Proposed Amendments to Pension Reform Bill Could Threaten Nigeria’s Savings Culture

The Nigeria Pension Reform (Amendment) Bill 2022 is currently in the final stages of the legislative process.

More specifically, he spent a second reading in the National Assembly and for next steps, the bill has been referred to the Establishment and Public Affairs Committee to seek public comment before implementation.

Consequently, a public audience was held on February 22, 2022 by the House Pensions Committee. This hearing focused primarily on the dual purpose of the proposed amendments

  • First, the proposed changes are intended to exempt the Nigerian police from the contributory pension scheme requirements of the Pension Reform Act i.e. like the exemptions for the Nigerian Army.
  • Second, the drafters of the bill seek to enshrine in law requirements that allow retirement account holders can withdraw up to 75% of their account balance and penalize unjustified delays in the payment of pensions as criminal offences.

Unsurprisingly, reactions have been mixed across the board of Nigerian pension players.

  • Proponents of the amendments have argued that the exemption from the police and the 75% withdrawal requirements are both in the immediate interest of account holders.
  • Opposing views of PenCom, Center for the defense of pension rights (CPRA) strongly rejected the amendments as not beneficial to economic progress.

For those opposed to the new requirements, below is an overview of the main concerns.

1. Why do the police want to be exempt from CPS?

Proponents of exempting police from the current contributory pension scheme want more than just exemption, the Inspector General of Police has instead argued that police officers should enjoy the same pension schemes as the Nigerian Army to go up officer morale.

  • “……exempting the police from the heinous contributory pension scheme might just be the magic to motivate the officers and men of the force to go the extra mile and save the country”

Additionally, Hon. Francis Ejiroghene Waive has argued that police pension benefits should potentially be increased by 500% to 686%simply to match their counterparts from other military agencies in order to boost morale.

“………For example, the highest pension benefit for a Deputy Superintendent of Police under this heinous pension scheme is 2.5 million naira and that of the Deputy Superintendent of Police is 1 .5 million naira while their equivalent in the army (captain) and DSS are paid 12.8 million naira and 10.3 million naira respectively “…

2. What are the implications of providing police with an enhanced retirement program?

Certainly, every employee seeks to derive maximum benefit from their employer when an opportunity arises. However, when making requests for a better package, several factors must be considered, including the financial cost of requests, as well as prevailing macroeconomic realities.

Financial cost

The Pensions Commission of Nigeria (PenCom) provided an estimate that the Federal Government need 1.8 trillion naira to cover a defined benefit scheme for the 300,000 police officers, a general estimate of an additional 6 million naira per person.

Notably, this estimate of 1.8 trillion naira (or an average of 6 million naira per police personnel) is likely to be exceeded, especially when compared to the declaration of Hon Francis Ejiroghene Waiver that there is a gap of 9-10 million naira per person between the Nigerian police and the Nigerian army pension scheme.

Macroeconomic realities

The above demand to provide members of the Nigeria Police Force with enhanced pension packages costing over N1.8 trillion stands in stark contrast to the realities on the ground.

  • Specifically, the 2022 budget recently approved by the federal government already shows a deficit of over 6.2 trillion naira.
  • It simply means that the Nigerian government needs to borrow 6.2 trillion naira to execute critical infrastructure projects.
  • Additionally, continued revenue challenges for the federal government mean it is continually unable to execute on key initiatives as debt servicing continues to be a huge drain on resources.

Therefore, due to current realities, non-capital expenditure demands of this magnitude are simply unaffordable. Especially at a time when it is essential to provide the federal government with the fiscal capacity to finance capital expenditures that drive economic growth.

This amendment risks creating a Pyrrhic victory for its supporters, with the FG taking on a heavy liability that it simply cannot meet. while Nigerian pension savings industry decimated by police exemption

3. Are there alternatives to the outright exemption of police forces?

Analysts have suggested that one solution to this problem of police dissatisfaction with their pension balances is to ensure that police receive a more competitive salary for their services AND simultaneously improve the customer service experience and mitigate data protection issues.

