The Pension Commission of Nigeria, PenCom, and the National Bureau of Statistics recently released the data on pension fund assets and membership registrations for March 2018. According to the said reports, pension fund assets increased to N7.94 trillion, while membership registration stood at 7.98 million. Looking at both figures on the aggregate gladdens the heart because they point to the fact that many more Nigerians are registering and taking their retirement seriously. This is particularly so when viewed against the backdrop that majority of the members fall within the 30-49 age bracket, as the report shows that 5,189,875 out of the 7,975,976 members are in that age group.
One question that comes to mind, upon looking at the numbers, is like Arm Pensions puts it, “is tomorrow looking good?” or are the pension assets adequate, assuming those 7.9 million people decide to retire today? In Economics, the wealth of a nation is usually measured with the gross domestic product (GDP) or sometimes, the National Income (NI). Unfortunately, it has been found out that GDP, as an aggregate measure does not, in most cases, translate to wealth of the people in an economy. Yes, economic growth does not always equal economic development.
Economists have, therefore, resorted to using another measure to gauge the well-being of the people, and that measure is GDP per capita, or par capita income. Par capita income is simply the total GDP, or NI of a country, divided by the total population.
It is not uncommon, therefore, to see countries with very little GDP that, because of their small populations, their per capita incomes surpass those of big GDP-large population countries. For example, according to the World Factbook, the GDP of the United States of America at the end of 2017 was $19.36 trillion and with a population of 326,625,791, its par capita income became $59,500. Compare that with Qatar with a population of 2,314,307, GDP of $341.7 billion and par capita income of $124,900. You can see that though the US is far bigger than Qatar in GDP terms, the latter is better than the former in par capita income terms. It may not be far from the truth, if it is said that Qataris are richer than Americans.
Now let us apply that to pension fund assets in Nigeria. Given the history, trend, and plight of pension and pensioners in Nigeria, one may be excused for basking in the euphoria that pension assets in Nigeria are in trillions of Naira. But what happens when the data is looked at in relation to the membership, in terms of par capita pension asset? N7.94 trillion pension assets spread among 7.98 million pension fund participants, translates into about N995,000 per person. At the current cost of living in Nigeria, how long can N995,000 last a retiree? Now you can see that pension fund assets in Nigeria are grossly inadequate.
There is a need for both the government and corporate citizens to do something about it. There are a few things that can be done to shore up pension assets, at least for now.
Increase the rate of pension contributions
One way to increase the adequacy of pension savings in Nigeria is to increase the contribution percentage. This may be painful at first, but it breeds conservatism and helps ensure that people live happily in retirement. If there is any time that calls for putting aside more now for later, it is in this age where longevity has increased and medical and other costs also increase with age.
Increase Tax Deductibility of pension contributions with age
While pension contributions are tax-deductible, there may be need to increase the deductibility in proportion to age. For example, in the US, contributions to 410k accounts (a form of retirement account) is limited to $18,000 tax-free for people below 50 years, but above 50, the limit is increased to $24,000. In this case, people are encouraged to catch up with lost savings. More importantly, this amount gets increased marginally each year.
Voluntary additional contribution
While there is provision for voluntary additional contribution by employees, there is no incentive attached to this. Countries like the USA use what they call company match to encourage employees to save even more. Company match comes in many forms, sometimes dollar for dollar or fifty cents for every dollar saved up to a given limit, usually 4% of an employee’s monthly pay, and with vesting schedules that almost mandates the employee to remain in the company for long. It is almost self-evident that employees will like to save extra if they know that for each additional Naira they save, their company will also save additional Naira on their behalf. For companies, this is only an altruistic corporate behaviour that helps them retain their best employees, in that employees may find it difficult to quit their jobs and forgo the company match.
Though there are a lot matters arising from the proposed multi-fund structure of PenCom, its implementation will go a long way to enable pension funds to invest in high-return variable income securities, albeit riskier. Investing a greater portion of pension assets in such securities would boost total pension fund assets in the long run if the attendant increased risk is managed properly.
Retirement Finance Education
One of the reasons why more people in the 30-49 age bracket are saving more is because they seem to understand the need to plan for their retirement. Gone are the days when children took care of elderly parents in retirement. The current unemployment rate has even exacerbated the problem.
There is, therefore, need for proper and constant retirement finance education, both by the corporate bodies and the government, to sensitize people on the dangers of not planning for retirement. With proper financial and retirement education, people will embrace the need and virtue of saving for retirement.