I recently noticed that a few of my lawyer friends did not have employer-funded pension accounts or Retirement Savings Accounts (RSAs). The initial assessment was that RSAs were not common among lawyers, and in an informal survey of almost twenty, less than half had a regularly funded RSA.
Such a low RSA participation rate in one of Nigeria’s most popular professional industries may be due to the fact that many law firms are micro-enterprises, so are exempt from the Pension Reform Act 2014 (PRA) which sets a minimum threshold of 15 employees.
But this trend among young lawyers is only a small part of a bigger picture.
The youth-shaped hole in Nigeria’s pension system
In the first quarter of 2013, there were 5.5 million registered RSA holders in Nigeria. That figure had risen to 8.6 million six years later. However, 33% of RSA holders (1.8 million) were under 30 years old in 2013 and down to just 9.5% (0.8 million) now. This decline in young RSA holders is not because that group has aged to the next category; the share of RSA holders in the 30-40 years group has increased only marginally (35% to 38%).
Yet at the same time, young people (15-34-year-olds) make up a larger share of the employed population, from 46% (29 million) to 49% (31 million) in the last six years. Put together, these figures show a mass exodus of Nigeria’s younger citizens from the formal contributory pension scheme (CPS) run in the country.
So the conclusion is that many young people became employed within the last five years, but are not participating in the CPS. Why?
Nigeria’s current pension rules exclude small businesses
A big part of the answer lies in the fact that a lot of young Nigerians are employed by micro-enterprises, which are not mandated to set up RSAs for their employees. In 2013, there were 58 million Nigerians working in these enterprises, 81% of the nation’s workforce.
By the end of 2018, this figure had risen to 64 million, 92% of the workforce. This coincided with an 82% drop in RSA ownership by youths in public sector employment and a 33% drop in RSA ownership by youths in formal private organisations. Given the fact that the youth share of the employed population is rising, it is safe to assume that majority of the employed youths are actually employed in micro-enterprises.
This exclusion of the country’s youth from the formal pension scheme poses a severe threat to Nigeria’s long-term future. The government currently spends 0.9% of Nigeria’s GDP on social protection for Nigerians above 50 years, much higher than countries with a similar income profile, even though this demographic barely makes up 20% of the population.
Nigeria’s elderly population (60+ years) is estimated to increase from 9 million now to 26 million in 2050. A tax-funded benefits scheme for even half of these people would impose a severe burden on Nigeria’s already stretched finances, and would divert resources away from investments in human and physical capital. A simple ₦30,000 a month stipend (minimum wage) would cost over ₦9 trillion, more than the current Federal Budget.
If pension penetration remains at its current rate (under 10%) then we are sitting on a time bomb.
The reality is that it is important for Nigeria’s young workers to be included in the CPS because personal savings and investments are generally not sufficient to protect against old age poverty. The Access to Finance Survey conducted by EFInA in 2018 reveals that, although nearly 55 million Nigerian adults save regularly, most tend to save mainly for emergencies. More generally, research from behavioural economics shows that people tend to under-save for the future and would benefit from schemes that force them to save more, as is common across the developed world.
Consistent and collaborative pension contributions, on the other hand, could secure the welfare of Nigeria’s elderly citizens and directly fuel economic growth by providing more funds for investment and deepening capital markets. In the absence of urgent and effective actions to close this hole in pension coverage, Nigeria’s young people risk their future, with a likely over-dependence on familial or governmental hand-outs, leading to an increase in overall poverty levels and causing decades of fiscal and social stress.
Young Nigerians take the initiative
Given this situation, why don’t more firms set up RSAs for their employees, or why does the government persist with the 15-employee threshold?
One argument is that small firms find pension contributions rather expensive. In response to my enquiries on the rationale behind the seemingly widespread non-compliance with the PRA,*Simon, a digital marketer in a tech start-up in Yaba opines that some founders view pension payments as an unnecessary add-on to the cost of labour. “But,” he adds, “My place is different. They told me that they would make pension contributions on my behalf, and every month, without fail, they have been deducting the money from my salary.” But the money was not paid into his RSA. It was kept for him, in a special account from which his employer promised to make en masse payment of the accumulated funds into his RSA. Payment is still pending.
When asked how he plans to escape old-age poverty, Saheed Omoniyi*, a young lawyer working in a small Lekki law firm says he has no plan. “I try not to think about it,” he says. “I guess I will use my savings.” Femi Folare*, another young lawyer working in an NGO in Yaba, has a different response. “I’ve been thinking about it a lot actually and I want to open an RSA by myself and start saving a percentage of money into it.”
Femi’s solution may hold the key. A self-employed individual, informal sector worker or employee in a non-compliant organisation is permitted to open a Micro Pension Plan (MPP) Account and pay money into it at will. Created for entrepreneurs and informal workers, the MPP is more flexible than a regular RSA, giving account holders weekly access to 40% of the money contained therein and allowing for contributions to be made as regularly as the account holder wishes. Crucially, it also means young Nigerians can open formal pension accounts without relying on their employers.
With regular public enlightenment on the MPP and the benefits of regular pension contribution, PenCom hopes to encourage the voluntary participation of informal sector workers in the CPS, effectively narrowing the gap in pension inclusion. The reduction of this gap could help the country achieve a huge pool of savings that could fuel economic growth, employment and infrastructure development. In the meantime, this mass scale exclusion of Nigeria's youth poses a longevity risk to the economy.
If not effectively managed, this could lead to a steep drop in the funds managed by PFAs. Coupled with the breakdown of the joint family system and the insignificant life time savings, it could mean that most of Nigeria’s youth population would spend the last years of their lives in poverty.
*Name changed to protect identity