On 25 June, the President of Nigeria signed the Pension Reform Act 2004 into law. This Act establishes a new contributory pension scheme for employees in both the public and private sectors.
Prior to the enactment of the above Act, the public service pension scheme was non-contributory and unfunded. The Nigeria Social Insurance Trust Fund (NSITF), which was established in 1994, managed the contributory pension scheme for private sector employees, which was financed by employee and employer contributions of 3.5 per cent and 6.5 per cent of gross income (basic salary, transport allowance and housing allowance) respectively. The government claims that the changes were necessary due to the maladministration of pensions.
The new contributory scheme applies to all employees in the public sector, and to employees in the private sector working in an organization in which there are 5 or more employees. In order to reduce the cost of pensions to government and to enable workers to accumulate reasonable savings before retirement, the contribution rate under the new scheme is a minimum of 7.5 per cent by employers and 7.5 per cent by employees in the public and private sectors. In the case of the Military, the employer is to contribute a minimum of 12.5 per cent and employees 2.5 per cent.
Prior to the enactment of the new law, pensions in the public and private sectors were of a defined benefit type. The new act provides for benefits based on defined contributions, thereby emphasizing individual responsibility for providing income in old age. Employees will thus receive their accumulated contributions plus any investment income upon retirement. Employees also have the option of converting this into an annuity or a pension to be paid on a monthly or quarterly basis.
A National Pension Commission (NPC) is to be established as the apex regulatory authority concerning pensions. Previously, the Federal Ministry of Labour and Productivity was the supervising ministry for the NSITF scheme, whereas various bodies supervised public sector pensions. The new regulatory body shall stipulate uniform rules, regulations and minimum standards, as well as ensure adequate supervision of all operators in the Nigerian pension industry.
Under the old laws, there was no provision for pension fund administrators. The new Act provides for the establishment of Pension Fund Administrators (PFA) who will be registered to administer the schemes. PFAs are to maintain Retirement Savings Accounts for employees. Employees are to choose their PFA, and they will be allowed to move their account to another PFA at their discretion, but not more than once in a year. The PFAs are to invest and manage pension funds and assets in accordance with the instructions of the account holder as per the provisions of the Act. All contributions are to be invested with the objective of safety and the maintenance of fair returns.
According to the government, there was a need to license professionals to manage pensions and to detach employers from direct control of such funds so as to minimize the temptation of embezzlement or the diversion of funds. The Act also provides for the establishment of pension fund custodians who shall keep custody of the funds and invest them as directed by the PFA. It was felt that custodians are required for the proper and efficient management of pension fund assets.
The new Act permits the NSITF to set up a PFA and manage under the Administrator the current reserves of its members and also to attract new members to the PFA. Current members are disallowed from withdrawing their accumulated contributions for at least 5 years in order not to destabilize the scheme, as well as give it the opportunity to liquidate some of its fixed investments (i.e. real estate).
Moreover, the Act allows the NSITF to introduce benefits for other contingencies
(sickness, unemployment insurance, work injury, etc.) to be managed by the Fund as a separate social insurance programme.
Source: National Social Insurance Trust Fund.
Reference: The Pension Reform Act 2004.
Implementation date: 00.2004