Coming of the contributory pension scheme

The Pension Reform Act 2004 was enacted with the aim of addressing the associated problems of the old pension system in Nigeria. It established the Contributory Pension Scheme (CPS) for all workers in the Public Service of the Federation, Federal Capital Territory, and the private sector where the total number of employees is five or more employees.

However, existing pensioners and workers that had three years or less to retire in accordance with the terms of their contract of employment were exempted from the scheme. Also exempted were the categories of persons under Section 291 of the 1999 Constitution of the Federal Republic of Nigeria.

Similarly, for the first time in the history of the country, a single authority, the National Pension Commission (PenCom) was established to regulate and supervise all pension matters in the country. The scheme is being managed by licensed Pension Fund Administrators (PFAs), while the custody of the pension fund assets are provided by licensed Pension Fund Custodians (PFCs).

The move from DB schemes to Defined Contributory schemes is now a global phenomenon following the success stories of the Chilean pension reform of 1981.

The paradigm shift from the DB scheme to funded schemes in developed and developing countries was ascribed to such factors as increasing pressure on the central budget to cover deficits, lack of long-term sustainability due to internal demographic shifts, failure to provide promised benefits etc.

Thus developed countries like the USA, UK and emerging market economies of Chile, Mexico, Nigeria etc adopted the funded pension scheme because it enhances long-term national savings and capital accumulation, which, if well invested can provide resources for both domestic and foreign investment.

Aims of new pension scheme

The main objectives and features of the Pension Reform Act 2004 are: to ensure that every person who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as and when due; as well as to assist individuals by ensuring that they save to cater for their livelihood during old age and thereby reducing old age poverty; and also to ensure that pensioners are not subjected to untold suffering due to inefficient and cumbersome process of pension payment;

The scheme also aims at establishing a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the Public Service of the Federation, Federal Capital Territory and the Private Sector; and stem the growth of outstanding pension liabilities.

Besides, the pension reform programme is governed by the key principles of sustainability, safety and security of benefits, transparency, accountability, equity, flexibility, inclusivity, uniformity and practicability.

Essence of the Contributory Pension Scheme

The new scheme, known as the Contributory Pension Scheme (CPS) which, as the name suggests is contributory in nature, is mandatory for every employee in the Federal Public Service (including employees of the Federal Capital Territory) and employees in all Private Sector organisations.

Employers are expected to deduct 7.5 percent of the employee’s total emolument and also provide a counterpart funding of 7.5 percent to be remitted into a Retirement Savings Account (RSA), which the employee is expected to open with any Pension Fund Administrator (PFA) of his choice. This makes up a minimum of 15 percent to be paid into the employee’s RSA.

However, both the employer and the employee may opt to fund the RSA above the mandatory minimum of 15 percent. Employers may also opt to bear more than half of the mandatory minimum of 15 percent.

Private Sector organisations with less than five employees are however not mandated to adopt the scheme but may elect to do so. This system has a number of features which has made it an increasingly vital component of the pension systems of many countries not only in the Organisation for Economic Co-operation and Development (OECD) countries, but also amongst the developing countries particularly in Asia and Latin America.

The pension reform has some peculiar features that position it as a catalyst for sustainable social welfare programme. For example, the fact that the reform is fully funded ensures that the overall retirement income is maintained from the onset of the scheme. This ensures that retirement benefits are paid on sustainable basis because funds are always available to defray any pension obligation that falls due.

Every worker in Nigeria is now assured of blissful retirement

In order to ensure that every workers in Nigeria enjoy blissful retirement, the employee is required by law to open a ‘Retirement Savings Account’ in his/her name with a Pension Fund Administrator of his/her choice. This individual account belongs to the employee and will remain with him for life even if he/she changes employer or Pension Fund Administrator.

While an employee may only withdraw from this account at the age of 50 or upon retirement thereafter, he can withdraw a lump sum of 25 per cent of the balance standing to the credit of his retirement savings account if he/she is less than 50 years at the time of retirement and could not secure a new job after six months from leaving the last job.

Similarly, he can withdraw a lump sum if he is 50 years or above at the time of retirement and the amount remaining after the lump sum withdrawal shall be sufficient to fund programmed withdrawals or annuity that will produce.

Besides, Section 9 (4) of the Pension Reform Act 2004 allows for voluntary contributions. This has provided an opportunity for employees covered by the scheme to make additional contributions to enhance their pension benefit. However, for voluntary contributions, the tax relief is only applicable if the amount contributed or part thereof is not withdrawn before five years after the first voluntary contribution was made.