Workers’ Future In Jeopardy Over Unremitted Pension Deductions

Retirees under the Contributory Pension Scheme in Lagos

Most public and private sector employers are not remitting their workers’ pension deductions to their Retirement Savings Accounts, a situation that will leave the contributors with nothing to fall back on in their vulnerable old ages, Nike Popoola writes:

Unremitted deductions

Johnson Obinna worked for an aviation company in Lagos for five years until he got another job with a marketing firm in 2013. He had opened a Retirement Savings Account (RSA) with a Pension Fund Administrator (PFA) and expected his employer to be remitting his monthly pension contributions to the account each time his salary was paid.

According to the Pension Reform Act, 2004, his employer has the responsibility of deducting 7.5 per cent of his total monthly emolument and augment it with same amount to make a total of 15 per cent, which should be transferred into his RSA with the PFA of his choice.

Obinna used to notice the deduction of 7.5 per cent of his monthly income from his payslips when he was with the former employer, but was not comfortable with the arrangement because the amount being so deducted was not reflecting on the monthly SMS alert he was getting from his PFA.

He and his other colleagues with similar experiences were, however, too scared to raise any issue, because they never wanted to have any issue with their employer as long as their salaries were being paid.

When he got a new job and went to his PFA to verify the actual balance in his RSA, he was disappointed that his former employer had been defrauding him of his pension benefits.

“My PFA told me that just a paltry ₦50,000 was remitted into my RSA for five years, which is not right. From my calculations, I should have nothing less than ₦1.55m in the retirement savings account if my former employer had been remitting the pension deductions from my salary,” he said regretfully.

Obinna is not alone in the quagmire because many workers under the Contributory Pension Scheme (CPS) are finding zero balance or ridiculously low amounts in their RSAs upon retirement, a situation that makes them not to be entitled to drawing pensions when they are out of service.

Tayo Adeleke, who is currently working with an IT firm, said he discovered that the balance in his RSA was lower than what it should be.

“My company has not remitted my pensions for 11 months, which shows a shortfall of ₦440,000. I have gone to my PFA to lodge a complaint that my payslips show that my pensions are being deducted but the RSA alert is not reflecting that they were being remitted,” he lamented.

Adeleke said that his PFA said it would officially write his employer to remit the pension contributions of all the employees, but nothing had changed.

Most workers in this condition are afraid to confront their employers to ask them to remit their pension contributions to their RSAs because they do not want to be sacked. Yet, the more they keep quiet, the more the employers will divert what is meant to be their pension savings and put the workers’ financial future in jeopardy.

Kelvin Davis, who retired from the federal civil service in October 2015, stated that his PFA had not commenced the payment of his pensions.

“They are saying they cannot commence the payment of my pensions because the Federal Government had not paid my accrued rights and they need such to augment my contributions under the CPS. It has not been easy surviving without any monthly income for more than a year,” he said.

Tajudeen Lawal, who retired as a teacher 16 months ago, similarly complained that his PFA had not commenced the payment of his pensions, because the government had yet to pay his accrued rights.

“The last time I went to my PFA, I was shouting that I would die in their office if they would not pay me, but after begging me, some of the directors contributed ₦20,000 for me to manage for the meantime,” he said.

What the Pension Reform Act says

The Pension Reform Act was enacted and signed into law in 2004 to provide a contributory scheme for the payment of retirement benefits of employees in both the public and private sectors.

This was because the old Defined Benefits Scheme had huge liabilities, which were not being funded and many pensioners were dying of hardship because they could not get their pensions.

The Act mandated every employee to open a RSA in their name with any PFA of their choice and notify the employers.

Employers, according to the law, were required to deduct 7.5 per cent of the workers’ monthly remuneration and add another 7.5 per cent, which should be paid into each employee’s RSA not later than seven days after the salary is paid.

Ten years after, the law was amended and replaced with Pension Reform Act, 2014.

