Overview of various Pension plan in Nigeria

An Overview of the Various Pension Schemes in Nigeria and the Social Impacts on the Beneficiaries.ByPhilip Eche – Managing Partner/CEO, Focus Business Managers Ltd (Management, Marketing and Social Security Consultants),Kaduna.08033165487 : 

An Overview of the Various Pension Schemes in Nigeria and the Social Impacts on the Beneficiaries.ByPhilip Eche – Managing Partner/CEO, Focus Business Managers Ltd (Management, Marketing and Social Security Consultants),Kaduna.08033165487 January 20, 2011 1

Outline : 

Outline What is pension? Types of Benefit Payments Rationale & objectives of Pension Reform The nature of the scheme The Transitional Arrangements National Pension Commission The safeguards for the scheme Social impact of the Pension Reform January 20, 2011 2

What is Pension?Pension is a periodical payment and/ or a Lump sum reward on a contractual legally enforceable agreement between an employer and an employee or any other sum payable gratuitously by the Government, Employer of Labour or a Company to its employee in consideration of past services rendered upon cessation of employment.Pension is critical to how a worker will live after retirement. It is therefore the right of the worker on how his pension works, what changes that may be made by his employer, how secure is the fund. These questions are answered through the various enabling Laws. : 

What is Pension?Pension is a periodical payment and/ or a Lump sum reward on a contractual legally enforceable agreement between an employer and an employee or any other sum payable gratuitously by the Government, Employer of Labour or a Company to its employee in consideration of past services rendered upon cessation of employment.Pension is critical to how a worker will live after retirement. It is therefore the right of the worker on how his pension works, what changes that may be made by his employer, how secure is the fund. These questions are answered through the various enabling Laws. January 20, 2011 3

Pension Plan : 

Pension Plan A pension plan is basically a structure for investing money. A pool of invested pension funds is used to pay monthly benefit to retirees under specified conditions. There are two kinds of pension plan: A traditional Defined Benefit Plan (DBP) that has a formula for determining the monthly pension payments during retirement. It is an employee’s salary history and the number of years of service. It is therefore up to the employer to make sure there is enough money set aside to fund the promised pension. Under this scheme, the employer solely funds it. E.g. Government. January 20, 2011 4

Pension Plan Cont’d : 

Pension Plan Cont’d Defined Contribution Plan (DCP) sets out how much money an employer and an employee will pay into the plan. The amount may be a flat rate or a percentage of the earning. The exact amount of the eventual retirement benefit is left undetermined until the employee retires. E.g. the NPF and NSITF schemes January 20, 2011 5

Types of Benefits : 

Types of Benefits There are many types of retirement plans or benefits: Pay as you – public sector pensions (Pension Act no. 104 of 1979) Defined Benefit – private sector (NPF Act 1961 and NSITF Act no. 73 of 1993) Deferred Profit Sharing (DPS) – organizes private sector (OPS) and multinational companies Defined Contribution – PRA no. 60 of 2004 January 20, 2011 6

The Pension Industry before the Reforms : 

The Pension Industry before the Reforms 1. Non-uniforms laws, rules, regulations Pension Act 1979 + Government Circulars (Public Service only) NSITF Act 1993 (private sector only with 5 and above employees) Investments & Securities Act 1999 2. Multiple & passive regulators: NAICOM SEC Office of the Head of the Civil Service Federal Civil Service Commission January 20, 2011 7

The Pension Industry before the Reforms Cont’d : 

The Pension Industry before the Reforms Cont’d 3. Public Service Unfunded Defined Benefit Non-Contributory Poor Administration Weak Governance Poor Investment Management (few exceptions) Huge Deficits Huge defaults and payment arrears  4. Private Sector Mostly operable in large institutions in the organized Private Sector Usually, “resignation schemes”, aimed at ensuring Employee loyalty January 20, 2011 8

The Pension Industry before the Reforms Cont’d : 

The Pension Industry before the Reforms Cont’d 5. Need for Reform Ensure payment of retirement benefits (Private and Public sector) Create a uniform legislation/regulation for pension funds Use pension funds as a catalyst for long-term savings and economic development Stem the tide of growing pension liabilities in the public service Even as the world population is ageing, people are living longer, therefore the need for a sustainable, prudent and simple method of retirees’ management is paramount. January 20, 2011 9

Why the Pension Reform? : 

Why the Pension Reform? Most schemes were under or unfunded Unsustainable outstanding pension liabilities estimated at N2 trillion Weak and inefficient administration Demographic shifts and aging make defined benefit scheme unsustainable Most workers are not covered by any form of retirement benefit arrangements January 20, 2011 10

What are the objectives of Pension Reform? : 

