The Pension Reform Act was signed into law on 25 June 2004 and it establishes a Contributory Pension Scheme (“CPS”). A CPS is a pension scheme into which both the employer and employee make regular funded contributions. The Scheme is applicable to all employees in the Federal Public Service and Federal Capital Territory, and any private sector organization with 5 or more employees.

The Act requires that pension funds be managed only by licensed Pension Fund Administrators (“PFA”), while the pension fund assets can only be held by licensed Pension Fund Custodians (“PFC”). The Act also established the National Pension Commission (“PenCom”) to regulate, supervise and ensure the effective administration of pension affairs in Nigeria.

Objectives of the New Pension Scheme

Due to the huge unsustainable pension deficit estimated at about N2 trillion which characterized the erstwhile Pay-As-You-Go Defined Benefit Scheme operated in Nigeria, the new Contributory Pension Scheme was conceived to achieve the following objectives:

1. Ensure that every person who has worked in either the public or private sector receives his/her retirement benefits as and when due.
   
2. Assist employees by ensuring that they save to cater for their livelihood during their old age
   
3. Establish a uniform set of rules, regulations and standards for the administration and payment of pension funds in Nigeria.
   
4. Stem the growth of outstanding pension liabilities.
   

Other Features of the New Pension Scheme

Fully Funded
The new pension scheme is contributory, fully funded and based on individual accounts that are privately managed by PFAs, with the pension assets held by PFC.

Contributory Scheme
The new Scheme mandates employers and employees alike to contribute a minimum of 7.5% each of employees’ monthly emolument (basic salary, housing and transport allowances). The only exceptions are military personnel who contribute who contribute 2.5%, with the Federal Government contributing 12.5%. However, employers may elect to bear the full burden by contributing not less than 15% of employees’ monthly emolument. Employers deduct contributions from individuals’ monthly salaries and forward the funds to the PFC of the employees’ PFA.

Choice
Employees determine which licensed PFA manages their RSA.

Portability
RSAs belong to the employee for life and can be moved from one job to another. PFAs, on the other hand, can only be changed once a year.

Withdrawal
Withdrawals can only be made from RSAs upon retirement or upon attaining the age of 50 (whichever is later). Mode of withdrawal could be monthly or quarterly calculated on the basis of an expected life span. The retiree can also purchase an annuity for life from an insurance company. Withdrawal of a lump sum is possible, however it is subject to a limit.

How the Scheme may affect you

Employers are to stop remitting contributions to the Nigeria Social Insurance Trust Fund ("NSITF") from the commencement of the Act. All contributions made to NSIFT after commencement of the Act, but before licensing of the PFA shall be transferred by NSITF to an employee's RSA with a PFA of his/her choice.

NSITF is required to open an RSA for every member and credit the portion of the member's contribution with returns thereon. Funds credited to the RSA of contributors shall remain with the RSA of NSITF for not less than years from the commencement of the Act.

Find Out More:

General Questions and Answers

Download: Pension Reform Act 2004

National Pension Commission

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