OVERVIEW OF THE CONTRIBUTORY PENSION SCHEME by M A Umar (NATIONAL PENSION COMMISSION) National Pension Commission

OVERVIEW OF THE CONTRIBUTORY PENSION SCHEME

by

M A Umar

(NATIONAL PENSION COMMISSION)

National Pension Commission

Department of Banking and Finance's Town & Gown Seminar 2015

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Outline Introduction Features of CPS Objectives of CPS Safeguards in CPS Benefits of CPS Exemptions under CPS Highlights of PRA 2014 Stakeholders in the Scheme Regulation of Investment Grounds/Conditions for Access to RSA CPS under PRA 2014 – A Scorecard Next Steps


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Introduction– Rationale for Pension Reform

o Public Sector operated Defined Benefit (DB) Scheme that was: unfunded marred by weak, inefficient and poor administrationproned to financial malpracticesendless and painful annual physical verifications

o Private Sector was characterized by low coverage and compliance leaving most workers with no and/or inadequate retirement benefit arrangements


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Introduction…Cont’d Pension Schemes Post 2004

o Enactment of the PRA 2004

o Contributory Pension Scheme (CPS) was introduced in 2004 for both Public and Private Sectors

o DB Scheme for previous retirees and those exempted from the CPS

o Established PenCom to direct and oversee the overall policy on Pension Matters in Nigeria

o Workers are able to save; receive their retirement benefits as and when due

o Established the platform to explicit and accurate budgeting for accrued right and payment of pension generally


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Features of CPSo Contributoryo Fully Funded o Individual Retirement Savings Accounts (RSAs)• Personalized & portable with the aid of PIN

o Private Sector Management• Pension Fund Administrator (PFA) administers and manages Funds

• Pension Fund Custodian (PFC) holds Pension Funds and Assets on Trust

o Planned Withdrawal of Savings – Programmed Withdrawal or Life Annuity

o Life Insurance Cover for cases of death in active serviceo Strong Regulatory Framework and uniform standards for

both private and public sectors


Objectives Objectives of Contributory Pension Scheme (Section 1, PRA

2014)o Establish uniform set of rules, regulations and standards for the

administration and payment of retirement benefits for Public Sector, FCT, State Government, Local Government and Private Sector;

o To make provision for the smooth operations of the CPSo The Contributory Pension Scheme seeks to, amongst others,

ensure that every worker receives his retirement benefits as and when due

o To assist improvident individuals to save for their old age

Retirement Benefits Administration is the last phase of the process/ activities put in place to achieve the above objectives of the Pension Reform

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Safeguards of the Scheme Separation of functions of PFAs and PFCs

– (an ingenuity in Nigerian pension administration)

Guarantee by the parent company of the PFC (mostly banks, to prevent loss or erosion of pension funds)

Guidelines and restriction on Investments – (regularly reviewed)

Risk Rating of Investment Instruments Appointment of Compliance Officers (statutory

– s. 68 PRA)


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Safeguards of the Scheme …cont’d

• Pension assets held by a PFC excluded from execution of judgment debt – (pension benefits are sacrosanct)

• Sale of pension assets, grant of loan or use as collateral is prohibited

• Stringent licensing conditions – (to ensure only pension businesses are done by PFAs and PFCs)


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Safeguards of the Scheme …cont’d

Highly regulated and supervised - (statutory periodic and special examinations)

Appointment of Top Management and Directors of PFAs & PFCs must be approved by PenCom – ( fit & proper persons test usually conducted by police, SSS and NIA and reference from other sister regulatory agencies)

Reporting requirements by PFAs and PFCs and adequate sanctions

Statutory Reserve Fund by PFAs and Minimum Pension Guarantee (up-coming)


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Benefits of the Scheme Pensioner no longer at the mercy of the

employer and is assured of regular payment of retirement benefits - (individualized RSA)

Employee has up to date information on his Retirement Savings Account

Contributor has the freedom to choose who administers his retirement benefits account - (choice of PFA)