The 2014 amended version of the law raised the employee and employer’s contributions to eight per cent and 10 per cent respectively of the total monthly emolument of the worker, thus putting the total contribution at 18 per cent instead of the previous 15 per cent.

A worker can start drawing pensions upon reaching the age of 50 and is no longer in paid employment.

As the government does not provide any other funds as pensions for workers in retirement, the savings in the RSAs are expected to serve the function of guaranteeing the payment of monthly stipends to the workers when they retire.

The Director-General, National Pension Commission, Chinelo Anohu-Amazu, said the PRA was enacted to deliver better pensions to retirees.

She said there were new developments introduced by the PRA 2014, such as the upward review of the minimum rate of pension contributions and the sanctions and penalties against infractions of the provisions of the Act.

“The Federal Government took a remarkable step in changing the pension landscape through the enactment of the Pension Reform Act,” she said.

Recovery agents for unremitted contributions

In 2012, when the regulatory authority, PenCom, discovered that several thousands of employers were not funding their workers’ RSAs, it employed the services of recovery agents.

These recovery agents were mandated to go after the defaulting employers to retrieve all outstanding contributions along with the interest penalty.

As the recovery agents have continued their work up till now, PenCom revealed that it had been able to recover a lot of funds from the defaulting employers.

In March 2016, PenCom revealed that it had recovered ₦8.73bn from some of the employers and that the amount included fines imposed on the defaulters.

Government as a big defaulter

The Federal Government, which enacted the PRA, is the largest employer of labour in the country and also a major defaulter of the law.

The Pension Fund Operators Association of Nigeria disclosed this during its 2016 Annual General Meeting in Lagos earlier this year.

PenOp stated in its report, “Compliance with regard to remittances of pension contributions from the public sector at both the federal and state levels has lagged notably. While remittances from the Federal Government through the PenCom were last received for September 2015, some states have outstanding remittances dating back over two years.”

The association, however, said private sector remittances had been more consistent though impacted by the adverse economic environment in the country.

PenOp disclosed that most of the federal workers affected were direct employees of ministries and not under the parastals, but were being paid by PenCom with the funds released from the Central Bank of Nigeria.

It was also gathered that the Federal Government had also failed to increase its contribution into the RSAs of workers in the parastals by crediting their accounts with just 15 per cent of their total monthly emolument more than two years after the PRA 2014 mandated employers to contribute 18 per cent.

Recycled poverty

A major problem of the old Defined Benefit Pension scheme was that the Federal Government was not funding it well through the issuance of retirement bonds, which were meant to be redeemed by the workers upon retirement.

Because of this, there were no sufficient funds to pay the workers when they retired, which led to mounting liabilities in excess of ₦2tn.

This subjected the pensioners to undue hardship and untimely death, as they could not get their entitlements to take care of their health, enable them to eat good foods and settle other bills.

The Executive Director of the Lagos-based Centre for Pension Right Advocacy, Mr. Ivor Takor, said on retirement, a worker was expected to be paid a lump sum and collect monthly pensions either through a programmed withdrawal or an annuity purchased from an insurance company from the balance in his RSA under the CPS.

He said, “The balance is made up of the total contributions of the employee and employer, the return on investments of the contributions over the years, and the accrued pension rights for employees who were already in service before the commencement of the PRA 2004 in June 2004.

“The accrued right is got through the redemption of the Federal Government’s retirement bond through the Retirement Benefits Bond Redemption Fund Account in the Central Bank of Nigeria.”

The pension expert noted that the main difference between the CPS and the DBS was that most variants of the old pension scheme were not fully funded. Therefore, upon retirement, there were no ready funds to pay the pensioners.

He expressed worries that the same problem was already becoming manifest in the CPS, as both private and public employers were not funding the workers’ RSAs, meaning that the workers would also retire without pensions to claim.

“We are gradually returning to the pre-pension reform era, where under the Defined Benefit Scheme, retired public servants and pensioners were not sure when their retirement benefits and pensions would be paid,” he said.