What are the objectives of Pension Reform? Ensure that every worker receives his retirement benefits as and when due Assist workers to save in order to carter for their livelihood during old age so as to reduce old age poverty Establish a system that is financially sustainable, simple & transparent; safeguards pension assets and promotes savings Secure compliance & promote wider coverage January 20, 2011 11

Objectives of Pension Reform cont’d : 

Objectives of Pension Reform cont’d Empowering the workers Control over Retirement Savings Account Promotes labour mobility Minimises incentives for early retirement Establish strong regulatory & supervisory framework Provides for single regulator Eliminates regulatory overlap and arbitrage January 20, 2011 12

What is the nature of the Scheme? : 

What is the nature of the Scheme? Contributory & Fully Funded Individual Retirement Savings Accounts Privately Managed & third party custody of pension assets Strictly regulated and supervised January 20, 2011 13

Rights of Employees : 

Rights of Employees Power of the Employee/Contributor Right to Select PFA of choice Right to reports on quarterly basis and on demand Right to move RSA once a year Right to appoint next of kin Right to customer support from PFA Right to lodge complaints with PenCom Demand payment of employer and employee contributions into RSA Accumulated contributions from January 2005 to date will be credited into RSA Life insurance cover up to 300% of the worker’s annual income Premium to be paid by employer No deductions from employee salary January 20, 2011 14

How does the Scheme work? : 

How does the Scheme work? Employee opens a Retirement Savings Account (RSA) with a Pension Fund Administrator (PFA) of choice Employer and employee in the private sector to jointly contribute minimum of 15% employee’s basic salary, housing & transport allowances to the RSA Military is 2.5% by service men and govt 12.5% Employer may bear the full burden, i.e. not less than 15% Contribution by government shall be a first charge on the Consolidated Revenue Fund of the Federation Contributions and retirement benefits are tax-exempt January 20, 2011 15

Withdrawal from Retirement Savings Account : 

Withdrawal from Retirement Savings Account Account holder must be 50 years or upon retirement (terms of employment, medical advice or disability) 50 years not related to 35 years of service or 60 years of age Mode of withdrawal Programmed monthly or quarterly withdrawals or Annuity for life purchased from Life Insurance Company with monthly or quarterly payments January 20, 2011 16

Withdrawal from Retirement Savings Account Cont’d : 

Withdrawal from Retirement Savings Account Cont’d Lump sum withdrawal provided that the amount left after the withdrawal shall be sufficient to procure an annuity or fund programmed withdrawal that will produce an amount not less than 50% of employee’s annual remuneration as at the date of retirement If under 50 years, lump sum withdrawal is 25% provided that no employment is secured within 6 months January 20, 2011 17

Survivor and Disability Benefits : 

Survivor and Disability Benefits Employer shall maintain life insurance 3 times total emolument in farvour of each employee Upon death & disability, the benefits under life insurance will be paid to the RSA Benefits be paid thereafter to the designated beneficiary January 20, 2011 18

Functions of Pension Fund Administrator : 

Functions of Pension Fund Administrator Opens and maintains Retirement Savings Account (RSA) for every employee Invests & manages pension fund assets Provides customer support service including access to customer account balances and statements Shall have Investment & Risk Mgt Committees for efficient operations of the PFA Pays retirement benefits to the retirees January 20, 2011 19

Functions of Pension Fund Custodian : 

Functions of Pension Fund Custodian Receives the total contributions remitted by employers Notifies the PFA within 24 hours of the receipt of contributions from any employer Holds pension fund assets in safe custody on trust for the employees and beneficiaries of the retirement benefits Execute transactions and undertakes other related activities on behalf of PFA Reports to the Commission on assets held for PFA January 20, 2011 20

Transitional Arrangements for Public Sector: Retirement Benefits Bond : 

Transitional Arrangements for Public Sector: Retirement Benefits Bond Accrued pension rights (gratuity & pension) are guaranteed & will be actuarially determined for each employee transiting to the new scheme at the cut-off date Fed. Govt to establish a Retirement Benefit Bond Redemption Fund (RBBRF) at CBN & pay 5% of monthly wage into the Fund until last retirement bond issued is redeemed Bond redeemed from RBBRF upon employee’s retirement and added to RSA January 20, 2011 21

Transitional Arrangements for Public Sector: Pension Departments : 

Transitional Arrangements for Public Sector: Pension Departments Pension Departments to replace existing Pension Boards and Offices Departments shall: Carry out existing functions of relevant pension offices Make budgetary estimates for existing pensioners Receive allocations from the Government and make payments to pensioners as and when due Ascertain existing deficit of category of officers exempted from the scheme Carry out any other related functions as the Commission may direct January 20, 2011 22

Transitional Arrangements for Private Sector & Self-funded public sector : Existing Schemes : 

