The introduction of the Contributory Pension Scheme (CPS) in 2004 addressed the challenges of the Defined Benefits Scheme (DBS), which was unsustainable and caused undue hardship to retirees. Before the CPS, huge pension liabilities made it impossible for the Federal and State governments to meet their pension obligations to retirees in the public sector. In the private sector, on the other hand, the retirement plans were characterised by meagre pensions or no pension coverage at all
The CPS introduced the following innovations that completely transformed the pension and retirement landscape in Nigeria:
Individual Retirement Savings Account
One of the benefits of the CPS is that participants are allowed to open individual Retirement Savings Accounts (RSA), where contributions are accumulated till retirement. The RSA addressed the problem of pension liabilities. Once an employee exits active service, funds are available for immediate payment of retirement benefits. The CPS also permits members to make Voluntary Contributions to their RSAs from their salaries. The mandatory requirement that PFAs provide regular/periodic statements of accounts to contributors ensures RSA holders are informed on the status of their RSAs, especially when their employers pay pension contributions.
Mobility of Labour
The RSA facilitates labour mobility across sectors and different tiers of government. Once RSAs are opened, and Personal Identification Numbers (PINs) are issued to employees, the PINs are tied to each employee throughout their lifetime. Thus, when an employee changes jobs from one employer to another, he maintains his RSA for contributions from the new employer. Therefore, there is no need to open another RSA while changing jobs. The employee simply needs to provide the new employer with his PIN and PFA.
Contributors’ Rights
First, the CPS allows participants to select any PFA to open an RSA. Secondly, the PRA 2014 guarantees the right for RSA holders to transfer their retirement savings account from one PFA to another once a year. Thirdly, participants retiring under the CPS can decide on the mode of their retirement benefit payment. Retirees under the CPS can choose either the Programmed Withdrawal (PW) or Retiree Life Annuity (RLA) method. The PW is a product offered and administered by the PFAs under the regulation and supervision of PenCom, which provides a retiree with the option of a lump sum and regular monthly or quarterly pension payments.
In contrast with the PW, the RLA is a product of Life Insurance Companies regulated by NAICOM. The RLA offers a retiree periodic payment based on the expected life span. In addition, employees in service before 2004 are assured of their Accrued Pension Rights under the CPS. The Accrued Pension Rights represent an employee’s benefits for the past years of service up to June 2004, when the Pension Reform Act (PRA) that birthed the CPS came into effect. Finally, RSA holders under 50 who lose their jobs and have been unable to secure another job within four months are allowed to access 25 percent of their RSA balance.
Benefits payments under CPS
During the first quarter of 2022, PenCom approved 7,724 requests for retirement benefit payments. The requests consisted of 5,326 payments under Programmed Withdrawal (PW) and 2,398 under Retiree Life Annuity (RLA). The sum of N25.17 billion was approved as lump sums, while the monthly pension and annuity payment were N425.88 million. PenCom also approved PFAs to pay N6.545 billion to 9,578 RSA holders under the age of 50 years that lost their jobs and were unable to secure another employment four months after. The amount approved for payment represented 25 percent of their RSA balances. Furthermore, PenCom granted approvals to pay death benefits to the Administrators/ Legal Beneficiaries of 3,001 deceased employees and retirees in the sum of N16.03 billion during the period. These benefits payments indicate that the CPS provides financial security in retirement and during a temporary job loss.
Minimum Pension Guarantee
The CPS also provided for a Minimum Pension Guarantee (MPG) as contained in the PRA 2014. Thus, the MPG is a provision for all individuals who have contributed some years but have not accumulated enough to have a minimum pension. PenCom is working to determine the minimum pension and commence the implementation of the MPG.
Accumulation of Long-term Funds
The CPS has generated a pool of long-term funds that have been invested in the economy. The Scheme has accumulated N13.879 trillion as of 31 March 2022. Thus, the CPS has directly fulfilled the functions of transferring resources over time and pooling funds in an efficient manner. The creation of funds for long-term investments significantly impacts capital formation and investment.
The CPS has reformed pension administration in Nigeria so that workers get their retirement benefits immediately after retirement. The CPS is, therefore, inevitable given the issues associated with the old DBS, including but not limited to coverage, funding, transparency, and inability to pay retirement benefits. These challenges led to the accumulation of enormous pension liabilities that are yet to be fully settled.
