Social Security Verification Exercises In Nigeria – The Case For A More Seamless Process

Background / Introduction

Perhaps one of the most important tasks for every government in the world is to provide the enabling framework for social security, which may include retirement benefits, health insurance, and disability cover for its citizens. The elements of Social Security and its administration vary from country to country. In Nigeria, Social Security comes in form of the Employee Compensation Scheme (ECS), the Pension Scheme (PS), the Industrial Training Fund (ITF), National Housing Fund (NHF) and the National Health Insurance Authority (NHIA). The rules and regulations that guide the administration of these schemes mandate contributors to deduct and remit contributions on a self-assessment basis. This implies that employers/contributors are expected to assess themselves and make remittances to the relevant regulatory body/agency based on the specific guidelines prescribed in the respective legislations.

The Employee Compensation Act (ECA), 2010, Pension Reforms Act, 2014 (which repealed the Pension Reforms Act No 2, 2004), and the Industrial Training Fund Act, 2004, provide the legal basis for the administration of the ECS, the PS and the ITF scheme respectively, which are the primary areas of focus in this article. These legislations grant the relevant agencies the power to request any document or information to carry out verification exercises.

In the past, taxpayers had become accustomed to the incessant and annual requests for tax audit exercises by the State Internal Revenue Services (SIRS), but this was hitherto not prevalent with the social security schemes. In recent times however, there has been a marked upsurge in requests for verification exercise by the social security agencies.

These verification exercises, which are essentially audit exercises often arise following requests by employers/contributors for issuance of compliance certificates from the agencies. In this article, we have highlighted the most common issues faced during the verification / audit exercises. We have also provided recommendations to ensure a more seamless social security audit / verification process for all stakeholders.

Review of Social Security Schemes and Evaluation of Key Issues

1. Employee Compensation Scheme (ECS)

ECA, The ECA, 2010, administered and enforced by the Nigerian Social Insurance Trust Fund (NSITF), provides the legal basis for contributions to the ECS. However, the ECA did not expressly define the basis of contribution. This has left it open to multiple interpretations by contributors since the ECA came into effect.

Based on Section 33 (1) of the ECA, every employer is required to make a minimum contribution of 1% of the total monthly payroll into the scheme, although, the term "payroll" was not defined. For this reason, some employers had hitherto contributed to the ECS based on their total monthly payroll cost while others have assumed the use of the sum of Basic, Housing and Transport allowances which is predominantly adopted in the computation of the mandatory pension contribution in Nigeria.

In a bid to rectify the issue of interpretation of the term 'Payroll', a joint committee of the NSITF and the Nigeria Employers' Consultative Association (NECA) which is an umbrella organization for employers in Nigeria, signed a Memorandum of Understanding in 2016 (the MoU) which provided clarification on the definition of 'Payroll' for the purpose of contribution to the scheme.

Following the signing of the MoU, employers began to contribute to the ECS based on the definition of payroll as the total remuneration, excluding pensions, bonuses, overtime, and irregular one-time payments. However, notwithstanding the MoU, representatives of the NSITF have in recent times pushed back on this definition of payroll during verification exercises. Many have continued to insist that the MoU is null and void as, among other reasons, it was signed by an acting chairman of the NSITF at the time and that NECA refuted the agreement even though there is no documentary evidence to the claim. According to the NSITF officials, the provision of the NSITF Act should form the basis for contribution to the scheme, although this also raises another issue as the definition of Payroll is unclear in the Act.

This issue has unfortunately resulted in discrepancies between contributions made by employers who had based their contributions on the definition of payroll as contained in the MoU and the amount assessed by the NSITF during verification exercises, given the difference in the basis on which the contribution is calculated.

2. Industrial Training Fund (ITF) Scheme

The ITF Act, 2004, was introduced to establish a fund – the Industrial Training Fund – to be utilized to promote and encourage the acquisition of skills in industry or commerce with a view to generating a pool of indigenous trained manpower sufficient to meet the needs of the economy.

The ITF Act mandates employers, subject to certain conditions, to make contributions to the ITF based on the cost incurred in maintaining employees in their employment. Section 6 of the ITF Act provides that employers that fall into the 'liable category' are required to contribute 1% of their total annual payroll to the ITF on a yearly basis.