Transitional Arrangements for Private Sector & Self-funded public sector : Existing Schemes Employer can be allowed to continue with its Pension Schemes provided that it meet certain conditions An employer may apply, through a wholly owned subsidiary for a closed PFA licence, to manage own scheme if it meets certain conditions The NSITF shall establish a company to undertake the business of a PFA and could offer social security services January 20, 2011 23

Transitional Arrangements for Private Sector & Self-funded public sector : Existing Schemes : 

Transitional Arrangements for Private Sector & Self-funded public sector : Existing Schemes The employer is required to compute accrued pension rights for past service and create nominal RSA for each employee In event of shortfall, employer shall issue written undertaking and notify PenCom of steps taken to meet it Upon retirement, employees can access their accrued pension rights under the old scheme rules January 20, 2011 24

Transitional Arrangements for NSITF Scheme : 

Transitional Arrangements for NSITF Scheme All contributions made and all attributable income for all contributors under the NSITF Act 1993 shall be computed NSITF shall open temporary RSA and credit thereto total benefits for all contributors A contributor under NSITF scheme shall not transfer his funds in the temporary RSA to another PFA until after 5 years from the commencement of the new scheme Funds held by a deceased contributor shall be transferred to his/her estate Contributions made to NSITF after commencement of this Act but before licensing of PFAs shall be credited into the contributors’ RSAs opened with licensed PFAs of his/her choice All pension funds and assets held and managed by NSITF shall be transferred to a custodian January 20, 2011 25

The role of National Pension Commission : 

The role of National Pension Commission Apex body to regulate and supervise pension schemes Formulate, direct and oversee the overall policy on pension matters in Nigeria including sanctions Approve, licence and supervise PFA, PFC and other institutions relating to pension matters Maintain National Data Bank on pension matters Receive and investigate complaints against PFC, PFA and Employer Membership include NLC, NECA & National Union of Pensioners, SEC, CBN, MOF & HOSF January 20, 2011 26

What are the Safeguards for the Scheme? : 

What are the Safeguards for the Scheme? Separation of functions of PFA and PFC Pension Assets Custodian Guarantee Risk Rating of Investment Instruments & Compliance Officers Government contribution shall be a first charge on Consolidated Revenue Fund of the Federation Pension assets held by a Custodian shall not be used to meet the claim of any Custodian’s creditors in event of liquidation of the Custodian Pension assets held by a Custodian shall not be seized or subject to execution of judgment debt or stopped from transfer to another Custodian January 20, 2011 27

The Safeguards for the Scheme cont’d : 

The Safeguards for the Scheme cont’d Sale of pension assets, grant of loan or use as collateral is prohibited Appointment of top management or Directors of PFA, PFC or other institutions must be approved by the Commission Reporting requirements by PFAs, PFCs & Pension Departments & adequate sanctions Statutory Reserve Fund by PFA & Minimum Pension Guarantee Public Disclosure of Information by operators in the industry January 20, 2011 28

Expected Social Impact of the Contributory Pension : 

Expected Social Impact of the Contributory Pension Improves living standards of the elderly Secures financial autonomy & independence of retirees Pensioners are no longer at the mercy of their employers and are assured of regular payment of retirement benefits Improves Labour market Reduces incentives for early retirement and increases supply of labour Reduces unemployment Increases coverage of pension scheme Promotes labour mobility as retirement savings accounts are portable January 20, 2011 29

Expected Social Impact of the Contributory Pension Cont’d : 

Expected Social Impact of the Contributory Pension Cont’d Public awareness can play a major role in reducing expenditure on compliance issues. This will also help in building workers’ confidence on the scheme and its long term benefits.  Good Governance: The development of any economy should be a collaborative approach between the government and the private sector. Government policies should be geared toward creating an enabling environment strong enough to attract the private sector both local and foreign to invest in her economy. Policies that translate into areas like; - Security of life and properties - Constant electricity - Affordable housing - Availability of good water - Good roads - Tax incentives January 20, 2011 30

Pension Industry and the Capital Market : 

Pension Industry and the Capital Market Pension Fund Assets: Generates long term savings (compulsory savings, tax incentives & desire for increased retirement benefits) Promotes bond and equity markets thereby developing the financial market and demands Raises productive capital formation that positively impacts on GDP growth  Triggers positive qualitative factors  Privatization Modernization of capital market infrastructure (trading, settlement system) Creation of domestic institutional investors (PFAs/CPFAs), with long term focus, would moderate stock market and price volatility. More efficient avenue for financing government(s) long term borrowing needs through infrastructural bonds January 20, 2011 31

Thanks for your attention, Questions and Answers : 

Thanks for your attention, Questions and Answers January 20, 2011 32