www.pwc.com/ng Pension at State Government Level The New Era At PwC, we Pension Schemes… succeed aim to help State 2 Pension at State Government Level The New Era Introduction 3 PwC Nigeria's pension reform was necessitated by the myriad of problems that plagued Defined Benefit Schemes in the public sector and the varying types of pension schemes that existed within the private sector. The key challenge of the public sector Defined Benefit Scheme was its dependence on budgetary provisions from various tiers of governments for funding which eventually became unsustainable. In 2004, the Federal Government of Nigeria enacted the Pensions Reform Act (PRA 2004) which introduced the Contributory Pension Scheme (CPS) and made it mandatory for employers and employees in both the public and private sectors to contribute towards the retirement benefits of employees. In 2014, the PRA 2004 was repealed and a new act PRA 2014 was signed into law. This new act has now made it mandatory for state and local governments to implement contributory pension schemes for their employees. In this document, PwC, a leading professional services firm sets out our understanding of the CPS at state level and how we can help state governments achieve full compliance. It is our view that state governments can no longer ignore the need to implement it even amidst rising recurrent expenditure and the current economic climate. This is because the long term cost savings greatly outweigh the initial implementation costs. We do hope that this discussion document will stimulate states in the right direction and encourage them to partner with the National Pension Commission as well as relevant stakeholders in the implementation of their contributory pension schemes. We are happy to discuss this further with you. Excerpts The Pension Reform Act 2014 Part II – Establishment of a Contributory Pension Scheme 1. There is established for any employment in the Federal Republic of Nigeria, a Contributory Pension Scheme (in this Act referred to as “the Scheme”) for payment of retirement benefits of employees to whom the Scheme applies under this Act. 2. The Scheme established under subsection (1) of this section shall apply to all employees in the Public Service of the Federation, the Federal Capital Territory, States, Local Governments and the Private Sector subject to the provisions of section 5 of this Act. PenCom has set out guidelines for the implementation of Contributory Pension Schemes by State Governments… Enact Pension Law Establish Pension Board Develop Transition Framework Operate CPS Contributory Pension Scheme (CPS) Implementation process State Legislature State Pension Board State Government State Pension Board PenCom State Legislature State Government Implementation Stages Responsible Parties The pension law would govern and regulate the administration of the state’s pension scheme The state’s pension bureau would drive the implementation of the Contributory Pension Scheme The transition framework would articulate the State's transitional arrangements with key milestones to be met at different timelines within the CPS journey State employees would own Retirement Savings Accounts (RSA) with PFAs of choice while State Governments remit monthly employer/employee contributions to these RSAs Rationale 1. Enact a Pension Law to conform with the provisions of the Pension Reform Act 2014 2. Establish a Pension Bureau and develop a Transitional Framework 3. Register eligible employees with the National Pensions Commission (PenCom) 4. Obtain employer codes for all its MDAs from PenCom 5. Determine the accrued retirement benefits rights of all its employees and pensioners through actuarial valuations 6. Establish and fund a Retirement Benefit Bond Redemption Fund (RBBRF) with the Central Bank of Nigeria (CBN) or a Pension Fund Administrator (PFA) for the domiciliation and management of accrued rights funds 7. Establish a Group Life Insurance policy for its employees 8. Remit pension contributions and employee accrued retirement benefits rights if any to a PFA of employee choice Source: PenCom guidelines & circulars Setting up a contributory pension scheme would require State Governments to do the following; 4 Pension at State Government Level The New Era are yet to enact their pension laws but have drafted their CPS bills. are at various stages of roll out have enacted laws have fully implemented the CPS Kaduna Niger Lagos Rivers Osun Jigawa Delta Zamfara KEY Fully Implemented CPS Enacted Pension Law Drafted Pension Bills Ogun Oyo Kebbi Sokoto Taraba Katsina A n amb r a Kano Ekiti Kogi Bayelsa Nasarawa Ondo Edo Enugu Adamawa Imo Kwara Bauchi Plateau