The blueprint South Africa needs

This is the second article in our five-part series on Nigeria’s pension reform journey and its lessons for South Africa.

The first article (featured in the FAnews April edition) explored South Africa’s retirement savings challenges, highlighting pension system shortcomings and the need for reform.

In this article, we examine Nigeria’s Contributory Pension Scheme (CPS), its key features, and how these reforms have shaped the country’s retirement landscape. We also discuss how South Africa can learn from this experience.

The turning point

Before Nigeria’s reforms, its pension system faced inefficiencies, inadequate coverage, and financial instability, leaving many retirees without access to their pensions (Dahir-Umar, 2023). The 2004 Pension Reform Act introduced the CPS, marking a turning point for retirement security.

In Nigeria’s Pension Reform Journey, Aisha Dahir-Umar details how the government overhauled the system to create more equitable and sustainable retirement options (Dahir-Umar, 2023).

The CPS: a paradigm shift

Before the CPS, Nigeria’s Defined Benefit pension system faced unpaid arrears, fund mismanagement, and inadequate coverage (Dahir-Umar, 2023). The 2004 Pension Reform Act introduced the CPS, shifting to individual accounts where employees and employers contribute a fixed percentage to Retirement Savings Accounts (RSAs).

Dahir-Umar notes that the previous system was fragmented, inefficient, and unsustainable, making reform essential for workforce security and economic stability (Dahir-Umar, 2023). This led to the creation of the National Pension Commission (PenCom) in 2004 to oversee the reforms.

Key features of the CPS

According to Dahir-Umar’s Nigeria’s Pension Reform Journey (2023), the CPS has several key features that distinguish it from the previous system and contribute to its success:

1. Mandatory contributions: Both employers and employees are required to contribute a percentage of the employee’s salary to their RSA. This ensures regular funding for workers' retirement savings and helps avoid pension arrears, which were a major issue in the old system.
2. Individual Retirement Savings Accounts (RSAs): Each worker has an individual account, which provides more control over their retirement savings and ensures that the funds are personally owned and managed.
3. Private sector participation: The CPS allows for private sector involvement through licensed Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs), responsible for managing and safeguarding the funds.
4. Portability of accounts: Workers can move their pension savings between employers, crucial for employees who change jobs frequently, ensuring that workers' retirement savings remain intact, regardless of their employment status.
5. Diversified investment of funds: Pension funds under the CPS are managed with a diversified investment strategy, aimed at maximising returns while minimising risks, ensuring long-term growth of retirement savings (World Bank, 2020).

The CPS was introduced to address Nigeria’s pension system failures, including arrears, mismanagement, and limited coverage (Dahir-Umar, 2023). A key improvement was eliminating pension arrears, ensuring consistent funding through mandatory contributions.

The system also enhances transparency by separating the roles of Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs). Additionally, it has expanded coverage to public and private sector employees and small businesses, providing broader social protection (PenCom, 2021).

Lessons for South Africa

As South Africa moves toward pension reform, lessons from Nigeria’s CPS offer valuable insights. Both aim to expand coverage and emphasise individual retirement savings, but key differences exist.

South Africa’s system allows employees to opt out, unlike Nigeria’s mandatory CPS. Additionally, South Africa proposes a government-run default fund, while Nigeria relies on private Pension Fund Administrators (PFAs).

Key takeaways for South Africa as it develops its pension reform strategy include:

1. Phased implementation: South Africa should consider a gradual rollout of the auto-enrolment system, starting with larger employers before extending it to smaller businesses. This phased approach will allow for smoother implementation and enable lessons to be learned along the way (OECD, 2020).
2. Robust regulatory framework: A strong regulatory framework is essential for the success of any pension system. South Africa must establish clear guidelines from the outset, ensuring that the system is well-managed, transparent, and accountable (South African Government, 2022).
3. Public education and awareness: Public education campaigns will be critical to the success of South Africa’s pension reforms. Workers need to be informed about the importance of saving for retirement and how the system will work (PenCom, 2021).
4. Leveraging technology: South Africa can benefit from adopting technology solutions for record-keeping and fund management, similar to those used by Nigeria’s pension operators. Technology can improve efficiency, reduce errors, and enhance monitoring (World Bank, 2020).
5. Flexibility for informal sector workers: A significant portion of South Africa’s workforce is employed in the informal sector. The pension system must be designed with the flexibility to accommodate this group, ensuring that they too can benefit from retirement savings options (OECD, 2020).

The FSCA’s stance

FAnews asked Zareena Camroodein, Departmental Head: Fund Governance and Trustee Conduct, about the steps the FSCA is taking to ensure that the regulatory framework effectively manages the mandatory participation of employees as South Africa prepares to implement auto-enrolment in its pension system. Additionally, FAnews asked about how the FSCA plans to address the potential challenges of expanding pension coverage to informal sector workers, drawing from Nigeria’s experience with the Contributory Pension Scheme.

In response, Camroodein stated that “the policy around auto-enrolment has not yet been finalised, as further discussion is required following the publication of the document by National Treasury (NT) on 15 December 2021, titled Encouraging South African households to save more for retirement, which was released for public comment.”

She emphasised that “it would be premature for the FSCA to take any steps to ensure employer participation before enabling legislation is in place to give effect to auto-enrolment.” Furthermore, she clarified that mandatory participation differs from auto-enrolment, as the latter allows employers to opt out, whereas mandatory participation does not provide for such an option. Regarding the coverage of informal sector workers, she noted that the government is considering several options, including drawing from lessons learned in other African and global jurisdictions.

Looking ahead

Nigeria’s CPS has fundamentally altered the pension landscape and provided a model for other African countries, including South Africa. By studying Nigeria’s experience and adapting the lessons learned to the South African context, policymakers can create a pension system that enhances retirement security for all.

Next Thursday, we examine the regulatory frameworks of Nigeria and South Africa, comparing their effectiveness in pension fund management.

Writer’s Thoughts

The lessons from Nigeria’s Contributory Pension Scheme (CPS) provide valuable insights into ensuring a more inclusive, efficient, and sustainable system. By adapting successful elements from Nigeria’s approach, South Africa can create a robust framework that addresses the diverse needs of its workforce, ultimately securing a better future for its retirees. Do you agree? Please comment below, interact with us on X at @fanews_online or email me your thoughts at myra@fanews.co.za.

References:

• Dahir-Umar, A. (2023). Fighting for the Future: Nigeria’s Pension Reform Journey. National Pension Commission. Retrieved from https://www.pencom.gov.ng/wp-content/uploads/2023/10/Nigerias-Pension-Reform-Journey-Aisha-Dahir-Umar.pdf
• (2021). Annual Report and Financial Statements. National Pension Commission. Retrieved from https://www.pencom.gov.ng
• World Bank. (2020). Pension Systems in Sub-Saharan Africa: A Comparative Overview. World Bank Publications.
• (2020). Pensions at a Glance 2020: OECD and G20 Indicators. Organisation for Economic Co-operation and Development.
• South African Government. (2022). Financial Sector Conduct Authority and Pension Reform in South Africa. South African Government Publications.

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