PENCOM Partners THISDAY for Awareness on Contributory Pension Scheme

As the regulator of the Nigerian Pension industry, it is the responsibility of the National Pension Commission (PenCom) to carry out public awareness, enlightenment, and education on the Contributory Pension Scheme (CPS). To this end, the National Pension Commission (PenCom) is partnering with THISDAY Newspapers for a weekly publication that will provide insight on topical pension issues and the workings of the CPS.

A number of pension arrangements preceded the advent of the CPS, the first of which was the 1951 Pension Ordinance. The Pension Ordinance had a retroactive effect from 1 Jan 1946 and initially applied only to United Kingdom officials posted to Nigeria, but was later extended to Nigerian Public Servants albeit, under less than ideal terms. The first private sector pension scheme in Nigeria was set up for the employees of the Nigerian Breweries in 1954 but the introduction of the National Provident Fund (NPF) in 1961 established the first formal social protection scheme for private sector employees. While the NPF was contributory, it offered only one-off lump-sum payment and was subsequently replaced by the Nigeria Social Insurance Trust Fund (NSITF) which provided an enhanced pension scheme to private sector employees. Next was the 1979 Pension Decree 102 (with retroactive effect from 1974) enacted for Civil Service Pension Scheme which brought about an unfunded and non-contributory pension scheme where benefits were paid from the government’s Consolidated Revenue Fund.

For decades, the Federal Government operated an unfunded Defined Benefits Scheme for the public service and the payment of retirement benefits was budgeted annually. The annual budgetary allocation for pension was often one of the most vulnerable items in budget implementation because of revenue constraints. In many cases, even where budgetary provisions were made, the inadequate and untimely release of funds resulted in delays and accumulation of pension liabilities. It was obvious therefore that the Defined Benefits Scheme could not be continued. In the private sector, many employees were not covered by the pension schemes put in place by their employers and many of these schemes were not funded. Besides, where the schemes were funded, the management of the pension funds was full of malpractices between the fund managers and the Trustees of the pension funds. It became evident that the various pension systems and arrangements were unsustainable.

This necessitated a re-think of pension administration in Nigeria. Accordingly, a pension reform was then initiated to address and eliminate the problems associated with pension schemes in the country. The outcome of the reform was the enactment into law of the Pension Reform Act 2004 (PRA 2004), which birthed the CPS. The PRA 2004 was repealed and reenacted in July 2014.

The CPS is an arrangement where both the employer and the employee contribute a portion of an employee’s monthly emoluments towards the payment of the employee’s pension at retirement. In addition to the CPS’ contributory nature, the scheme is fully-funded and based on individual Retirement Savings Accounts (RSA). The individual account commonly referred to as an RSA, is opened by an employee with a Pension Fund Administrator (PFA) of their choice. All pension contributions are remitted into the RSA and invested. The accumulated RSA balance is thereafter used for payment of retirement benefits. As a safeguard to ensure transparency, Pension Fund Assets under the CPS are privately managed by PFAs and kept in custody by Pension Fund Custodians (PFCs) which are licensed and supervised by PenCom. These measures are intended to ensure that every person that worked in either the public or private sectors in Nigeria, including the self-employed persons, receives their retirement benefits as and when due. This is the main objective of the CPS.

It has been eighteen years since the advent of the CPS and within that period, 9.65 million employees had opened and operated RSAs while N14.06 trillion has been accumulated as pension assets. The scheme has produced 399,741 retirees, and N1.3 trillion has been paid as benefits since the inception of the scheme. By all accounts, the CPS has stayed the course when viewed within the pitfalls that characterised the pension schemes that preceded it.

In the weeks to come, this column will provide salient information on the pension industry in order to inform and enlighten stakeholders and boost confidence in the Contributory Pension Scheme. The National Pension Commission assures all stakeholders that it will continue to come up with positive innovations and policies that will not only address their yearnings, but also enhance the regulation and supervision of the pension industry.

All figures stated are as at April 30, 2022