Introduction
On 1 July 2014, the President signed the Pension Reform Act 2014 (PRA 2014) into law. This Act repeals the Pension Reform Act No 2 of 2004, governs and regulates the administration of the Contributory Pension Scheme (CPS) in Nigeria. This article highlights the role of the actuary in the management and regulation of the different pension schemes operating in the reformed pension industry in Nigeria.
Who is an Actuary?
An actuary can be defined as a business professional who uses skills in mathematics, economics, computer science, finance, probability and statistics, and business studies to help both public and private institutions assess the financial and/or non-financial risks occurring and to formulate policies using modelling techniques that minimize the cost of those risks, in order to remain solvent (Wikipedia).
Thus, actuaries are best-known for their expertise in quantifying contingent risk and for the provision of advice to assist the managers and other stakeholders of financial institutions to understand and to manage their risk. Actuaries are also often experts in the design of financial security systems and also in the design and management of pension schemes. Another key area of expertise of actuaries is in investment, particularly in relation to strategic decision-making regarding investment asset allocation, although some actuaries also work in active fund management roles where they are making the day-to-day investment decisions whether to buy, sell or hold particular stocks.
Pay-As-You-Go (PAYG) Defined Benefit Schemes
In pay-as-you-go (PAYG) defined benefit (DB) schemes (e.g. for members of Armed forces, exempted public service employees and pensioners as stated in section 5(1) of PRA 2014) the main roles of the actuary is to estimate the future cost of providing the benefits in accordance with the scheme rules and regulations. For a pay-as-you-go scheme which virtually has no fund at all, except perhaps a working balance to cover slight mismatches of the timing of income and expenditure, the actuary’s role is to make actuarial projections of income and expenditure and to estimate the excess or shortfall, or to calculate the contribution / tax rates which will be necessary if the income and expenditure is to be kept in balance year by year.
Actuaries might have a professional duty to “blow the whistle” if the trustees of the public service schemes are failing in some material way to administer correctly (i.e. allowing fraudulent practices) according to the scheme rules and the general regulatory requirements .An actuarial valuation which serves as a risk management tool is required by law (and also clearly stated in the rules of the pension schemes) and yet it has been inadvertently neglected or carried out on an irregular basis. Thus, the failure to seek an actuarial advice on a regular basis in the management of the public service pension scheme in the past is one of the fundamental causes of the pensioners’ problems in Nigeria. For example, the provision of unrealistic budgetary allocations for pension costs due to lack of actuarial advice had led to the availability of excess funds allocated which resulted in the fraudulent practices, ghost or fake pensioners’ scandals. The PAYG DB schemes for exempted employees and pensioners which are under the supervision and regulation by National Pension Commission (PENCOM), as stated in Sections 6 and 46 of PRA 2014, still need the services of the actuary even if the schemes are in their run-off stages.
Funded Defined Benefit (DB) Schemes
In a funded defined benefit (DB) pension scheme (for employees and pensioners in private sector not applicable under section 2 subsections (2) or (3) of PRA 2014), the role of the actuary is to carry out actuarial valuations on a regular basis, often three or five yearly intervals as stated in the scheme rules to estimate the appropriate level of contributions needed to pay for the benefits. The level of contributions and the adequacy of the assets held to meet the future costs of the accrued benefit rights, need to be kept under regular review. Solvency requirements (valuation methodology and assumptions) for the private sector were at the discretion to the actuary. In addition, actuaries advising funded DB schemes have the role to determine: bulk transfer values in relation to mergers and acquisitions, individual membership transfer values, and blowing the whistle etc. Section 50(2) of PRA 2014, specifies that an employer in the private sector operating any defined benefits scheme (particularly for the exempted employees) shall undertake, at the end of every financial year, an actuarial valuation to determine the adequacy of his pension fund assets. Thus, section 50(2) takes precedence over any scheme rules in terms of the inter-valuation period.
Funded Defined Contribution (DC) Schemes
In a defined contribution pension scheme (CPS), for employees and pensioners not exempted under PRA 2014, it is sometimes suggested that little actuarial involvement is required, since the benefits will be what they will be. However, notwithstanding the apparently simple structure of defined contribution schemes, there are still many aspects which require actuarial inputs as highlighted below.
Design
Ideally, in order to set an appropriate level of contributions which is likely to generate a target level of benefits, a similar type of actuarial calculation is needed to that for determining contribution levels in a defined benefit scheme. Thus, it is presumed that an actuarial advice was sought in arriving at the contribution rate(s) stated in section 4(1) of PRA 2014. Actuarial evaluations are required to test the viability of proposed expense/charging structures at the design (or charges review) stage of CPS and to assess the necessary level of provisions (for the administrative and investment expenses of maintaining the contracts for as long as they could remain in force) each year in an ongoing basis. The actual expenses are incurred at the level of the Pension Fund Administrator (PFA), Pension Fund Custodian (PFC) and PENCOM, but deductions can usually be made from the members’ contributions (or income based), and sometimes also as a percentage levy on the funds under management (or asset based), annually or more frequently, in line with regulatory guidelines, as stated in sections 24(d)and 83(2) of PRA 2014.
The current charging structure adopted under the PRA 2014(including any existing regulation of fees) is less vulnerable to insolvency. However, the PFAs and PFCs can become insolvent in the future. Thus, the management of the expense provisions and general oversight of the adequacy of deductions to cover the expenses actually being and/or likely to be incurred, should be considered to be actuarial tasks.
PIUS APERE
