Nigerian workers are not preparing for retirement. Of the 69 million people in the labour force, just 7 million have pension accounts. In the United States, more than half of the working age population have some form of retirement plan, and that number is over 70% in the United Kingdom.
A pension plan is a retirement account where employers and employees make monthly contributions. In Nigeria, employers contribute 10% of the salary and the employee contributes 8% – this is known as a defined contribution scheme. The employee receives the money when she retires.
Previously, Nigeria operated a defined benefits system where the pension account was solely topped up by the employer, or the government in the case of the civil service. Although this meant that retirement benefits were part of the annual government budget, it was too expensive for employers to maintain. Hence the shift to a co-funded system.
People have put forward many explanations for why Nigerians do not seem to be planning for retirement. Perhaps they don't know they can get pension plans or do not want the money deducted from their salaries. Also, small businesses often believe they don't have to provide their employees with pension plans, but the law makes it mandatory if you have over 15 employees. But, more often, employers prefer not to accumulate the extra cost of putting a plan in place.
There have been reports of private employers failing to remit their contributions to employee pension accounts, and the backlog makes it harder for them to pay. Most are confident that they will not be penalised, even though the law stipulates a 2% penalty on unremitted funds.
In recent times, the National Pension Commission (PenCom) has tried to penalise companies. In April 2018, reports suggested that employers were forced to pay ₦7 billion in penalties for deducting funds from employees' salaries and not remitting them to their retirement accounts. This is a good start, but there are still a lot of organisations that are yet to remit their employees’ funds.
The fact that only 10% of the working population have pension plans may leave the other 90% reliant on future generations – or the government – to take care of them when they are older.
Moreover, most pension account holders in the country are aged between 30 and 49. In a country where over half the population is below 30, you would expect that age group to account for more than 9% of pension accounts. Then again, we should not be surprised; Nigeria's youth unemployment rate is 25%, compared to the national average of 19%.
Returns on Pension Investments
The elephant in the room when it comes to Nigeria's pension industry is returns on investment. Returns have barely covered a high inflation rate over the years, meaning that people's savings are effectively losing their value.
Why is this? Well, pension fund administrators (PFA) have traditionally invested in safe but low-yielding government securities. As at April 2018, 70% of PFA funds were put in government securities. The hope is that new pension legislation (including the recently introduced multi-fund structure) would encourage PFAs to diversify their investments in order to get higher returns.
One way of doing this would be by funding Nigeria's infrastructure. The country's infrastructure deficit has been discussed at length, and it makes sense to dedicate a portion of pension funds – patient, sizable capital – to plug this gap. The kinds of investments that could be made in which the funds are retained for years. Government revenue is inadequate and foreign investors are usually not willing to put in long-term funds in businesses in Nigeria because the country is perceived as too volatile and risky, but the country needs these investments in the private sector to boost productivity and employment.
This isn’t to state that investments should be made solely for improving the economy as it may not be profitable for them. But the investments should be made based on its individual merits and PFAs have the technical expertise and in-house to research on these investments as well as advise PFAs on improvements that could be made in their businesses.
We might need to rethink the way pensions are managed in Nigeria, the investment opportunities available, and explore the ways we can boost pension penetration.