This alternative is noteworthy because monthly police salary adjustments provide higher disposable income and allow police officers to save a more reasonable amount which ultimately improves their retirement savings account balances.

In addition, this approach ensures that the responsibility for contributing to the pension rests with individual police personnel. This protects the federal government from the risks of having huge unfunded pension obligations.

Finally, this alternative avoids a return to the scenario of the 2004 pre-pension reform which was poisoned with unlimited cases of pensioners endlessly waiting for a pension check which was not received largely due to more than 2 trillion naira in pension liabilities.

  • Research analyst, Demiola Oju, said Nigeria does not need additional financial responsibility. she says “Over the past few years, the contractual debt service burden has increased. What the government does not need at this time is another future contractual obligation on funds which it does not have, particularly because it has a structure in place to deal with it under the contributory pension scheme.
  • Damilola further said that withdrawing funds from the Nigerian Police PFA would involve divesting and unwinding investments in long-term bonds, corporate debt and illiquid property investments before maturity. Since the financial ecosystem is interconnected, this will put pressure on the financial system.

4. A 75% lump sum payment to retired pensioners will make their situation worse

Regarding the proposed amendment to allow retirees to withdraw the 75% lump sum payment. The proposition may seem noble, especially since from a retiree’s perspective, the lingering anxiety of sub-inflationary returns and sub-optimal customer service experiences are remarkable.

However, from a macro perspective, the opportunity costs can be immense and allowing a 75% lump sum withdrawal may not be a proportionate response to the challenges faced.

Specifically, decimating the Nigerian savings industry by encouraging large-scale fund withdrawals will deprive the economy of the benefits of domestic investment mobilization.

Most economists agree that the degree of savings in any country is key engine of economic growth. There is even a formula:

  • National Savings Rate = (Income – Consumption) / Income. But that is outside the scope of this topic.

However, the central point is that a country’s domestic savings are used to stimulate investments that drive economic growth and then future consumption.

Conversely, if a country does NOT encourage saving (i.e. a country has a high marginal propensity to consume), the result is that the country will eventually need borrowing to support itself.

If this problem sounds familiar to you (i.e. a high propensity to consume that decimates the culture of savings and ultimately results in higher borrowing for critical projects), then you’re probably thinking of recent experience. of the federal government to decimate its Surplus Crude Oil Savings Account. From a high of $17 billion to just under $35 million in January 2022.

  • An investment analyst, Ayo Bamidele, said 25% of the pension fund is NOT enough to support pensioners for the long term. Specifically, he said, “if we are advocating for a larger lump sum payment of at least 75%, as proposed under this bill, we must consider whether the remaining 25% is enough to sustain you periodically for the rest of your time on earth.. The answer is a resounding NO.

In conclusion

Both amendments may seem noble, however, from a macro perspective the proposals have enormous potential to decimate Nigeria’s fragile retirement savings sector and create financial risks to the economy due to the decline in domestic savings.

The idea of ​​regulatory reform should always be to make things better for all stakeholders and the Nigerian economy as a whole. Therefore, rather than seeking to decimate Nigeria’s savings culture by increasing the number of exempt groups such as the police, as well as expanding eligible withdrawals, the focus should be on how to increase returns and benefits available to retirees.

This can be accomplished by allowing the pension industry to seek more opportunities to participate in the development and growth of the real sector. Alternatively, retirement account holders may have the option, within the existing retirement structure, to use their existing account balances for certified low to medium risk investment opportunities.

  • Examples of unlimited use of accounts, such as Mortgagesreal estate investments or individuals be allowed to purchase USD assets that are held in national custodians or even use the fund balance as a source of a loan or collateral for a loan.
  • The basic principle is that individuals can access their accounts for certified investments, but respecting AUM balances rather than large-scale withdrawals.

Interestingly, in advanced economies, retirement accounts form the basis of wealth creation and individuals are encouraged to tap into these balances for new investment opportunities such as buying a house or buying a small business (i.e. people can use their retirement balance rather than take out personal or business loans at high interest rates).

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