decription of pension reform Channel conflictFunction: is a rule which assigns an element in the domain to an element in the range in such a way that each element in the domain corresponds to exactly one element in the range. The notation f(x) read “f of x” or “f at x” means function of x while the notion y=f(x) means y is a function of x. The letter x represents the input value, or independent variableFunction: is a rule which assigns an element in the domain to an element in the range in such a way that each element in the domain corresponds to exactly one element in the range. The notation f(x) read “f of x” or “f at x” means function of x while the notion y=f(x) means y is a function of x. The letter x represents the input value, or independent variable

1. BFN 221- OMEGA SEMESTER
TOPIC: PENSION REFORMS
EXPLANATION OF PENSION REFORM ACT

2. • Pension is a fixed amount of money paid periodically to a person who no
longer works, by his former employer or from funds set aside for such
payment, upon satisfaction of the given conditions. Pension is an
arrangement put in place to make sure that retirees collect their pension
with ease as and when due.
• The scheme can be contributory or non-contributory, defined contribution
or defined benefit, funded or unfunded.
• Gratuity is a lump sum paid to retirees on retirement and entitlement
depends on the number of years spent.

3. • Contributory pension scheme is one whereby both the employer and the
employee contribute the specified percentage of the employee’s
emolument to the pension fund that is established for payment of pension
to retirees after working for a prescribed number of years and attaining
the mandatory number of years in service.
• Non-contributory pension is the sole responsibility of either the employee
or employer.
• Defined contributory pension scheme is that which specifies the basis on
which contributions will be made relative to the level of benefit that will
be provided.

4. • Funded pension fund is one where the amount contributed by the
contributors is invested outside the business of the employer, with a view
to providing enough fund to meet pension liabilities as at when due.
• Unfunded pension fund is one where the contribution is invested into the
business of the employer.
• Before the commencement of 2004 Pension Reform, the pension and
gratuity system in the public service in Nigeria had practically collapsed
with pensioners routinely and for long being unable to receive their
pension and gratuity payments.

5. • The painful spectacle of the old and helpless pensioners including ex-
servicemen, queuing up, almost endlessly for their pensions and
sometimes dying in the process, suddenly became recurring features of
retirement life.
• The schemes that were operational in the private sector such as the
National provident Fund (NPF) and Nigeria Social Insurance Trust Fund
(NSITF) did not fare better than that of the public service.
• The social consequences of the absence of pension and retirement plan
contribute to the state of corruption.
• Expected pension benefits were not paid and workers tried to accumulate
enough money that can sustain them in retirement, while in service.

6. • According to Nwude (2010), pension liabilities was (estimated at over N2
trillion as at 2006) and arrears amounting to above N60 billion.
• This sad and unacceptable state is traceable to a combination of factors,
including misappropriation and embezzlement of pension funds and
persistent failure of governments and organizations to make provisions for
pension payments, resulting in chronic underfunding of pension schemes.
• Many of the retirees could not pay their children’s school fees, house
rents, and even afford decent meals.

7. • Pre Pension Reform Act was faced with:
• Unfunded and inadequate budget allocation
• Unsustainable outstanding pension liabilities estimated at N1 trillion in the
public sector.
• Demographic shifts and aging made defined benefits scheme
unsustainable.
• Many workers not covered by any form of retirement benefits
arrangements pension schemes had been largely unregulated with highly
diversified arrangements were’ resignation’ than retirement scheme.

8. Pension Reforms - Historical Perspective
• Pension ordinance of 1951 was the first public sector pension scheme in
Nigeria. It took retrospective effect from January 1, 1946.Initially only for
British Officers serving in Nigeria.
• Pension and Gratuity were provided by Governor-General and were not
rights.
• Qualify age for both pension and gratuity was ten years of meritorious
service.
• Pension provisions remained in pieces of legislations until they were
codified in Pension Decrees 102 and 103 of 1979.
• In 1997, parastatals were allowed to have individual pension
arrangements for their staff and appoint Boards of Trustees (BOT) to
administer their pension plans as specified in a Standard Trust Deed and
Rules prepared by the Office of the Head of Service of the Federation.