Benue Akwa -Ibom Abia Yobe Borno FCT … however, as at 2014, full compliance with the PRA remains low Gombe Ebony 26 States + FCT 15 States 8 States 10 States 5 PwC Cross River @ Lagos State Two major models of Contributory Pension are currently in operation at the State government level today Overview The Jigawa State pension model is recognised as the pioneer contributory defined benefits pension scheme model in the Nigerian pension landscape. It kicked off in 2001 after the Jigawa state government implemented reforms to its previous defined benefit pension model due to its huge pension deficits, the nonpayment of pensioners as well as multiple and fraudulent pensioner records. The contributory pension scheme in Jigawa has provided an opportunity for the State employees to key into their retirement future. The state government contributes 17% of employees basic salary into the employees retirement savings account while employees contribute 8% of their basic salary. It also has a gestation period of five years before employees can draw benefits from their contributions. Jigawa state has guaranteed its employees a minimum pension on retirement regardless of contributions made over work life Lagos state’s model is tailored after the federal contributory pension scheme The Lagos state pension model was enacted in 2004 following the then enactment of the Pension Reform act 2004 at the Federal level Act i.e capital A pension commission for the state was established and the contributory pension scheme took off fully in 2007. Lagos State government and it’s employees have an equal contribution ratio of 7.5% of basic salary, housing and transport allowances. This is however being reviewed by the State House of Assembly in the amendment of it pension reform act. Employees to align with the Federal Pension Reform Act 2014 of the State prior to the enactment of the State pension bill were beneficiaries to pension bonds which upon redemption were transferred into individual RSA’s. Overview Case Study Founded: 2007 Contribution Ratio: Employee (7.5%) : Employer (7.5%) Assets under Management: NXbn (2015) Total Contributions : N55.6bn (2007-2014) Civil Service Strength: 45,730 (2013) Retirees to date: 5773 (2014) ! Jigawa State Case Study Founded: 2001 Contribution Ratio: Employee (8%) : Employer (17%) Assets under Management: N29bn (2015) Total Contributions : N22.8 (2014) Civil Service Strength: 64,528 Contributory Defined Benefits Pension Scheme (CDBS) Defined Contributory Pension Scheme (CPS) 6 Pension at State Government Level The New Era Partnering with PenCom and relevant stakeholders is critical in achieving full implementation of the State Pension Schemes Poor management of pension funds CPS set up is mandatory for the State Governments (PRA 2014) Unwieldy growth of pension liabilities Retirees not paid their retirement benefits as and when due Current Situation with Pension Amidst the current situation, State Governments can no longer ignore the need to implement a Pension Scheme for its employees In addition to complying with the law, State Governments need to take advantage of the various opportunities that abound within the Pension industry to secure the future of its greatest asset – the Civil Service – and harness the benefits of implementing a CPS. • Possible reduction in wage bill: Workers to be transferred to the new scheme will need to be registered and validated. This would ultimately result in the identification of and elimination of workers and possible reduction of the State’s wage bill. • Access to funds for capital projects: States with CPS can float infrastructure bonds to access pension funds that can be used for developmental projects. Plus, a reduced wage bill would free funds to be utilised in the provision of capital projects. • Security of pension funds: The scheme entrenches the principle of transparency and as reflected in the reporting requirements of the PFAs and PFCs to the contributors body • Reduced retirement burden to State Governments: Pension funds would be managed by professionals best qualified to make appropriate investment decisions and as such, funds for to retirees Additional income earned as administration fee: State & Local Government pension bureaux earn a maximum of N40 as administration fee per state employee RSA on a monthly basis ghost up accountability and regulatory pay out can Key Benefits to States in implementing the CPS 7 PwC At PwC, we have developed a framework through which we assist States achieve full compliance We promise to deliver: 1 Clarity of success requirements 2 Clarity of scheme fundamentals 3 As the leading advisor and service provider to the Financial