Micro pension is simply defined as a retirement savings plan for Individuals in the Informal
sector. Since the inception of Contributory Pension Scheme, The scheme has recorded over 7 million pension account holders; this is less than 1% of Nigerian Working Population as the informal sector constitutes 80% of the working population. Without doubt, the pension industry’s main objective of covering 30% of the working population in Nigeria under the CPS by the end of 2024 and reducing old-age poverty and social liability is not possible without penetrating the Informal sector.
In implementing this initiative, the informal sector has been segmented into three broad categories. The low income earners, the high income earners and the SMEs. Each of these categories is going to be targeted with appropriate pension products and sensitization programmes that meet their peculiarities. Pencom plans to capture around 250,000 individuals at the Initial stage of the Scheme and over 50 million in the future.
In this write-up, we would discuss the precedents (Models), the challenges, the benefits and
the ways to effectively implement the Micro Pension Scheme.
Is Nigeria the first Country to practice Micro Pension?
No, Micro pension has been a practice in many Countries and it has been a success.
In 2014, Enviu started the development of a micro pension company in Ghana, together with
partners and a team of experienced pension professionals. After more than a year of plans,
pivots and pilots Ghana launch People’s Pension Trust Ghana in 2016. So far the project
has been challenging, but also very rewarding.
Demand for micro-pensions in Kenya is overwhelming with 85.3% of the possible
participants supporting the initiative. Similarly 94% of the financial service providers would
be willing to support such a micro-finance product. The Mbao pension plan was officially launched on 28th June 2011 for the Medium and Small Micro Enterprises (MSMEs) sector and to help members of the Jua Kali Associations to save regularly to provide a long-term and reliable income when they retire from their jobs or business. The name Mbao refers to the amount- 20 Kenyan Shillings (KES) – which is the minimum daily contribution that members can make (RBA, 2011).
The Retirement Benefits Authority in Kenya has already operationalized a micro pension scheme where the contributions are a minimum of Kshs. 20 per day.
One of the most famous pension schemes in India was launched in 2005 by the Unit Trust of
India Assets Management Company (UTI AMC) together with several third parties: SEWA
Confidential (Self Employed Women’s Association), an Indian micro-finance institution; COMPFED, a federation made up of Indian milk producers; and an urban cooperative bank run by women. The main characteristics of the UTI AMC micro-pension scheme are:
- Contribution of small amounts from Rs. 50 to Rs. 200 per month;
- Flexible payments (monthly or yearly non mandatory contributions);
- Presence of a neutral third party, like a Micro-Finance Institution, a Non-Governmental
Organization, Self Help Groups. In particular, the third parties play as aggregators for collecting a large number of pension funds members with common characteristics; they have also several administrative roles and reduce transaction costs of micro-pension providers by identifying members and collecting contributions. There are other micro pension scheme in India such as: Invest India Micro Pension Scheme, etc.
Benefits of Micro Pension Scheme:
- It would create awareness among the poor of the importance of saving and investing
in long-term projects, providing them with a retirement income;
- It would improve the financial literacy of the poor. More financial literacy increases
the transparency of the financial markets: people are more aware of the risks, costs
and benefits that the financial products and services provide. Therefore it is hard for
financial products providers to cheat and hide twisted clauses. More transparency
makes also financial markets more competitive thus lowering operational costs;
- It would generate a large amount of savings which can be channelized into
investments in the local market;
- It would reduce the burden of Government budget. A third-pillar may allow
Governments to reduce pension provisions to the whole population and to redirect
them towards other sectors like infrastructures or even support to the poorest share
of total population.
- Inexperience with formal financial institutions
- Low incomes
- Inadequate government support and bad experience with informal financial sectors
- Confidential issues
Possible models of Implementation:
Considering the precedence from other Countries who are already practicing the Micro Pension Scheme and peculiarity of our Economy and demography, the most likely model that would be adopted is the Public-Private Partnership Model
Under this model, a central pension scheme is maintained by the government but there are public or private agents who provide services to enhance the operations of the pension scheme. The key characteristics of the model are; the scheme is voluntary, defined contribution funded plan, a network of bank branches, microfinance institutions and post offices would be used to collect contributions and interact with participants, an independent centralized record keeping agency is maintained to ensure administrative efficiency and consolidate account statements, each member has a unique number that records contribution savings regardless of the agent used and members of the scheme may be allowed to switch between competing agents. The model thus involves a Public Private Partnership in the provision of the micro-pension products.
They appoint fund managers, administrators, custodians and the agents (Partners).
The responsibility of the fund managers is primarily the investment of funds and must therefore be linked with the custodians. The role of MFIs and SACCOs in implementing this model can never be emphasised.
The most severe Challenges of this model are high administrative costs of operating the scheme, lack of awareness on the operations of the scheme by clients, low level of financial literacy amongst the clients, and absence of a regulatory framework. The less severe challenges are: absence of long-term saving habits amongst clients, high transaction costs charged to the clients and relationship management between different stakeholders. Collection of contributions from clients, payment of benefits to clients and competition with existing products would not pose challenges if the model is implemented.
The design and implementation of micro-pensions could be the missing link in increasing pension coverage in Nigeria. The Impact of the micro scheme on the pension business would be enormous if it is well-managed. The systems should be carefully crafted to address governance, flexibility, the contribution mode and design. To encourage participation, government should contribute a portion individual’s fund or establish a micro pension protection fund that can be used to augment individual contributions. The mode of withdrawal should be more flexible. And finally, mobile money should be utilized to ease contribution and withdrawal.