In 2011, the Federal Government gazetted the ITF (Amendment) Act, which made several changes / updates to the ITF Act 2004. Amongst other amendments, the definitions of "payroll" and "employee" were amended in Section 16. Specifically, "payroll" was redefined as the total of all basic pay, allowances and other entitlements payable within and outside Nigeria to any employee in an establishment, public or private. It is important therefore to note that the contribution is solely centered around the "employee" status of workers.

However, recently, representatives of the ITF have stressed the inclusion of "directors fees" as stated in organizations' Audited Financial Statements (AFS), in computing the total payroll cost for employers during verification exercises. This invariably has led to huge penalties for employers that had prepared their contributions without including the total sum of directors' fees as specified in their AFS.

The ITF should note that "directors fees" in the AFS for certain companies may have components of both the executive and non-executive directors, and payments made to non-executive directors are not regarded as staff costs, thus, should not form part of the ITF computations.

3. Pension Contribution

The Pension Reform Act, 2014 (PRA) mandates every private sector employee to make a minimum contribution of 8% of the sum of their basic, housing, and transport allowances while the employer makes a matching 10% contribution to the employee's Retirement Savings Account (RSA). This is on the basis that the employer has at least 3 employees in its employment.

Based on the PRA, the employer, who acts as an agent for deduction and remittance of pension contribution should make monthly pension payments for its employees not later than 7 days after payment of salaries to the employees. The National Pension Commission (PenCom), which is the agency saddled with the administration of the PRA has, in recent times, called for frequent verification exercises of employers' records to ascertain their level of compliance.

The verification exercises typically cover regulatory compliance, accuracy of contributed amount, review of discrepancy between deductions and remittances by employers, suspected fraud, amongst others.

The exercise is commendable as the underlining aim is to ensure that the accurate deductions and contributions are made to the employees' retirement savings accounts.

Notwithstanding the above, the exercise is usually time consuming and the PenCom often requests documents that may not be readily available at the time of the request resulting in a delay in completion of applications for compliance certificates, which are usually time sensitive in nature.

4. Other Issues

• Use of Consultants

A challenge that often arises during verification exercises is the aggressive approach of consultants engaged by various agencies. While the use of these consultants is legal and could provide some advantage to the regulatory bodies, it is important that the credentials, expertise, and experience of the consultants are properly scrutinized before they are engaged to carry out the verification exercises.

It has been observed that many of the consultants are mostly contracted on a commission basis; hence, they tend to push the audit statute of limitation without proper cause and essentially request for investigation regardless of the status of periods that had been previously audited.

• Variances in Audit Reports

Upon completion of the field audit / document review phase of these exercises, an audit status report/assessment is subsequently provided to the companies being assessed.

Unfortunately, based on experience, there is usually a significant difference between the information contained in the documents submitted to these agencies and the figures reported in their assessments.

This is notwithstanding the fact that the documents would have been provided by the employers in the specific formats requested and additional information/clarification provided to the officials and representatives of the agencies during reconciliation meetings. Many contributors are of the opinion that the agencies oftentimes employ best of judgment approach in their assessment, irrespective of the documents that have been provided to them.

Recommendations

There is no gainsaying the fact that the Social Security verification exercises are important. However, the relevant agencies of government must ensure to address the challenges that have negatively impacted the seamless process of audit exercises.

We have provided below some recommendations that should help to address the challenges that have been highlighted above.

• The NSITF/NECA and the Federal government should provide a clear definition of "payroll" that would adequately define the basis of computation of ECS. Appropriate legislation should be passed by the National Assembly and assented to by the President.

• The ITF should ensure to properly evaluate the elements that make up Directors Fees on Financial Statements before including the item in the computation of ITF contribution for employers.

• The agencies should create a system where historically compliant employers/ contributors are exempted from the current annual nature of the verification/audit exercises. This will also save the agencies and companies manpower costs and other related costs required for the exercise while also promoting compliance.

• The agencies should properly sensitize their consultants on the approach, statutes of limitation and other requirements that guide the conduct of audits during their onboarding process before the commencement of work.

• The regulatory agencies should be proactive in initiating requests for audit / verification exercises to ensure a more timely process for issuance of compliance certificates.

In conclusion, employers should engage the services of reputable firms like KPMG to obtain appropriate guidance and support prior to the commencement of social security audit / verification exercises.

The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.