US embassy cable - 04LAGOS2014

UNCLAS SECTION 01 OF 03 LAGOS 002014 
 
SIPDIS 
 
STATE PASS TO OFFICE OF PERSONNEL MANAGEMENT 
 
E.O. 12958: NA 
TAGS: EFIN, ELAB, AMGT, PGOV, NI 
SUBJECT: ENACTMENT OF NEW PENSION ACT 
 
 
1. (U) Summary.  Nigeria's National Assembly has 
enacted a new Pension Reform Act that establishes a 
uniform contributory pension scheme for public and 
private sector employees.  The new law confers pension 
management responsibilities on professional pension 
fund administrators, who will maintain retirement 
savings accounts in behalf of public and private sector 
employees.  A National Pension Commission will regulate 
and supervise the activities of the administrators and 
custodians of pension fund assets. The new scheme is 
expected to be fully funded, privately managed, and 
strictly regulated. End summary. 
 
CONTRIBUTION RATES AND RETIREMENT BENEFITS 
 
2. (U) Under the new scheme, both employers and 
employees will be required to contribute a minimum of 
seven and a half percent of an employee's monthly 
earnings to a retirement account.  Employers will have 
the option of bearing the full burden of the scheme. 
Every employee subject to the act's provisions will be 
required to maintain an account with a Pension Fund 
Administrator of his or her choice.  Employers will 
have to deduct their employees' contributions at source 
and remit them within seven days to a Pension Asset 
Custodian designated by the employees' Pension Fund 
Administrator. The accumulated funds from employees' 
retirement savings accounts will be drawn down in two 
phases at maturity. First, employees, upon retiring, 
will collect lump sum cash payments that will be not 
less than fifty percent of their current annual 
remuneration. Second, the other half of the funds in 
the retirement savings accounts will be invested in 
annuities designed to provide pension benefits to 
retired employees for the remainder of their lives. 
 
PENSION FUND ADMINISTRATORS(PFAs) 
 
3. (U) Only limited liability companies that will have 
accrued minimum paid-up share capital of N150 million 
(USD 1.15 million at the current exchange rate) will 
qualify to manage pension funds. Fund administrators 
will operate retirement savings accounts in behalf of 
employees and will invest the latter's funds in various 
assets through PACs.  The administrators will maintain 
account books of transactions and will provide relevant 
information to the National Pension Commission.  The 
PFAs will compute and pay retirement benefits in line 
with the law regulating the pension scheme. 
 
PENSION ASSET CUSTODIANS (PACs) 
 
4. The responsibility for safekeeping pension funds 
will lie with licensed financial institutions that will 
be required by law to hold pension funds and assets in 
trust. Companies having a minimum net worth of five 
billion naira (USD 38.5 million) will manage the PACs. 
The former will be required to have cumulative balance 
sheet assets of one hundred and twenty five billion 
naira (USD 960 million) or be owned by licensed 
financial institutions with the same balance sheet 
position. (Comment. The one hundred and twenty five 
billion naira requirement may be unrealistic.  The 
National Pension Commission has said it will review the 
new law and recommend amendments. End comment.) Pension 
fund custodians will invest in behalf of PFAs.  They 
will be required to provide data and other information 
relating to their operations and dealings with funds 
administrators to a National Pension Commission. 
 
NATIONAL PENSION COMMISSION 
 
5. (U) The Pension Act establishes a National Pension 
Commission whose principal objective will be to 
regulate, supervise and otherwise ensure the effective 
administration of pensions in Nigeria. The full-time 
officers and staff of the Commission will comprise a 
non-executive chairman, an executive director general, 
four commissioners, and other officials representing 
each of the six geo-political zones of Nigeria.  The 
appointments of the principals will be subject to 
senate confirmation.  The head of the Civil Service and 
one representative of the Central Bank of Nigeria, the 
Finance Ministry, the Nigeria Labor Congress, the 
Nigerian Union of Pensioners, the Nigeria Employers 
Consultative Association, and of the Securities and 
Exchange Commission will also be on the board of the 
commission. 
 
NIGERIAN SOCIAL INSURANCE TRUST FUND (NSITF) 
 
6. (U) The new pension act clarifies the statutory 
responsibilities of the Nigerian Social Insurance Trust 
Fund (NSITF).  While NSITF will continue to provide 
social security insurance services, it will also serve 
as a pension funds administrator.  NSITF will guarantee 
minimum pension benefits as determined by the pension 
commission, and will credit all existing contributions 
plus attributable income less amounts required to 
guarantee minimum pensions to employees' retirement 
savings accounts. However, NSITF will transfer all the 
funds and assets it holds and manages to pension fund 
custodians as soon as the pension scheme is 
established.  Five years after its establishment, 
employees will be free to transfer their NSITF 
entitlements to any PFA of their choice. 
 
TRANSITIONAL PROVISIONS FOR THE PRIVATE SECTOR 
 
7. (U) The pension act makes transitional provisions 
for private sector organizations with existing pension 
schemes, which by law must participate in this new 
scheme.  Private sector organizations that have defined 
contribution schemes will be required to re-compute 
their employees' contributions and to credit them to 
retirement savings accounts to be opened for employees. 
Such pension funds and assets will have to be 
segregated from the funds and assets of that these 
private sector organizations accumulated before the 
enactment of the new pension scheme. (The old pension 
scheme, also established by legislation, was non- 
contributory for the public sector. Benefits were 
defined and linked to final salary.  The scheme failed 
because it was only partially funded or in most cases 
not funded at all. Until the new pension act was 
passed, pension schemes in the private sector were 
voluntary and governed by trust deeds.  The schemes 
were contributory, insured, self administered, and 
generally successful.) 
 
