CPS: 20 Years of Gains and Pitfalls

As stakeholders in pension sector celebrate 20  years of successful regime of Contributory Pension Scheme  in Nigeria,  Ebere Nwoji reports that PFAs see the period as years of gainful reforms in Nigeria’s  pension system.

The Contributory Pension Scheme (CPS) system  of retirement benefits payment will in June 2024 clock 20 years of its practice in Nigeria. The operators, after a critical look at their performance, admitted that it has not been  wasted 20 years but years of reforms  and achievements. They however noted that one of the major challenges of the scheme over the years has been the need to get Nigerians see  the value of  financial planning through pension savings. According to the operators, after these 20 years of its existence, Nigerians know little or nothing about pension. They added that even those who knows about the scheme do not have the trust as to understand that the sector is a protected industry as such  there should be no fear of loss of the saved funds.

At the 2023 media retreat organised by the Pension Operators Association of Nigeria(PenOp) the umbrella body of Pension Fund Administrators,  the operators recalled that  the condition of pensioners during the pre Contributory Pension Scheme (CPS)  era was nothing desirable .They recalled that pensioners were nothing better than destitutes in different corners of the country, where they cluster to wait endlessly to collect their meager benefits .

The situation, they said, continued for many years until in June 2004 when the former President Olusegun Obasanjo instituted a massive reform in the pension sector having adopted  the prevailing Contributory Pension scheme (CPS) from Chile to replace the Pay as you go system. The former President through the lawmakers enacted the Pension Reform Act that instituted the CPS establishing the National Pension Commission (PenCom) as the regulatory authority.

CPS and its objectives

The CPS which is contributory in nature is fully funded and is privately managed and ensures that every one who worked in Nigeria receives his retirement benefits as at when due.

It covered all employees in public and private sector but exempts all workers who had three years or less to retire and persons covered by the provisions of section 291 of the constitution of federal republic of Nigeria 1999. The main objective of the CPS is to ensure  that every person that worked in either the public or private sector in Nigeria  receives his or her retirement benefits as and when due.

Features of CPS

One of the major difference between the old pension scheme and the CPS is that whereas the old pension schemes were not fully funded as such at retirement, the pensioners were not sure of getting their benefits due to paucity of funds, the CPS is fully funded .Money for settlement of workers at retirement is contributed and is waiting for collection at individual employee’s account ie Retirement Savings Account (RSA) .

Before the CPS establishment, government had huge deficit of over N2 trillion in pension but twenty years after the establishment of the CPS, the scheme has accumulated over N17.5 trillion invested in various portfolios . In his paper at the retreat titled “At the Dawn of 20 Years of Pension Reform What are the Gains?”, 

Retirement Benefits Paid

PenOp Chief Executive officer,  Mr Oguche Aguda said in the past 15 years Pension Fund Administrators (PFAs) have paid a total sum of N1.63 trillion to retirees in both public and private sectors under both programme withdrawal.

He  said the above figure was paid to 442,000 Nigerians who retired from services in various employments in the country during the period.

 Agudah said out of the N1.63trillion lump sum paid on both life annuity  and programme withdrawal, in the second quarter 2023  total life annuity payment stood at N665.1 billion .This according to him was received by 111.708 applicants. He said in third quarter 2022, a total of N595.22billion was paid to 102,696applicants as annuity lump sum.

He said in third quarter 2019, a total of N386.30 billion was paid as annuity life lump sum to 71,214 applicants while in the third quarter 2015, a total of N101.96 billion was paid to 20,615 applicants and in third quarter 2011, N1.51 billion was paid to 331 applicants as  annuity.

Oguche said under programme withdrawal, in second quarter 2023, a total of N964,239.47 billion was paid to 339,201 applicants as lump sum under programme withdrawal while in third quarter 2022,N887,604.25bn was paid to 315, 112 applicants in third quarter 2022. In third quarter 2019, a total of N 589,335.78bn was paid to 117,502 applicants under the programme withdrawal while in third quarter 2015, N288,541.87 was paid to 117,502 applicants and in third quarter 2011, a total of N99,297.37bn was paid to 35,419 applicants.

The Annuity and programme withdrawal systems are two windows through which retirees under the Contributory Pension Scheme receive their retirement benefits .

He insisted that twenty years down the line the Contributory Pension Scheme instituted by the former President Olusegun Obasanjo has recorded significant growth with the total assets now standing at N17.65 trillion as at October this year.

Key Issues in CPS Management

Also speaking, PenCom Head of Survillance department, Dr Ehimeme Ohioma said the three key issues in pension management which all PFAs must not joke with were adequacy, sustainability and service delivery .

According to him, pension payment must be adequate for retirees to solve their problems.

He however said for pension payment to be adequate, workers and their employers must contribute adequately because a worker’s contributions determine his payment at retirement.

He said the pension system must be sustained to ensure continuity .

He said to ensure that continuity, the managers must ensure that in this period of inflation, return on investment was above inflation.

He said this could be done through right choice of investment instruments and windows.

On service delivery, Ohioma said pension administrators must bear in mind that there must always be complaints from the contributors.

He said this being the case, it behoves operators and regulators to ensure that the complains were perfectly treated.

He said this explains why PenCom increased the capital of operators to ensure they have critical infrastructures to be able to serve the public.

He highlighted capacity as another critical factor in ensuring successful pension management. 

He said skill of individual pension fund manager needed to be constantly updated to meet acceptable standard.

He said these were  the secret behind the accumulation of N17.65 trillion pension assets in Nigeria between June 2004 and  October 31, 2023 .

He said 64 percent of the assets were invested in federal government securities, 11 percent in corporate debt and 8 percent in quoted equities while less than 1 percent was in private equities and infrastructure.

He said the sector was faced with the challenge of availability of windows for investment.

The pension Fund Administrators have also within the period risen with the banner of Micro pension scheme launched some years ago. Both operators and the regulator are working hard to promote the relevance of the Micro pension scheme to the self employed and artisans.