CPS building high net worth pensioners

Without a doubt, the old systems and process of pension management and administration in Nigeria was highly ineffectual and ineffective. This is because the system created a pensioner class that absolutely no one wanted to aspire to!  Pensioners were always looking unkempt, malnourished and in depths of despair and hopelessness.

The old system made it seem like the term ‘pensioner’ was only applicable to persons who had lost their way in their working lives and now had to make do with crumbs and leftovers. The old and retired pensioners were often looked upon and seen as never-do-wells who were at the mercy of their subordinates and those depended on the succeeding generations in order to survive.

This approach to pension management was extremely baffling when you consider that your pension is meant to comprise a portion of current earnings kept aside for your retirement.

If many people’s current earnings are not sufficient to exist on, then how can a portion of these same insufficient earnings be enough for you later in life? Add to this fact, the falling value of our currency and increasing prices of goods and necessities, you can see that the system was doomed to failure as long as it lasted.

Now a nation can only be as good as how it treats its elderly. Our old people were being made to suffer to receive the retirement benefits, and cases were abounding of many dying at collection and processing centres. The process was fraught with so many hurdles and bottlenecks which were downright degrading.

The entire system was crying out for a change and thankfully the federal government took heed and introduced a more progressive model.

It was in order to create a more beneficial and practical system that the Federal Government instituted the 2004 Pension Reform Act and instituted a Contributory Pension Scheme Model whereby employers and employees both contribute seven and a half percent every month into a Retirement Savings Account for the employee.

In late 2014, the government amended the act proposing that these sums be increased to 10 and 8 percent as employer and employee contributions respectively meaning that each employee has a whopping 18 percent of his or her monthly income being kept aside for retirement. This scheme is guaranteed to produce high net worth pensioners for the very first time in Nigeria due to the following:

These funds being kept aside will also be invested in various investment vehicles in order to increase the earnings capability of the existing funds. PenCom has stipulated that funds held by a pension fund administrator could be invested in government securities, quoted equities, the money market and other fixed income.

So, in actual fact the account owner earns because the funds are invested while he continues to add more funds for as long as he is actively employed which will also be invested and the cycle continues thereby yielding more income.

This scheme effectively guarantees producing high net worth pensioners far different from the pensioners of old because it is extremely progressive in nature. Eighteen percent of current income is sizeable and will continue to be substantial especially when one’s net income continues to rise as is expected for many working class people. The older one gets, the more money is earned which translates to more pension funds which can be invested to yield more when retirement time comes around.

The new pension reform act also stipulates that all gains, profits and dividends from pension funds and assets are exempted from tax. This means that all gains accrue to the account holder whose funds were invested. This is an excellent investment vehicle especially because minimal deductions would be made on your returns. Tax savings ploughed back to earn more will help wealth to grow faster.

Fourth, the act has legal backing and employers are obliged to make their contributions regularly, otherwise they will be penalised. Past pension schemes made it extremely easy for employers to abuse the process by diverting pension funds.

It was commonplace to hear that some pension funds had been diverted to other purposes by unscrupulous company executives. This can no longer be the case as monitoring systems and hefty penalties await defaulters.

A much better structure has also been put in place to protect depositors with the establishment of the National Pension Commission. PenCom was set up to regulate and monitor the pensions process. Every participating individual has a Retirement Savings Account that can be accessed online and the amounts being deposited shared so as to avoid ignorance and ambiguity.

This amended structure also includes the establishment of Pension Fund Administrators, who are licensed to manage Pension Fund Assets on behalf of pension fund contributors. They open the Retirement Savings Accounts, invest and manage the pension funds according to PenCom’s guideline.

There is also another player within the Pensions framework called the Pension Fund Custodians whose duties and responsibilities is to basically store pension fund assets. The PFCs store the deducted funds and inform the PFAs who take it from them for investment purposes.

These two groups act as checks and balances thereby better safeguarding depositor’s funds.

I believe that with all these initiatives in place, the next generation of pensioners are on track to being of high net worth in their pensionable ages and retirement. The reform of the pension process will amount to improvements in the quality of their lives in old age compared to their predecessors.