Services Industry worldwide, we’re ideally placed to assist with the implementation of a CPS, in line with PenCom’s requirements, and capitalise on inherent and emerging opportunities within the pension industry. Clarity of the ‘current state’ Clarity of route to success Clarity of future state 4 5 PwC State Level CPS Rollout / Transformation Approach Assess & Analyse Design & Construct Implement State Government Diagnostic Review / Draft State Pension Law Design Scheme Framework, Model & Road Map Train, Handover & Monitor Key Outputs State Staff Welfare Scheme Performance Evaluation State Pension Diagnostic Report State Pension Reform Act State Pension Bureau Operational Framework Report State Pension Transitional Framework State Pension Liability Funding Plan High Level Pension Scheme Implementation Plan Training Plan & Report Project Management Track & Report results 1 2 3 8 Pension at State Government Level The New Era 208,000 Staff & partners 756 Locations Why PwC is the right partner Experienced Global Pensions Team We are able to provide you with highly skilled individuals that are not only experts in understanding the specific local pension constraints, but are also experienced in working together with clients to a single shared project vision and strategy. Significant Experience in Asset Liability Modelling We can assist determine pension liabilities within various risk parameters and design investment strategies to mitigate these risks to acceptable levels. Deep Industry Experience We have over 40,700 financial services professionals across the globe who are trusted business advisors to Governments, Pension Funds, Banking and Financial Institutions as well as Fortune 500 companies Consistent, High Quality Delivery We apply relevant knowledge, lessons learned and insight into how governments have approached similar pension scheme implementation issues and challenges. Our products, services and methodologies are globally consistent, which results in uniform quality and cost-effective advice around the world. assurance advisory tax 1. Ensure full compliance with the provisions of the Federal Pension Reform Act as it relates to State Government Contributory Pension Schemes; 2. Provide clear direction and practical recommendations while balancing state government staff welfare goals and objectives; 3. Determine the actual staff strength of State Governments and the actual value of employee accrued retirement benefits rights; 4. Improve state employees and retirees customer service experience via redesigned customer service processes which would establish excellent service delivery and prompt monthly pension payments; 5. Decrease underlying costs and overall expenses by Identifying inefficiencies within current state pension scheme and ascertaining the actual size of state pension liabilities Eliminating redundant pension processing platforms and procedures; Increasing operational efficiencies by (re)designing pension processes and reducing data entry A PwC-led pension transformation project has the potential to: 9 PwC Contact us Dr Andrew S Nevin Partner dl: +234 1 271 1700 m: +234 806 059 3528 e: [email protected] PwC offices in Nigeria Lagos Port Harcourt 35 Woji Street GRA Phase II, Port Harcourt Rivers T: +234 84 571 513 F: +234 84 237 959 Lagos Head Office Landmark Towers 5B Water Corporation Road Victoria Island, P. O. Box 2419 Lagos, Nigeria T: +234 (1) 271 1700 F: +234 (1) 270 3108 Lagos Annex office 17 Yesufu Abiodun Street CCP Building Oniru, Lagos T: +234 1 271 1700 F: +234 1 270 3108 Abuja 2nd Floor Muktar El - Yakub's Place Plot 1129 Zakariya Maimalari Street Opposite National Defense College Central Business District Abuja T: +234 9 291 9302 - 4 Email: [email protected] https :// twitter.com/PwC_Nigeria Website : www.pwc.com/ng https://www.linkedin.com/company/pwc_nigeria Financial Services Dr Bert Odiaka Partner Nigeria Advisory Leader dl: +234 9 291 9302-4 m: +234 803 471 8674 e: [email protected] Taiwo Oyedele Partner dl: +234 1 271 1700 m: +234 806 019 6593 e: [email protected] Tax Mary Iwelumo Partner dl: m: e: +234 1 271 1700 +234 803 301 3035 [email protected] Government & Public Services Tony Oputa Partner dl: +234 1 271 1700 m: +234 805 501 2958 e: [email protected] Assurance Tobi Olanipekun Manager dl: m: e: +234 9 291 9302-4 +234 803 425 9297 [email protected] Advisory 10 Pension at State Government Level The New Era 11 PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more by visiting us at www.pwc.com/ng This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2016 PricewaterhouseCoopers Limited. All rights reserved. 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