IMF moves against early retirement in developing nations
• As PenCom admits to transitional past liabilities
The International Monetary Fund (IMF), has warned developing nations to be wary of early retirement and attendant effect on the economy.
This is as IMF has projected at least two per cent rise in the global Gross Domestic Product (GDP) of cost of public pensions by 2050.
According to the world monetary body, many emerging market economies and low income developing countries have started to face the challenges of growing aging population.
Speaking at the launch of the IMF Staff Discussion Note, held recently in Tokyo, Japan, with the theme: ‘The Future of Saving: The Role of Pension System Design in an Aging World’, the First Deputy Managing Director, IMF, David Lipton, said that old age dependency ratio could put serious pressure on economic growth and fiscal imbalances.
But industry regulator, the National Pension Commission (PenCom) believes Nigeria is spared of economic pressure, as the transition from defined benefit scheme (DBS) to the fully-funded contributory pension scheme (CPS), is a strong mitigating factor against pension funding crisis. This implies that the pension scheme maintains no liabilities at any given time.
However, PenCom told The Guardian that there are still transitional past service liabilities and accrued pension for the public sector.
“These are for public sector employees – both the Federal Government and States Government, who were in service prior to the commencement of the CPS in 2004, and the liabilities are expected to be defrayed by 2039 for the Federal Government, or as enshrined in State Pension Laws.
Lipton had noted that in view of an aging population in many developed countries, private savings would drive national savings over the next 30 years, while pension systems would influence private savings.
He said: “The cost of public pensions will increase by just over two percentage points of GDP by 2050, but that’s a global average. The increase will be particularly pronounced in emerging markets and low income countries.
“The relatively young populations in emerging markets and low income developing countries will generate higher private saving, and this will more than offset a projected decline in public saving, while the differences in private saving rates across countries are large and is driven by the characteristics of pension systems.”
He therefore urged countries to think through the most effective pension and social safety net systems, and to put in place necessary reforms to mitigate the challenge.
Again, PENCOM reassures that the future appears promising for the CPS in Nigeria, especially as “The Nigerian population is young as evidenced by the low old age dependency ratio, which is less than six per cent from the recent available demographic data by the National Bureau of Statistics (NBS).
“The CPS has taken care of pension funding, as it is a fully-funded scheme. In this regard, no additional payment is made by the government after retirement of an employee apart from the pension increase, as provided for in the 1999 Constitution, which will only be paid to those who started work before July 2004. Thus, cost is relatively low.”
“Due to the foregoing factors, the pension scheme in Nigeria would be fully privatised with minimal or no cost implication,” it added.
Also commenting, an expert at AIICO Pension Fund Administrator (PFA), Eguarekhide Longe, said the challenges of aging population would not affect Nigeria, “as the country no longer operates the DBS, which places the liability for pension payment on the government.”
Rather, he explained: “Nigeria’s CPS places the liability for pension funding on contributors. This means that contributors’ pensions are funded by what have been jointly contributed by themselves and their employers plus investment income.
Longe however noted that, “what would impact on the pension system with people living longer will probably be that an increased percentage of emoluments from both employee and employer will have to be set aside in the employees active working years so that their Retirement Savings Account (RSA) is adequately funded.”