Beauty of Contributory Pension Scheme (CPS)

In 2004 the National Assembly of the Federal Republic of Nigeria enacted the Pension Reform Act. Given the previous state of the Nigerian pension industry, this was a groundbreaking event, marking the beginning of a much better regulated industry.

The act states that it was established to set in place a contributory pension scheme for payment of retirement benefits of employees. It aims to “ensure that every person who worked in either the public or private sector receive his retirement benefits as and when due and to assist individuals by ensuring that they save for their livelihood during old age.”

In terms of eligible contributors, it covers all public and private sector workers in Nigeria. With regards to private sector employees, this is for all those that are employed at organisations having 5 or more employees.

Each contributing member is to have a retirement savings account or RSA account, with an eligible pension fund administrator of his choice. Employees are to be supplied by a personal identity number or “PIN”. A minimum of 7.5 percent of the monthly salary is to be contributed by the employer, and another 7.5 percent by the employee each month, within 7 days of the salary being paid out by the employer. The only exception is with individuals employed by the military, where the employer has to contribute 12.5 percent and the employee 2.5 percent of their monthly salaries.

The employer may, on his own discretion decide to bear the full cost of the contribution, with the only provision being that this amount be at least 15 percent of the employee’s salary. If an employee decides to do so, he can contribute additional funds to his RSA, and these contributions will be seen as tax deductible.

It is further stipulated, that no person shall be eligible to make any withdrawals from his RSA before reaching the age of 50, or upon retirement. The holder of the RSA shall utilise the balance of their account to fund monthly or quarterly payments based on their expected life span, although they are also allowed a lump sum payment from their account based on certain provisions.

These provisions include that the remainder of the funds, after the lump sum has been withdrawn are enough to fund periodic payments that will produce an amount not less than 50 percent of their annual remuneration as at the date of retirement. The retiree also has the option of investing the balance of his RSA funds in a life annuity at an insurance company authorised by the National Insurance Commission.

The pension scheme regulated by PenCom requires pension funds to be privately managed by licensed PFAs duly licensed to open Retirement Savings Accounts for employees, invest and manage the pension funds in a manner as the Commission may from time to time prescribe.

They are also to maintain books of accounts on all transactions relating to the pension funds managed by it, provide regular information to the employees or beneficiaries and pay retirement benefits to employees in accordance with the provisions of the Pension Reform Act 2004.

According to the Act, The National Pension Commission, or PenCom, was established as a “corporate body with perpetual succession and a common seal”. The principal function of the Commission is to regulate, supervise and ensure the effective administration of pensions in Nigeria.

In terms of the different roles and positions in the Commission, a strict adherence to experience and ample qualifications can be observed throughout the Act. The chairman, director-general and other members other than ex-officio ones are all appointed by the President of Nigeria, one each from the six different geo-political zones subject to confirmation by the Senate. Tenure of the office is limited to a 4 year term, with a possible second term allowed.

The Commission is mandated with issuing the guidelines for the investment of the pension funds. These are constantly being monitored and adapted as the need arises or the environment changes.

For example, at the end of 2012, PenCom brought out a revised set of regulation including newly allowed asset classes such as Infrastructure funds as well as Private equity. Given their suitability for long term pension fund assets as well as needs arising in the Nigerian economy, these adapted guidelines were widely acclaimed by the sector.

Due to the fact that all PFAs and PFCs need to be licensed and regulated by the Commission, other functions such as establishing standards, rules and guidelines for the management of pension funds are ascribed to them. Public awareness and education campaigns on the establishment of the scheme as well as the management of it were also set down by the Act as responsibilities. Any complaints levelled against PFA, PFC or employer with regards to pension fund matters are to be received and investigated by PenCom.

The Commission is funded by fees levied on the pension assets. All fees to be paid out to PFAs and PFCs for the fulfilment of their duties need to be approved by them as well. In the instance of irregularities, fines can be imposed by them. PenCom have to report to the President as well as the Public Account Committee annually on its activities and administration, including submission of their audited accounts, which have to be published afterwards.

Given the growth in the pension fund industry since 2004, currently estimated to be around N3.87 trillion, the Act certainly helped enable the country to make huge strides forward. Deepening of the debt as well as capital markets are just some of the benefits that has resulted from it. Generally the model set in place is one that can be used and implemented in a number of other African countries, desperately in need of it.