of the account.
There is no provision for free medical treatment in old age. There are relatively no other pension earnings in Nigeria because lower income earners lack culture and resources to engaged in saving, therefore it’s no too common to have retirees deriving other incomes from stocks or savings.”
Takor praised the Global Pension Report, saying it would remind us that activities in the industry are open to global scrutiny.
‘’Our pension administration and future reforms will focus on coverage, sustainability of the scheme, adequacy of benefits and compliance, especially by employers, including governments,’’ he said.
The Acting Director General, PENCOM, PENCOM, Mrs. Aisha Dahir-Umar, criticised the report, saying it was biased and unfair to Nigeria.
She noted that Nigeria’s pension system scored 4.6 out of seven in the report, yet it was ranked 64 among the 70 systems covered.
She said the pension systems of the 70 countries are not the same, noting that most of them operate the Defined Benefits schemes that require capital injection from taxes from active workers to support it.
Thus, when the number of active workers reduces, the adequacy and sustainability ratios fall in almost linear relationships, she said.
She stressed that it is the same with Contributory Defined Benefits schemes. However, with DC schemes, like the Nigeria’s, they are funded, thus adequacy and sustainability are not dependent on active contributors, but measured in various ways.
“For DC schemes, adequacy is largely based on the capacity of the contributor’s RSA balance to give a high replacement ratio at retirement.
In this case, an individual RSA holder may decide to define what will be adequate replacement ratio for him or her and works towards achieving it.
In Nigeria, Section 4(1) of the PRA 2014 has provided for minimum contributions by employee and employer, while Section 4(3) provides for additional voluntary contributions.
The combined effects of these provisions gave the employee the opportunity to build the balanced RSA to whatever replacement ratio that is desired.
“Adequacy in a DC System also depends on the return on investment. Thus, in a favourable macroeconomic condition, RSAs could be significantly enhanced by the investment of the Fund Manager.
However, the restriction of investments to local assets in Nigeria has, to some extent, reduced the chances of PFAs from generating more income for the RSA holders.
In addition, contributors with small RSA balances would be significantly hamstrung from building adequate replacement ratios.
Thus, for RSA holders retiring in these conditions, as we have seen in many cases in Nigeria, the pension may not be adequate.”
“Sustainability, on the other hand, could only be hampered if there is a major systemic effect on the pension assets.
However, Section 82 of the PRA 2014 has provided for Pension Protection Fund (PPF), to among other things, provide support to retirees in case such catastrophe is experienced.
There is also provision of Minimum Pension Guarantee under Section 83 of the PRA 2014, which ensures sustainability of the benefits in case of exhausted RSAs.
The sources of funding for the PPF are the government, pension regulator and Pension Fund Operators. Thus, any analysis that did not take the peculiarities of the pension systems being analysed will produce very biased results, which this study just showed,” she insists.