It is counter-productive – Operators
… It has come to stay – PenCom

By Rosemary Onuoha

FOLLOWING a recent guideline from the National Pension Commission, PenCom, workers are jettisoning the Voluntary Contribution, VC, initiative of the Commission on the grounds that it defeats the original aim why workers embraced the initiative.

According to the guideline which took effect from December last year, a retiree can only withdraw 50 percent of his VC after retirement while the balance of 50 percent shall be fixed for pension and utilized at date of retirement to augment the contributor’s retirement benefit.

It will be recalled that the Pension Reform Act, 2014, permits active workers to make VC in addition to the mandatory contribution of the Contributory Pension Scheme, CPS, if they so desire.

However, while some operators and contributors are kicking against the recent directive on the grounds that it is the right of the worker to determine how he will collect his VC, PenCom is insisting that the directive is to maintain the pension objective of the CPS.

Discussing this development with Insurance Vanguard, the Director General of Lagos State Pension Commission, LASPEC, Mrs. Folashade Onanuga, stated: “One of the marketing points for us for VC is that we tell workers that after retirement, even before their accrued rights are paid, they should have a bulk sum to start something with. That is why majority of them went into it. All of a sudden this directive came on board and so many workers are jettisoning the VC.”

A pension contributor who spoke on condition of anonymity said, “My mandatory contributions are there in my Retirement Savings Account (RSA). But for my VC, I contributed that on my own accord. So, if I wish, I could use my VC to augment my pension or withdraw everything. However, it is not the right of government to mandate that 50 percent of my VC should be added to my mandatory contribution. To me that is a fraud.”

Why the change – PenCom

However, speaking to Insurance Vanguard on this issue, Head of Research and Corporate Strategy Department at PenCom, Dr. Farouk Aminu, stated: “People are missing the essence of pension. Pension account is not savings account. If you want to save money and use it later in life, go to the bank and open a savings account which you can collect at will. But if you want to put money in a pension account it should be for pension and not for savings.”

Aminu further explained: “People are just using the RSA as a savings account to run away from paying government taxes especially people who receive very fat salaries like those working in the oil sector. Somebody can put N500,000 into the VC, after two days, he withdraws it.

They do this because they will not pay tax to government by putting money into the RSA. So PenCom came up with the directive that when you put your money into VC you can’t withdraw the whole of it. You must keep some back for your retirement because that is the whole essence of pension. If you need a savings account then go to the bank and open one.”

The guideline

The guideline states: “Section 4(3) of the Pension Reform Act, 2014 allows active employees under the Contribution Pension Scheme (CPS) to contribute voluntarily in addition to the mandatory contributions into their respective retirement Savings Account (RSA) in order to augment their pension retirement.

Similarly, Section 4 (7) allows exempted employees from the CPS to participate voluntarily in the CPS subject to a guideline issued by the Commission.

“The Commission has observed the current high trend of request for Voluntary Contributions (VC) withdrawals by Pension Fund Administrators, PFAs, especially the significant VC amount withdrawn, usually within short duration of lodgement in the RSA both for mandatory and exempted contributors thereby defeating the purpose of VC which is meant to enhance pension at retirement. Also the short interval between the date of contributions and withdrawals, results in insignificant tax payable to the relevant tax authorities.

“The following rules and activities must be adopted by all PFAs/Pension Fund Custodian, PFCs, to foster compliance, (a) Time frame for withdrawal from VC account shall be once in every two years from the last approved withdrawal date. Subsequent withdrawal shall only be on the incremental contributions from the date of last withdrawal. (b) For mandatory contributors, the amount remitted as VC shall be separated as follows: 1) 50% shall be tested as contingent, available for withdrawal within the stipulated timeframe of every 2 years. Taxes would be deducted on income earned in line with section 10 (4) of the PRA 2014. 2) The balance of 50% shall be fixed for pension and utilized at date of retirement to augment the contributor’s retirement benefit.”

Stakeholders’ reactions

Reacting to the development, Onanuga said, “In Lagos, we started the awareness for VC about a year and a half ago and when contributors were settling down with it, PenCom came up with the guideline. With all due respect, Lagos workers are very knowledgeable and educated. So, some of the contributors have stopped making VC.

“For Lagos State Pension, the payroll is automated. The first thing we did to be able to have voluntary contribution was to create a deduction feed on Oracle. If we did not do that the pay point would not be able to deduct it. So, that was created about a year and a half ago. With the opening of the window, people could make voluntary contribution, and so many people came on board.

“We have been educating workers on making voluntary contributions to have extra savings for themselves and also that when they retire, they will have a bulk sum immediately to fall back on. Whilst they were settling down, the new guidelines came out. Even if workers make voluntary contributions, apart from the fact that they cannot collect immediately as they would have wanted to, fifty percent now will be transferred into their retirement savings account, which is a big challenge for us.”

Speaking on condition of anonymity, a worker said, “As a worker it is my voluntary contribution. Hence, it is my right to ask that part of my pension savings be transferred to mandatory contribution; nobody should compel me to do so.”

No going back, PenCom insists

However, the regulatory body has insisted that the directive has come to stay.

When hinted that some active workers are jettisoning the VC initiative due to the new directive, Aminu said, “They can back out and open a savings account, it is better. People are doing this because they know when they put money into the RSA, they will not be taxed. So they put money there with hope that when they retire they will withdraw it in bulk without tax, it should not be so.  If you want to do pension, do pension, if you want to do savings, do savings.”

Speaking to Vanguard on condition of anonymity, Managing Director of a PFA said, “Many people have evaded tax payment with VC and that is where the crisis started. The Federal Inland Revenue Service, IFRS, as well as state revenue boards started complaining because they have estimated what they will make from tax, based on income paid to workers. However, they found out that some workers directed that the bulk of salaries should be added to VC which led to the reduction in the tax estimates.  After the money is paid into VC, the contributor goes back to withdraw it the next week. The trend has been on-going for some time now. So it is such round-tripping that PenCom has blocked. So now if you want to save for pension, it will be for pension, if it is for savings, put it in the bank.”

Experts disagree

Managing Director/CEO of Aiico Pensions as well as Chairman Pension Fund Operators Association of Nigeria, PenOp, Mr. Eguarekhide Longe, said that the directive from PenCom is ideal because people were using the voluntary contributions for the purpose that it was not intended for.

Former board member of National Pension Commission, PenCom, representing organized Labour, Comrade Ivor Takor, said that retirees should be allowed to collect their VC in bulk after retirement if they so desire.

He said, “Since an active worker voluntarily made additional contribution to his mandatory savings, it is his prerogative to collect the money the way he wants when he retires.”

Comrade Joe Ajaero,  President of the United Labour Congress (ULC), one of the organised labour movements in the country, said, “A lot of workers have not embraced the contributory pension scheme because N18,000 minimum wage is nothing to write home about. However if a worker goes the extra mile to have voluntary contribution and PenCom is giving directive on how the money will be withdrawn, then she or he should consider other savings options.”

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