State governments’ recklessness

PenCom has also expressed concerns about the poor attitude of many state governments to pension matters.

According to PenCom, only 10 states are remitting deducted funds into the RSAs of their employees out of the 26 states that have enacted their Pension Reform Laws as of March 2016.

Only 10 out of the 36 states of the federation have commenced the remittance of contributions into the RSAs of their employees, while eight have begun funding of their Retirement Benefit Bond Redemption Fund Accounts, according to PenCom.

The records also show that 673,116 contributors, who are workers of the various state governments, are registered with different PFAs.

According to the report, Lagos, Ogun, Kaduna, Niger, Delta, Osun, Rivers and Anambra states have commenced the remittance of contributions to six PFAs and are funding their accrued rights.

It explained that Imo State had yet to commence the remittance of pension contributions, but that the Imo State University was currently implementing the CPS, but not yet funding its accrued rights.

Zamfara State also commenced the remittance of pension contributions of its employees to the PFAs, but has yet to fund its accrued rights.

PenCom stated that Jigawa State had transferred its pension assets to six PFAs for management, while Kano had yet to transfer its assets to the PFAs.

According to the report, the remaining 26 states have yet to commence the remittance of contributions into their workers’ RSAs or fund their accrued rights.

Between the old and new schemes

There appears a glaring difference between the way pension benefits are calculated under the DBS and the CPS.

A major difference as pointed out in the Pension Reform (Amendment) Bill 2016 is that under the DBS, workers who have worked for up to 35 years are entitled to 70 per cent of their last monthly salaries as pensions, while those who get to the rank of director will receive 100 per cent of their last monthly salaries as pensions.

The DBS is also subject to upward review every five years when the Federal Government carries out a salary review unlike the CPS.

Under the CPS, a retiree accesses his pensions either through programmed withdrawal provided by the PFAs, or annuity offered by insurance companies.

The programmed withdrawal computation is based on the template given by PenCom and the higher the lump sum, the lower the monthly pensions and vice versa. Annuities are computed based on some calculations of actuaries, which are based on certain parameters.

In short, the amount an employee is able to accumulate in his RSA at retirement from both his contributions and the employer determines how much he gets as pensions.

However, this is a very uncomfortable aspect of the scheme, especially for government employees, because benefits under the CPS usually tend to be smaller compared to those of the DBS, a reason many of the workers have been trying to opt out of the CPS.

Threats to pullout of the CPS

Immediately the CPS commenced, federal government workers due to retire after June 2007 were moved into the scheme to join their counterparts from the private sector.

In 2011, the Nigerian military and State Security Services pulled out from the Contributory Pension Scheme and returned to their old pension systems.

This encouraged the Nigerian Police and all the other paramilitary organizations to commence a gradual process of pulling out of the scheme too, but their decision was met with strict resistance from the Presidency, which did not give its approval.

Some of the reasons given for the decision to pullout were that pensioners under the CPS were experiencing serious delays in the remission of their pensions, sometimes due to rigorous documentation or simply as a result of the inefficiency of the PFAs.

A major point mentioned was that employees were often underpaid as revealed by the statements of remitted contributions to their RSAs, with the balances in the accounts being far less than what they were ordinarily entitled to. These irregularities and the non-remittal of funds poised serious concern to the contributors and exposed the scheme to fraud, ultimately affecting the returns on investments of contributors since not all part of their contributions were being remitted.

While calling for permission to opt out, the paramilitary organizations stated, “Deductions from the salaries of employees are not remitted to the PFAs; this became detrimental to the pensioners owing to the fact that the pension scheme is contributory. Therefore, non-remittal of funds to the administrators means no pension will be paid to the affected persons.”

PenCom intervened in order to ensure that no other body pulled out from the scheme after which a whitepaper was issued by the Federal Government in 2014 foreclosing any other institution leaving the CPS.