 
TRANSITIONAL PROVISIONS FOR THE PUBLIC SECTOR 
 
8. (U) All government ministries and departments will 
establish pension fund offices.  These offices will 
issue government bonds to cover the entitlements to 
pensions existing before the new scheme takes effect. 
The bonds will be redeemed upon the retirement of 
employee contributors who will then have an option to 
buy annuities. 
 
LABOR'S REACTION 
 
9. (U) On July 15, 2004, the Nigeria Labor Congress 
(NLC) organized an interactive forum to examine both 
the nature of what will be the contributory pension 
scheme and the mechanism and institutions established 
by law to administer the scheme.  The participants 
perceived inadequacies and ambiguities, and called on 
both the Presidency and the National Assembly to 
address them. The NLC fears that the new act 
inadequately addresses existing pension liabilities. 
The NLC said this situation informed its call for 
pension reform scheme that might clear the backlog of 
pension arrears.  The NLC is urging the GON to 
appropriate funds from federal revenue (especially from 
crude oil sales) to clear these liabilities. 
 
10. (U) The NLC also questions the constitutionality of 
the new pension act.  It argues that the National 
Assembly has no constitutional mandate to legislate 
pension schemes for the private sector, and has 
threatened to contest the legality of this new act. The 
NLC is also urging the Government of Nigeria to review 
the composition of the National Pension Commission to 
ensure adequate and equitable stakeholder 
representation. 
 
BANKS EXPECTATIONS 
 
11. (U) Many banks are positioning themselves to 
benefit from the new pension scheme. Some banks have 
begun to form asset management companies or departments 
preparatory to being licensed as pension fund 
administrators (PFA). Notable among them are the 
Investment Banking And Trust Company (IBTC), the United 
Bank for Africa (UBA), First Bank, and NAL Bank. Some 
of these bank were managing contributory pension funds 
for the private sector before the new act became law, 
and expect to become PFAs for such companies once the 
banks become duly licensed. Some of these banks are 
also preparing to be licensed as pension fund 
custodians (PFC). The law stipulates that PFAs cannot 
transact business with affiliated PFCs, however. 
 
CONTRIBUTORY PENSION FUNDS TO ENSURE LONG-TERM FUNDS 
 
12. (U) Many financial operators consider the scheme 
overdue, given its potential as a major source of long- 
term funds. At present, the primary source of liquid 
assets of the financial sector, particularly the 
banking sub-sector, is predominantly short-term funds 
from the public sector. Bank dependence on such funds 
has always been cited as a reason for the low volume of 
credit extended to the real sector of the economy, and 
usually at high interest rates. Sola David-Borha, an 
executive director of the Investment Banking and Trust 
Company, told us in early August that the dearth of 
long-term funds has grossly undermined the investment 
potential of Nigerian banks. She said the pool of funds 
to be generated through the pension scheme will give 
banks greater latitude to invest in productive 
ventures. The availability of these long-term funds 
will ensure cheaper funds for the investing public as 
well, she said. 
 
13. (U) The cost of short-term public funds, which 
often exceeds 15 percent per annum, has usually been 
the banking sector's excuse for charging high interest 
rates on loans. Now, as a result of the new pension 
act, it is expected that pension funds will pool 
billions of naira within the first five years of the 
law's implementation. This will make it possible for 
banks and their customers to secure easier access to 
funds for working capital, mortgages, etc. at longer 
maturities and possibly lower cost. 
 
14. (U) While concerns have been expressed about what 
return will accrue to contributors of funds to be 
invested by banks and managed by the pension fund 
custodians, Bayo Yusuf, the senior manager of the 
pensions department of United Bank for Africa (UBA), 
told us that contributors to the pension schemes will 
receive the prevailing market interest rate. The law 
expressly states, "No PFA should give its contributors 
less than 200 basis points below prevailing market 
interest rate".  Contributors will thus receive some 
return on their "investment" at maturity. (Comment. 
The question is, what will be the prevailing market 
rate?  Is it to be treasury bill rate by itself or plus 
so many bonus points?  Is the prevailing market rate to 
be indexed to inflation?  Since the Government has 
sometimes sold treasury bills at a discount to offset 
the differential between the rate of t-bills at par and 
inflation, contributors to the schemes might receive 
little or no return on their investment were 
contributors to be paid a rate of return that is no 
less than 200 basis points below the prevailing market 
rate, as indicated above.  End comment.) 
 
15. (U) Yusuf believes that the possibility of banks' 
obtaining PFA licenses will help some banks to meet the 
July 2004 directive that they increase their capital 
base from N2 billion (USD 15.4 million) to N25 billion 
(USD 192.3 million) by December 31, 2005. The Act 
requires that PFAs have a N150 million capital base 
(USD 1.2 million), but most banks already have over 
N500 million (USD 3.9 million). Yusuf believes that 
should mergers or acquisitions not be feasible for 
banks to meet the new capital base requirement, some 
may opt to become PFAs, action that could improve the 
quality of funds administration in Nigeria. 
 
16. (U) The law allows companies like Shell Oil and 
Cadbury that have existing pension funds of over N500 
million to set up their own PFAs. Thus the focus of 
some PFAs will likely be on small and medium 
enterprises (five employees and above) that accumulate 
a smaller volume of pension funds, Yusuf said. Such a 
development could encourage positive banking habits and 
also help ensure future income for workers who until 
now have not contributed to pension programs. 
 
BROWNE