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Benefits of the Scheme …cont’d

Retirement Savings Accounts are portable

Stems further growth of pension obligations and provides a platform for addressing this liability

Encourages savings

Imposes fiscal discipline on the States to fund the RSAs on a regular basis (which can be further enforced through unionization) and is a solid foundation for economic development


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Benefits of the Scheme …cont’d

Creates a huge pool of long term funds (State bonds – N210.10 billion @ Dec. ’13)

Employees with RSAs could benefit from the upcoming initiative on investing PF Assets in affordable housing development

Introduces clear legal/administrative sanctions

Boosts the activities of the Capital Market

Enhances transparency in pension administration


Exemption under the CPS Section 1 subsection(2) state that the act shall apply to all employees in the

Public Service of the Federation, FCT, State Government and Local Government councils and Private Sector.

Exemptions Categories of person mentioned in Section 291 of the Constitution of the Federal

Republic of Nigeria 1999, shall be exempted

Armed Forces, the intelligence and secret services of the Federation.

Any person entitled to retirement benefits under any pension scheme existing before the commencement of this Act, but has 3 or less years to retire shall be exempted Those that were 57 years old as at June 2004 Those that have worked for 32 years as at June 2004 Those that have been paid under Defined Benefit (previous pension) scheme

other than Contributory Pension Scheme (CPS)

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Highlights of the Pension Reform Act 2014 Upward Review of Contribution Rate to 18% of employee’s monthly

emolumentso Employer minimum 10% /Employee minimum 8% - S 4 (1)

Enhanced Coverage of the CPS and Informal Sector Participation Utilisation of Pension Funds for National Development Exemption of Income on Investment of Pension Fund from Tax Funding of the Minimum Pension Guarantee and Establishment of the

Pension Protection Fund Periodic Review of Pensions Adoption of the CPS by States and Local Government Exemption of the Personnel of the Military and Security Agencies Review of the Retirement Age and Benefits of University Professors

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Highlights of the Pension Reform Act 2014…Cont’d

Restructuring the System of Administration of Pensions Under the Defined Benefits Scheme (PTAD)

Opening of a Temporary RSA for Employees that failed to do so Reduction in the waiting period to Access Benefits in the Event of

Loss of Job Objectives of Contributory Pension Scheme (Section 1, PRA 2014)

such that additional Benefits could be Paid to employees upon retirement or cessation of employment

New Offences were created and Stiffer Penalties provided to serve as deterrence against mismanagement and/or diversion of pension funds

Provides for Prompt Corrective Action on failing Licensed Operators by moving pension assets from one PFA to another

Access to RSA to pay Equity Contribution on Residential Mortgage

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Stakeholders in the Scheme

Employer

A person or organisation that provides work for 5 or more people

Important player in the scheme

Contributes a minimum of 10% of emoluments of the employee

Deducts and pays the contributions to the RSAs of the employees within 7 days of payment of salary


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Stakeholders in the Scheme …cont’d

National Pension Commission (PenCom) Apex body to regulate and supervise pension

matters

Formulates, directs and oversees the overall policy on pension matters in Nigeria

Approves, licenses and supervises PFAs, PFCs and other institutions relating to pension

Maintains National Data Bank on pension matters

Issues guidelines, frameworks, circulars, etc., to regulate operators and States


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Stakeholders in the Scheme … cont’d

Pension Fund Administrators (PFAs)

A duly registered company licensed by PenCom to conduct the sole business of pension administration

Manages and invests contributions

Keeps records

Performs benefits administration function


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Pension Fund Custodians (PFCs)

A duly registered financial institution licensed by PenCom to conduct the sole business of pension fund custody

Keeps custody of all pension funds and assets

Receipt and disbursement function


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Other Stakeholders:

Existing Pensioners

General Public

Informal Sector


Regulation on Investment

• General Principles (Section 2.0)

o Non-dealing in pension assets at prejudicial priceso Prohibition of lending and borrowing of pension assetso High corporate governance and conduct by Pension

Operatorso Investment in bonds of only Corporate entities and

State/Local Governments that have fully implemented the Contributory Pension Scheme

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Regulation on Investment…cont’d

Allowable Instruments/Asset Classes (Section 4.0)

Quoted Ordinary Shares and Redeemable Preference Shares of public listed companies: Ordinary Shares are units of ownership in public listed companies; while Redeemable Preference Shares take precedence over Ordinary Shares in the payment of dividends and during liquidation of companies.

