Understanding the PRA 2014

Introduction

The Pension Reform Act 2014 (PRA 2014) was passed into law in July 2014, 10 years after the passage of the Pension Reform Act 2004 (PRA 2004) that ushered in a compulsory contributory pension scheme in Nigeria.

With 10 years of experience on CPS, the new law seeks to improve on the old one and ensure a more robust pension system in Nigeria in line with the underlying principles of sound pension schemes anywhere in the world. It is important therefore to understand the salient issues regarding the new Act, especially those important differences between the old and the new and how it impacts on the schemes and its ultimate beneficiaries – Nigerian workers.

Coverage

Under the old law, employees of States and Local Governments were not covered by the Act, although the regulator – National Pension Commission (PenCom) thereafter worked closely with the National Council of State and various state governments to establish Contributory Pension Schemes in a number of States.

In the PRA 2014, State and Local Government employees are explicitly covered and expected to participate in the scheme. PenCom may have to issue clearer guidelines for the participation of States and LGAs especially for States that had already passed a modified version of the Contributory Pension Scheme into law.

Also, the PRA 2014 and a subsequent clarification issued by PenCom makes it compulsory for employers in the private sector who have up to three employees to participate in the Act.

Contributions

A major change with a great impact on the CPS is the increase in the minimum contribution rate from 15 percent to 18 percent. The increase in the contribution rate could be a direct response to the seemingly lower replacement rate that retirees under the CPS have received since the scheme started in 2004.

The fact that some retirees especially those in the public sector feel that they could have got better benefits under the old PAYG defined benefits scheme perhaps necessitated this change. You will agree that higher funding rates under a Contributory Scheme will naturally translate to higher retirement benefits, all things being equal.

However, employers will feel a greater impact of this increase because the employer contribution increased from 7.5 percent to 10 percent while employee contributions increased from 7.5 percent to 8 percent. Also, where employers choose to bear the full burden of the pension contributions, they will be required to contribute a total of 20 percent.

Overall, it is a better day for Nigerian workers in terms of the commitment that their employers will make towards their retirement benefits. It is also a plus for the economy and financial markets as the total pension assets available for investing will also increase.

Withdrawals before 50 years

Under the PRA 2004, only employees that were disengaged from employment before the age of 50 years could access up to 25 percent of their RSA as a lump sum after not being able to secure a job for six months. Under the PRA 2014 however, employees who voluntarily disengage and are unable to secure another employment for four months may access 25 percent of their RSA balance as a lump sum.

Withdrawals from Voluntary Contribution Accounts (VCA)

Under the old Act, any voluntary contributions withdrawn within less than five years of contribution will be subjected to tax at the point of withdrawal. This means for example that if you had contributed N100,000.00 into your VCA, and you wish to withdraw it in less than five years, the entire amount of N100,000.00 contributed will be subjected to tax.

However, under the PRA 2014, only the income earned on the Voluntary Contribution will be subjected to tax if the voluntary contribution is withdrawn in less than five years. This means that if you had contributed N100, 000.00 and it had accrued income of N15, 000, it is only the N15, 000 that will be subjected to tax at withdrawal before five years.

This will serve as incentive to employees wishing to take advantage of the tax exemption on Voluntary Contributions, and potentially increase the amount of savings into the Contributory Pension Scheme as well as the individual savings of RSA holders.

Life Insurance

In the PRA 2014, the proceeds from life insurance for a deceased RSA holder will be paid directly by the insurance company to the beneficiaries under the insurance policy. Prior to this, the proceeds are paid to the RSA and subsequently paid to the deceased beneficiaries.

This difference means that the balance on the deceased’s RSA can now be paid out without waiting for the proceeds from the life insurance. In case, there is delay of payment of benefits from the insurance company, such delays will no longer affect the payment from the RSA.

Investment of Pension Funds

Going forward, some part of pension funds may be used towards equity contributions for mortgages for RSA holders. This will however be based on specific guidelines to be issued by PenCom in this regard.

In the PRA 2004, there were no provisions for the use of any part of pension funds for obtaining loans. This new provision will potentially empower Nigerian workers to own their own homes and reduce the major housing deficit in our society. It will also potentially create a pool of mortgage related investment vehicles like Real Estate Investment Trusts and Mortgage Backed Securities.

Governance of PenCom

The governance structures of PenCom have also been changed under the PRA 2014. Specifically, the Board of PenCom has been expanded to include representatives of The Nigerian Stock Exchange and the National Insurance Commission, who play a very important role in the financial markets and their pension industry in Nigeria.

Also, the tenure of the Chairman and Director General remains five years in the first term and renewal for five years thereafter, while the tenures of the Commissioners and other Board Members is now for four years and renewable for another term of four years. This new provision will ensure proper succession planning and continuity for the PenCom Board.

Finally, the minimum years of experience for the Director General of PenCom was reduced from 20 years in the PRA 2004 to 15 years in PRA 2014, while the specific stipulations for the professional qualifications of principal officers of PenCom are longer included in PRA 2014.

There are a number of other differences between the PRA 2004 and PRA 2014 especially clearer and stiffer sanctions for non-compliance and other violations under the PRA 2014. The stiffer sanctions are meant to serve as a deterrent to potential erring operators, employers and other stakeholders in the Pension Industry.

Overall, the new changes under the PRA 2014 will strengthen the existing contributory pension scheme in Nigeria, and ensure that it is better able to create an impact on the beneficiaries – Nigerian workers and the Nigerian economy as a whole.