Pension schemes generally exist to ensure that workers and their dependents are catered for in retirement and in old age. To ensure that this objective is achieved, architects of modern and effective pensions schemes around the world are generally guided by these principles:
It should be fully portable and should attract no costs or administrative hurdles when the employee is moving from one employer to the other of from one pension fund manager to the other. Portability ensures that employers can make decisions about their careers without worrying about any impediments to their retirement benefits. If anything, moving from one job to the other should be encouraged as a means of ensuring that people can earn more, save more towards their retirement and potentially earn higher retirement benefits. When pension schemes are not portable, workers looking for “greener pastures” elsewhere may decide not to do so for fear of losing their benefits. Under Nigeria’s old Defined Benefit Pension Scheme in the Public Service, many talented public-sector employees declined opportunities in Nigeria’s more vibrant private sector for fear of compromising their future benefits.
#2: Universal Application:
Closely linked to portability is the fact that pension schemes should be universally applicable at least within countries. This means that everyone who works within a country should be compulsory covered by a pension scheme, and as much as possible, the rules for pensions schemes should be standardized. Where this happens, employee mobility is enhanced, and people can move from one employment type, segment or industry to the other without fear of compromising their retirement benefits.
#3: Realistic Replacement Rate:
The replacement rate is the measure of the extent to which your retirement benefits cover your terminal emoluments (last salary). This is important because the higher the replacement rate, the more likely your retirement benefits will be able to take care of your lifestyle in retirement. Ensuring a reasonably high and realistic replacement rate should be an important focus of regulators, scheme sponsors and the individuals themselves.
#4: Voluntary Contributions:
Regardless of the structure of the pension scheme, additional voluntary contributions should be available and encouraged. Additional voluntary contributions help to augment retirement benefits and bolster the replacement rate. In some jurisdictions, certain incentives exist to encourage voluntary contributions by employees, including: employer/government matching of additional voluntary contributions and tax incentives for additional contributions.
#5: Ease of Calculations:
A good pension scheme is one where participants can easily calculate their contributions, investment growth, and benefits. The calculations should be easy to understand and perform considering that participants in a pension scheme are generally not financial experts, but everyday people.
#6: Separation of Custody from Administration:
In order to ensure the integrity of the pension scheme, the custody of pension assets should be separated from the administration and management of the funds. This ensures that there are checks and balances between the operators involved in these two activities, and that pension funds can be invested properly, accounted for and the fiduciary risks involved in pensions can be significantly reduced and mitigated.
#7: Access to Information:
Information about pension schemes, rules for contributing, withdrawing, fees, and information about prices and performance must be open and publicly available. The higher the level of transparency there is about the management of pensions, the more likely that potential participants will trust the schemes and participate.
#8: Uniform and Effective Regulation:
Regulation is an important part of a sound pension scheme. There should be a separate regulator who should not be responsible for any scheme operations themselves. There must be clear regulations and rules and a clear process for rule-making and changes that ensures that operators and scheme participants are adequately engaged, and the overall interest of the pension system is always preserved.
Interestingly, when you evaluate Nigeria’s Contributory Pension Scheme against these international standards, you will no doubt agree that our Government and the Regulatory Agency, PenCom have done quite well with the Scheme that we operate. All that is left is for more Nigerians to embrace the scheme, and start enjoying its benefits.