FGN/State/LG Securities that are approved by SEC: These are instruments of indebtedness (Bonds and Treasury Bills) issued and guaranteed by the Federal, State and Local Governments.

Corporate Debt Securities (including Infrastructure Bonds, Asset/Mortgaged Backed Securities): Corporate debt securities are instruments of indebtedness issued by corporate entities.

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Money Market Instruments of Banks/Discount Houses: These include fixed deposits, tenured placements, Bankers Acceptances and Commercial Papers issued by financial institutions and corporate entities, respectively.

Open/Closed-end and Hybrid Funds (including Real Estate Investment Trusts and Exchange Traded Funds): These are specialist/managed investment funds that invest in securities that are tradable or have memorandum listing on a securities exchange.

Supranational Bonds: These are debt instruments issued by eligible Multilateral Development Finance Institutions e.g. International Finance Corporation and African Development Bank.

Private Equity Funds: These are designated pools of investment capital targeted at all stages of private equity investment.

Infrastructure Funds: Specialist Investment Funds that invest primarily in securities/securitized debt instruments of infrastructure companies or projects.

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Regulation on Investment..cont’d

Investment Limits (maximum limits)

◦ Portfolio Limits

◦ Sector Limits

◦ Per Issuer Limits

◦ Per Issue Limits

◦ Investments in all securities of any one company (10% of Portfolio Value)

• Instituted to ensure adequate portfolio diversification and mitigate potential investment and market risks.

24Department of Banking and Finance's Town & Gown Seminar

2015

Approved Investment Limits

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S/No Asset Class Portfolio (%)

Per Issuer (%) Per Issue (%)

1 Ordinary Shares 25 5 4.5

2 FGN Securities 80 80 80

3 State/LG Govt. Securities

20 5 16 – 20

4 Corporate Bonds 35 5 16 – 20

5 Money Market Instruments

35 3 – 5 (Banks)3 (DHs)

18 -20 (CPs only)

6 Supranational Bonds 20 5 16 – 20

7 Infrastructure Funds 5 5 20

8 Private Equity Funds 5 5 20

9 Mutual Funds 20 5 10

Department of Banking and Finance's Town & Gown Seminar

2015



Retiree Fund (Section 9.0)

– The Retiree Fund was created in February 2009. The major reason was to stem diminution in the value of retirees’ pension fund assets.

– The RSA balances of retirees who chose the Programmed Withdrawal Option (comprising pension contributions, proceeds of retirement bond and accumulated returns on investment) are transferred to the Retiree Fund.

– Mostly invested in fixed income securities based on the low risk appetite of retirees. Investment in quoted equities was added in December 2010 to provide some growth value to retirees and enhance real returns to the Fund.

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Retiree Fund (Section 9.0) cont’d

Approved Portfolio Limits (maximum):

• FGN/State Govt. Securities: 80%/20%• Money Market Securities: 35%• Corporate Debt Securities: 35%• Supranational Bonds: 20%• Quoted Ordinary Shares: 10%

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Ground/Conditions for Access to RSA

By Retirement (Section 7 and 16 of PRA 2014) Mandatory Retirement

o Later of 50yrs or attainment of Mandatory Retirement Age (generally 60 years in the public sector) with few exceptions

o Retirement from service on attainment of maximum allowable length of service (generally 35 years in the public sector)

o The Universities (Miscellaneous Provisions) (Amendment) Act 2012: Section 8 (3)

a) Attainment of 70 years for Academic Staff in the Professorial Cadre; andb) Attainment of 65 years for non-academic staff

