In Nigeria today, almost every worker sees a deduction on their payslip every month which is classed as ‘pension contribution’. A lot know what it is, and what it is for, but some are still unsure. This article is to explain a bit more about the Pension law in Nigeria and some facts and issues we believe Nigerians should be aware of.
What is a Pension?
A pension is a regular payment made during a person’s retirement from an investment fund or account to which that person and their employer(s) contributed during their time as an active member of the labour force.
In Nigeria, the Pension Reform Act 2014 (PRA) governs the framework and procedure for pensions, and so we will reference it a lot in this article.
The PRA establishes a Contributory Pension Scheme whereby the employers and the employees contribute minimum percentages of the employees’ salary to the scheme every month. The minimum contribution for the employer is 10%, and 8% for the employee. So to illustrate, if Dipo earns N500,000 monthly and works for Ikoyi Ltd, Ikoyi Ltd is supposed to contribute a minimum of N50,000 to the scheme monthly, while Dipo contributes a minimum of N40,000 to the Scheme monthly, every month until he retires. If Dipo or Ikoyi Ltd so wish, they can decide to increase the amount they contribute monthly, however they can not contribute anything less than the 8% and 10% respectively.
If Ikoyi Ltd is being generous, they can decide to bear the full responsibility for paying toward Dipo’s pension. In this case the PRA says that Ikoyi Ltd would have to pay a minimum of 20% of Dipo’s monthly pay the entire monthly emoluments.
The money contributed monthly goes into what is known as a Retirement Savings Account.
Am I entitled to a pension plan?
- If you are a worker working in the public sector then these contributions are mandatory
- If you are a worker in a private company with over 15 workers, then these contributions are mandatory.
- If you are worker in a private company with less than 3 workers (or are self-employed), then you are entitled to participate in the scheme subject to Pension Commission guidelines
- However if you are a worker in a private company with more than 3 workers, and less than 15 workers…the law is sadly silent on your status.
Having a pension plan is one of the most secure insurance policies for your future upon retirement, and it is important that when you are about to start a new job, you ensure that a pension plan is part of your package.
How are Pensions managed?
The PRA 2014 establishes a body called the National Pension Commission (NPC). The job of the NPC is to enforce and administer the pension regulations as laid out by the PRA 2014. It regulates two types of companies – Pension Fund Administrators (PFAs) and Pension Fund Custodian (PFCs).
The employee is meant to choose a PFA to manage his/her pension. There are a number of registered PFAs in Nigeria, so the employees have a variety of choice. Once the PFA is chosen by the employee, he/she needs to inform the employer.
What then happens next is the when the pension contributions are deducted, they are paid to the PFC specified by the PFA. The PFC upon receipt of the contribution, then informs the PFA of receipt of the funds, and the PFA then credits the Retirement Savings Account of the employee.
If the employee changes jobs, the law provides that the employee can keep his account with the PFA if he so wishes, however, he can switch to another PFA but not more than once in a year.
So what happens to your pension contributions when they are deducted? Do they just sit in the account until you retire and can withdraw them? The answer is no, the PFA take the funds and the invest them in certain approved investments e.g. government bonds, bill and other securities, shares of public limited companies, real estate development investments etc. This is strictly monitored by the Pension Fund Commission, with substantial fines and penalties available for erring PFAs.
How can you finally access your Pension?
Well, first things first, employees are not allowed to access the Retirement Savings Account until they retire or attain the age of 50 years (whichever is later). So if you retire at 35, you cannot access the account until you are 50 years old, and if you are 55 years and still working, you cannot access the account until you retire.
Upon retirement the individual is able to utilize the amount credited to his retirement savings account for the following benefits:
- Withdraw a lump sum from the total amount, provided that the amount left after the lump sum withdrawal is sufficient to procure a ‘programmed fund withdrawals or annuity for life’
- Programmed monthly or quarterly withdrawals calculated on the basis of expected life span
- Annuity for life purchased from a Life insurance company
The 50 year/retirement rule is the general rule, however there are exceptions provided if the person leaves employment before age 50 for medical reasons or in accordance with the terms and conditions if his/her employment which allow for partial lump sum removal in certain circumstances.
What happens to employers who do not remit?
It is mandatory for your employer to remit the pension contributions, and any non-remittance or late remittance is illegal. The penalty is payment of the amounts which are due to be paid, plus not less than 2% of the amount due. So if your company has not remitted 3 months worth of contributions totalling – N300,000. They are still liable to remit the N300,000 plus an additional N6,000 as a penalty.
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