9. • Decree 5 of 1985 stipulated the Pension Rights of Judges. This was
amended by Decrees 51 of 1988 and 62 of 1991.Pension Rights of Judicial
Officers are now preserved by section 291 of the 1999 Federal
Constitution.
• National Provident Fund (NPF) was the first formal social protection
scheme in Nigeria established in 1961 for the non pensionable private
sector employees. The Nigeria Social Insurance Trust Fund (NSITF) was
established by Decree No. 73 of 1993 to provide enhanced social
protection to private sector employees.
• The NSITF took over the assets of the NPF and commenced operations in
July 1994. All registered members of the NPF became automatic members
of the NSITF.

10. • All private sector employers and employees were mandated to register as
members as soon as they commence operations and assumed duty
respectively. From July 1994 to December 2000, the employee contributed
2.5% of his/her basic earnings while the employer contributed 5% of the
same amount, making a total of 7.5%.
• After December 2000 the contributions rates were amended to 3.5% of
gross earnings (BASIC salary + Transport Allowance + Housing Allowance)
while the employer contributed 6.5%, making a total of 10%.
• Pension Reform Act 2004 was one of the recent effort of the Government
at reforming the pension. As at 2010, the employer and employee
contribute 7.5% each of gross earnings (that is 15%) to the pension fund.
From 2014, this has changed to 10% and 8% respectively for employer and
employee.

11. • It established a contributory pension scheme for both the public and
private sectors. A new pension payment scheme was agreed by the
National Assembly in 2014 but it is yet to be fully implemented.
• The minimum employee threshold for mandatory participation is three
employees, not 15, as in the text of the 2014 PRA. Thus, companies with
three or more employees are required to join the system.

12. OBJECTIVES OF THE PENSION REFORM
• Promote saving culture
• Promote wider coverage of pension scheme.
• Ensure transparency and efficiency in the management of pension funds.
• To empower the employee.
• To pave way for the growth of a sustainable pension scheme that
employees can rely on.
• Establish strong regulatory and supervisory framework.
• Establish uniform rules, regulations and standards for administration of
pension matters.

13. RATIONALE OF THE PENSION REFORM
• Most public sector schemes were unfunded
• Unsustainable pension liabilities
• Weak and inefficient administration of schemes in both public
and private sectors
• Demographic shifts and aging make defined benefits schemes
unsustainable
• Many workers in the private sector were not covered by any
form of retirement benefits arrangement
• Existence of diversified arrangements which were largely
unregulated in the private sector.

14. BEFORE 2004 PENSION RFORM
• The contemporary Nigeria society lays undue emphasis on, and respects
wealth. The emphasis is on short-cuts, hot-cash, now-now-now and quick-
quick. A society that is faced with such level of misdemeanor is bound to
encourage unethical practices such as:
• Distortions in information used for pension management and accounting.
• Departure from rules and procedures of payments relating to retirements
benefits such as pension and gratuity.
• Circumvention of laws and regulations relating to retirement benefits.
• Alterations and manipulation of personnel records and age to postpone
retirement
• Diversion of moneys meant for retirees in favour of self, staff, officials and
cronies and economic consequences on the retiree through
manipulations, suppression and interceptions

15. • Deliberate failure to reconcile records relating to retirees and retirement
benefits.
• Improperly authorized and unauthorized payments out of funds meant for
retirees (example, pension fund)
• Reluctance to use modern business and accounting machines (such as
computer that facilitate information and data processing of retirement
benefits.
• Embezzlement of funds meant for the payment of retirees.
• Falsification of financial statements relating to pension and gratuity and
production of misleading audit reports thereof.

16. • Delays in, or non-remittance of on-payments to pension fund
managers, and the rest and Mass retrenchment (or mass
retirement) of workers without consideration of the social and
economic consequences on the retiree. The problems are
multidimensional and the list is endless.