Retirement Based on Terms and Conditionso Retirement before 50years in line with terms and conditions of

employment

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Ground/Conditions for Access to RSA …cont’d

Retirement on Medical Ground (Section 3(2)) Section 3 (2a) PRA 2014o Based on advice of a Physician/Medical Board

Temporary access (25%) Section 16 (2) (5) PRA 2014o RSA holder must be less than 50 years of ageo Must have been out of job for four months or moreo May withdraw up to 25% of RSA balance once before 50

years Documents Requiredo Letter of Termination/Severance/Retiremento Withdrawal request by RSA holdero RSA Statement/confirmation of balance by PFAo Employer’s confirmation of remittance of all entitlement

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Ground/Conditions for Access to RSA …cont’d

Withdrawal of Voluntary Contributions Section 4 (3)o It is an additional contributions made by employees to

augment their RSA balance/Pension at retiremento It is subject to tax if withdrawn before 5 years, Section

10 (4)

Section 4 (7) o It is contributions made by those ordinarily exempted

from PRAo It is a form of savings for exempted person

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CPS under PRA 2014: A Score Card…Cont’d

Initially licensed 26 PFAs, 7 CPFAs and 5 PFCs Presently reduced to 21 PFAs, 7 CPFAs and 4 PFCs due to mergers

and acquisitions

Number of registered contributors is over 6,173,600 as at 31 August 2015

There are 135,164 retirees currently receiving pensions as and when due under the CPS as at August 2015

Total pension fund assets had grown to about N5.03 trillion as at 31 August 2015

Nigerian CPS has become a model for other African countries: Study visitations from Ghana, Malawi, Uganda, Tanzania


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CPS under PRA 2014: A Score Card

Nigeria has become Africa’s Hub on pension matters: 2nd Edition of the World Pension Summit-’Africa Special’ held in Abuja from 5- 6 October, 2015

Safe and Sound administration of the Contributory Pension Scheme Upward review of sanctions under the PRA 2014 to reflect current

realities Common Offence by employers is non remittance of pension

contributions Commission engaged 173 Recovery Agents. Substantial amount

recovered through the exercise Several on-going legal action cases before the National Industrial Court

(NIC) for unremitted contributions Collaboration with Security Agencies such as the Police, the EFCC,

ICPC and National Human Right Commission


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Outlook & Next Steps• Continuous Political Will to Support the Pension Industry

• Strengthening the Dynamic Investment Regulation and outlet

• Sensitization and capacity building

• Wider Coverage Including Informal Sector

• Strengthening Existing Collaboration With Operator and Other

Regulatory Bodies• Commitment to Establishing Strong Corporate Governance in

the Industry• Customer Service Delivery by Operators essential


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Outlook & Next Steps

• Deployment of strategies for enforcement and increased compliance by Employers, Informal Sector and States & Local Governments participation

• Collaboration with other Regulators and stakeholders in the Financial Services Sector to create enabling environment for investment in infrastructure and housing:Structuring of Bankable Investment InstrumentsTaxation (S. 10(2) of PRA 2014: All pension fund investment

income are tax exempt) Land titling and registration towards investment in Real EstateCredit enhancement (FGN guarantee)Continual review of extant laws and regulations for further

improvement


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Thank you

National Pension Commission (PenCom)

Plot 174 Adetokunbo Ademola Crescent

Wuse II, Abuja

www.pencom.gov.ng

[email protected]|[email protected]

[email protected]• +234-9-94610466-8 |07002255736266 (0700CALLPENCOM)

• South-West Zonal Office, 88A Oduduwa Crescent, GRA Ikeja 08055998808

http://www.pencom.gov.ng/

mailto:[email protected]%[email protected]%[email protected]

mailto:[email protected]%[email protected]%[email protected]

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Thank you!


2015

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Questions?


2015