In the last few months, I have had the privilege of working with small business owners, graphic designers, photographers, video editors, book editors and other self-employed professionals due to some ongoing projects that I am supporting. This period also coincided with the lockdowns associated with the COVID19 restrictions in Nigeria and this usually led to discussions around employee welfare. In these discussions, I realized that many of these businesses are enlisted in any pension plan for their employees.
In most instances, the business leader or founder that I was dealing with is probably also younger than 34 years old, and with no pension plan as well. So, it is not a case of treating the employees badly. It is a systemic issue and looks like it is even an issue that is beyond the few businesses I discussed with.
Pension Reforms Act of Nigeria makes it compulsory for any business entity with more than fifteen employees to enlist its employees with a Pension Fund Administrator, with the employees opening a Retirement Savings Account (RSA). Based on the pension laws, the employer is expected to deduct 8% of the employee’s qualifying emoluments and remit to the PFA along with another 10% that is contributed by the employer. This law tends to capture medium-sized and large businesses, as micro businesses and small businesses tend to have less than 15 employees. The pension plan grew from zero in 2004 to about 5.4 million RSA holders in 2012, with only about 30% of those RSA holders being below the age of 30. As of 2018, RSA holders were about 8.4 million in Nigeria. The National Pension Commission (PenCom) is regarded as one of the leading agencies of the federal government, as a result of the continued growth and stability being enjoyed in the sector.
Despite the growth experienced in the first decade of the pension scheme in Nigeria, there has been a decline in the youth population on the formal pension scheme as the RSA holders below the age of 30 has fallen to about 10% of the total RSA holders as of 2018. The RSA accounts held be the young population declined in absolute terms from 1.6 million in 2012 to ~800,000 as at the end of 2018. As seen in the tables below, it is also evident that it is not an issue of the RSA holder moving into the next age group band (Age 30-40) as that band remained relatively flat between 2012 and 2018.
The employment data from the Nigerian Bureau of Statistics (NBS) further shines more light on this issue. Young people under the age of 34 constitutes the largest portion of the employed population, being relatively flat at about ~44% between 2012 and 2018, with the absolute employment number growing from 29 million to 31 million for people under the age of 34. This confirms that the youth population are actually in employment but are mainly outside of the formal contributory pension scheme. This is primarily because they are mainly self employed or employed in the informal sector, working with micro businesses and small businesses. EFINA in 2018 estimated the size of the employment in the informal sector at about 67 million, out of which about half would be people under the age of 34 based on the above NBS statistics.
In Nigeria, there is no real benefit scheme for the seniors and the aged population. With the recent decline in crude oil prices, the country can’t even afford such a “luxury” with our huge population. Our social values have also been influenced by western culture. In some social media debates, many youths have expressed disdain at people expecting them to take care of their parents at old age. These social values can only get worse in the nearest future. These issues, coupled with the poor savings and investments culture by young people in Nigeria, means that there is a looming “old age poverty” crisis waiting to happen when the current youthful population begins to age and become senior citizens.
The young citizens need to take their future into their hands. Old age poverty would be deadlier than any financial hardships that they ever experienced. There is a need to leverage on the recently introduced micro-pension plan which was introduced for self employed professionals, small business owners and people working with micro and small businesses. The micro-pension plan allows individuals to make personal voluntary contributions into their pension scheme – with no limits or minimum threshold. For the micro-pension scheme, participants could even access up to 40% of their savings in the unlikely event of any financial emergency. The micro-pension scheme also allows employees of companies that should have been in the formal contributory pension scheme to also participate in the micro-pension scheme, as an additional plan.
The challenge is that many PFAs are yet to publicize any special pension package under the micro-pension plan. The public enlightenment on pension schemes continue to be very poor. It was not until earlier this week that Leadway Pensions, one of the leading private pension companies in Nigeria, announced a special partnership with Awabah to lead the growth and deployment of its micro-pension products across the country. Awabah is led by Tunji Andrews, a very familiar name in the financial industry in Nigeria.
While I am very hopeful that a well implemented and managed pension scheme could help avoid the crisis of “old age poverty” by the time the current young working population would become senior citizens, the success of such a scheme largely depends on the financial behaviour of the individuals within that age group. Would they adopt the strategy of investing in their future, or would they rather lavishly spend on frivolities and trade-off their future with “Old Age Poverty”? Time, obviously, will tell.