17. Nigerian As Signatory to International
Labour Organization
• Nigeria as a signatory to minimum standard Convention 102 of the
International Labour Organization (ILO), is required to provide or establish
a minimum of three branches of social security namely, old age, invalidity
and survivor, out of 40 branches provided by the convention. In line with
this, many institutional and regulatory framework such as those highlighted
below were established.
• The Nigerian Social Insurance Trust Fund (NSITF) through Decree 73 of
1993 replaced the defunct National Provident Fund (NPF) scheme. It was
established for the protection of workers in the private sector of the
economy against the loss of employment income in the event of old age,
invalidity or death.
• Invalidity –man with wife and two (2) children and survivors –widow and
two (2) children

18. • The Security and Exchange Commission (SEC) by the provision of the
investment and Securities Act of 1999 was empowered to register and
regulate rating agencies and management of fund.
• The Joint tax Board is in charge of tax regulations over pension’s funds and
the approval of transfer of insured pensions, particularly when
contributor/member change jobs.
• The National Assembly by the 1999 Constitution of the Federal Republic of
Nigeria has the right to enact laws on pensions, gratuities payable out of
the consolidated revenue fund of the Federation.
• The Pension Reform bill of 2003 was an attempt to articulate a more
comprehensive legal framework that will correct most of the pitfalls and
lacunas in the previous framework especially the unethical approach
whereby employees indulge in sharp practices while in active service to
enable them amass wealth in order to be able to cope with the demands
of the society when they retire.

19. NDUSTRY/REGULATORY STAKEHOLDERS
• The industry stakeholders are:
• Employer
• Employee,
• National Pension Commission (Pencom),
• Pension Fund Administrator (PFA) and Pension Fund Custodian
(PFC).
• The Regulatory stakeholders are Central Bank of Nigeria (CBN),
• Securities Exchange Commission (SEC),
• Nigeria Stock Exchange (NSE),
• Federal Inland Revenue Services (FIRS)
• Nigerian Insurance Commission (NAICOM) and Budget Office.

20. FEATURES OF THE CONTRIBUTORY SCHEME
• Contributory - that is both employer and employee contribute
10% and 8% respectively of basic salary to the scheme and
maintain Individual Retirement Savings Accounts with the
pension scheme.
• Fully Funded
• From onset fund is set aside to fully meet retirement benefits
• Individual Retirement Savings Accounts (RSAs)
• Privately managed by third party of pension assets.
• Strictly regulated and supervised
• Coverage & Exemption
• Group life insurance cover
•

21. COVERAGE AND EXEMPTION
• The scheme is expected to cover both the private
and public sectors. The scope is as stated below:
• For Public Service of the Federation and all
Employers of three employees and above in the
private sector.
• Employees with three years or less to their
retirement. Existing pensioners are also
exempted.
•

22. RETIREMENT SAVING ACCOUNT
• Employee will open a Retirement Savings Account (RSA) with a Pensions
Fund Administrator (PFA)
• Before July 1, 2014, Employer and employee to jointly contribute
minimum of 15% employee’s basic salary, housing and transport
allowances to retirement saving account.
• The employer is to contribute 7.5% while employee in government
ministries are also to contribute 7.5%.In other cases, minimum of 7.5% is
to be contributed each by employer and employer he Employer may bear
the full burden not less than 15%.
• The new scheme is subject to review upward and the rate will be
determined by government.

23. PENSION FUND ADMINISTRATOR AND PENSION ASSET/FUND
CUSTODIAN
Function of Pension Fund Administrator
• The Pension Fund Administrator is expected to play the following role:
• Open and maintain Retirement Savings Account (RSA) for every employee.
• Invests and manage pension fund assets.
• Pays retirement benefits to employees
• Provides customer support service including access to customer account
balances and statements on demand
• They are expected to have Investment and risk management committee’s
for efficient operations of the PFA account.

24. Licensing Requirements for a Pension Fund Administrator
• Existing and prospective PFA are expected to be limited
liability company whose aim is to manage pension funds.
• It requires a minimum paid up share capital of N150 million
and the fund is expected to be managed and supervised by
professionally competent resource person who are to
administer the retirement benefits.
• A prospective PFA company, its subscribers, directors or
officers are not to be linked to distressed or managed fund.
• PFA should not engage in any other business other than
management of pension funds. Besides, they should satisfy
any other requirements set by the National Pension
Commission.