Minimum pensions

Operators of the scheme have been making arrangements for a minimum pension scheme to cater for those whose RSA balances are ridiculously low to provide them with any living pension.

The Chairman, Pension Fund Operators Association of Nigeria, Eguarekhide Longe, said that retirees under the CPS would begin to enjoy minimum pension payment in 2017.

“The minimum pension is going to take off early next year. We (operators) are supposed to pay three per cent of our management fees to set up the fund, the National Pension Commission is supposed to pay another fee and they have already given us notice that we must ensure that we put that money in our budget for 2017, that and it will take off next year,” he said.

Last year, operators of the scheme proposed a minimum pension payment of ₦14,400 to retirees under the CPS in the draft guideline for the commencement of the minimum pension payment.

Longer, however, did not confirm if the minimum pension would remain at the same value, but noted that the pension operators had a responsibility to make their own contributions to set up the fund to signal the commencement of the payment and that the Federal Government would also have to make its own contribution to the fund.

“Pension operators will put forward the information of the people who are not earning up to the minimum pensions and they can now get the augmented amount from the Pension Protection Fund; that is how it works,” he said.

The Pension Reform Act, 2014 provided that PenCom should establish and maintain a fund to be known as the Pension Protection Fund in respect of the guaranteed minimum pensions.

However, only retirees who meet the basic requirements would be able to enjoy the minimum pensions when the guideline to commence it is finally released.

Contributory Pension Scheme

Pension schemes are established by different governments worldwide to cater for their workers when they reach vulnerable old ages and are no longer in paid employment.

The objective is to help reduce the number of erstwhile workers who may have no other choice than to go into destitution and constitute a nuisance to the society.

The Managing Director, NLPC Pension Fund Administrators Limited, Wale Kolawole, said that the CPS was established to provide better life for all Nigerians in retirement.

He observed that in developed countries, old people usually beam with smiles, because they knew that at the end of the month, they would not need to rely on friends, relations and their children to survive.

Kolawole said it was relevant for all employers to embrace the CPS, adding that the thought of having a pension benefit would encourage more workers to retire early.

According to him, there will come a time when a worker’s body system will start to obey the law of diminishing returns.

For this reason, he explained that if a person had a pension arrangement in place after working for many years, his mind would be stable and his approach to his assignment would be impressive.

The Managing Director/Chief Executive Officer, Premium Pension Limited, Wilson Ideva, said that it was important for employers to ensure that their workers had a pension arrangement.

“You can have the best office and the best machinery, but if you don’t have a good human capital, everything you have put in place will not work,” he said.

According to him, one of the ways to build human resources and retain them is to establish pension accounts for them.

Ideva said, “One of the things you can do is to ensure that you have guaranteed pensions for them, because an employee will be thinking that if he leaves the employment in about 10 or 20 years, what will happen to him. Am I going to be roaming the streets or begging for food?”

The way forward

While non-funding of workers RSAs is rampant and gradually dragging the CPS into the messy situation of the scheme’s predecessor in which pension schemes were not funded when the workers were still in active service, experts have warned that this scenario must be addressed urgently in order to avoid future pains for the current workers.

The CPS, which is still relatively new, produced its first sets of retirees in 2007.

The Director-General, Lagos State Pension Commission, Folashade Onanuga, said funding of pension benefits could be done if the will and commitment to do it by the employers was there.

She said, “There should be commitment on the part of the governors, the legislative arm and there should be focus when you realize that your greatest assets are your workers. If you value your workers, you will think about their welfare.

“If you don’t care for them, this will have the ultimate effect of entrenching corruption within the system.”

The Director-General explained that when the worker knew that adequate preparation had been made for him, he would put in his best.

If an employer is committed to its workers, it will accord the workers their due place within the system, she noted.

“Other states need to look at the fact that we need to provide adequately for our workers. So many things are contending for State Governments’ funds, but it is these workers who will be used to achieve other things that the government is spending money on,” Onanuga said.