25. Function of Pension Assets Custodian/Pension Fund Custodian
• The PFC is the body to receive contributions remitted from
employees by their employer.
• The PFC is to notify the PFA within 24 hours of the receipt of
contributions from employer.
• They are to hold pension fund assets in safe custody on trust
for the employees and beneficiaries of the of the fund or
retirement benefits.
• They are also to report to NPC on assets held for PFA.

26. Licensing Requirements for Pension
Assets Custodian
• To qualify to operate as a PFC the following conditions must be satisfied:
• A licensed financial institution with a minimum net worth of N5 billion or
wholly owned by a company with a minimum net worth of N5billion.
• A minimum total balance sheet of N125 billion or is wholly owned by a
licensed financial institution with a total balance sheet of at least N125
billion.
• It should have professional and technical capacity to handle the functions
of a custodian.

27. • An existing or prospective PFC is to issue guarantee to the full
value of Assets held.
• The company should never involve a distress or mismanaged
fund.
• Undertakes to hold pension fund assets in safe custody on
trust for the employees and beneficiaries of the retirement
benefits
• Must meet any other requirements set by NPC
•

28. NATIONAL PENSION COMMISSION
• This is the apex body that is in charge of regulating and supervising the
pension scheme.
• The body will formulate, direct and oversee the overall policy on pension
matters in Nigeria; approve license and supervise PFA, PFC and other
institutions relating to pension matters.
• To meet up with the demands of its clients, the body will maintain a
National Data Bank on pension matters.
• The body will receive and investigate complaints against Pension
Fund/Asset Custodian, Pension Fund Administrator and Employer.
• Membership include Nigeria Labour Council, National Employer
Consultative Association and National Union of Pensioners, Securities
Exchange Commission, Central Bank of Nigeria and Ministry of Finance

29. BENEFITS OF THE SCHEME
• Pensioner is assured of regular payment of retirement
benefits.
• Contributor (in the private and public sector) has the freedom
to choose who administers his retirement benefits account.
• Enhances transparency in pension administration.
• Stems further growth of pension obligations. The reduction in
qualifying period for 10 years to 5 years and 15 years to 10
years for gratuity and pension as exacerbated pension
liabilities.
• Creates a huge pool of long term funds and is a solid
foundation for economic development.
•

30. Challenges of the Scheme
• Programmed withdrawal will not satisfy the good purpose of
the bill where life expectancy exceeds estimated life span. Any
pensioner that outlived this particular age will then become a
social problem as he will not be able to take care of himself.
• Cross boarder investment as provided in the pension fund
might also create problem of repatriation especially where
economies have different monetary and fiscal policies that are
subject to the dictate of international economic order.

31. Challenges of the new scheme
• There is also the problem of low level of information in the
country coupled with lack of human capital required to make
the new Pension Act work.
• There is the challenge of coverage. Would the PFAs provide
adequate branch network to cover the country for its
employees?.
• Can they also meet with the challenge posed by dynamic
information technology facilities, accurate record keeping,
regular pension payments and rendition of regular accounts
and reports to both the pension commission and
accountholders?

32. It would reduce the crave for government job and encourage
more private sector participation in the economy especially
employees in the public sector who hitherto held to their jobs as
long as they wanted by falsifying their ages.
The new Pension Reform Act will reduce some political risk by
moving pension plans outside the direct control of government
intervention It will also permit individuals who have enough
account to decide when to retire.

33. REVIEW QUESTIONS
1. With respect to the Pension Reform Act, discuss the
transitional arrangements for the public and private
sectors.
2. Briefly explain the functions of PFC and PFA.
3. (a) What was the position Pre Pension Reform Act? What
are the objectives of the Pension Reform.
(b) Briefly explain the rationale of the Pension Reform
Act.
4. List the requirements for Licensing a PFC
5. Critically analyze the benefits and challenges of the
Scheme