The Contributory Pension Scheme(CPS), introduced following the enactment into law of the Pension Reform Act 2004, is more user-friendly: The new system allows contributors access to their account balance through the internet and other technology driven platforms.
Efficient customer service and good investment returns are at the heart of the scheme, and the Pension Fund Administrators (PFAs) have had to put systems in place, as well as personnel and services that will ensure that contributors can gain easy access to their accounts, maximise returns to be earned on their retirement benefits over time, and receive their retirement benefits with ease.
What this signifies for the Nigerian workers, is the absence of queues. It also means that they do not have to travel long distances to get their pension payments or even to present themselves for periodic pay parades since pension payments are made directly to retirees’ accounts, through banks of their choice on a monthly basis. In addition, PFAs are required to have offices across the nation to enable clients have easy access to them.
Social and economic benefits: The new scheme enhances labour mobility, as workers can move freely from one employer to another without their retirement benefits being negatively impacted. The Pension Reform Act 2004 has instilled a savings culture among Nigerians which has created a pool of long term investible funds for the development of the financial markets and the economy as a whole. The life insurance cover for employees also improve staff welfare, and promotes workers commitment and loyalty while providing adequate cover for a worker’s family should he or she die in service.
Fund withdrawals are protected: Fund withdrawals before the prescribed retirement age of 50 years are protected by the PRA 2004. There are various instances, where this can occur; a programmed withdrawal for life, the purchase of an annuity for life, and a lump sum withdrawal. These requirements ensure that retirement benefits are only available to workers during their old age, except for situations of disability and ill-health. It also ensures that adequate funds are available on a continuous basis to meet recurrent expenditure of retirees throughout their lives. The Act also enables employees who have been out of employment by way of termination or redundancy and have not secured alternative employment after 6 months, to access a portion of their retirement savings.
Invested funds are secure
The PRA 2004 stipulates investment guidelines for the management of pension fund assets and requires that PFAs adhere strictly to these guidelines which generally specify the broad asset categories that are permissible and include maximum exposure limits for each asset category. The guidelines stipulate that assets be invested in investment grade securities issued by institutions with a track records and quality ratings.
PFAs are required to be prudent in the management of pension funds, and Pension Fund Custodians (PFCs) are expected to diligently monitor the investment decisions of the PFAs and provide a guarantee as to the security of pension fund assets.
These guidelines ensure that contributors’ funds are securely invested and will yield sufficient returns to meet the retirement needs of the workers as pension assets are invested in a manner to ensure reasonable diversification to reduce the risk of long-term investment.
They also ensure that asset allocation among the various asset classes of fixed income, equities and real estate reflects the need to create liquidity to meet regular withdrawal requirements at retirement. Continuing is excerpts of key issues as discussed by one of the Pension Fund operators in the country.
What differentiates CPS from the previous scheme?
The new pension scheme is known as a contributory pension scheme and it was established by the pension Reform Act in 2004. It is a method that ensures that workers’ retirement contributions are remitted regularly by employers; both in the private and public sectors.
In the past, only a few institutions operated the contributory pension scheme, and a good many private sector operators did not institute any sort of retirement scheme for their staff.
The major success of a contributory pension scheme is regularising the process of remitting funds to retirees. Also, under the new pension scheme, retiree benefits may or may not be remitted, depending on the liquidity of the business. However, in a funded contributory pension scheme, this risk is eliminated, and it can be ascertained early on in the employee’s work life. Usually, defaulting employers can be compelled to fund the Retirement Savings Accounts of the affected staff.
In a funded contributory pension scheme, workers are guaranteed retirement benefits which consist of the contributions made over time and the investment income and appreciation accruing to their RSAs. Managing and remitting funds under the new scheme has resulted in reduced delays because each retirement savings account is managed separately, which means no undue bottlenecks will be created when it is time for the benefits to be paid out.
What impact will the new scheme have on the nation’s economy?
The introduction of the new scheme has introduced a nation-wide mass savings culture, which allows PFAs accumulate assets that can be invested in financial markets. This is expected to potentially promote depth and liquidity in the financial markets which is critical to the success of any economy.
Pension fund activities are capable of inducing financial market development through their substituting and complementary roles with other financial institutions, specifically commercial and investment banks.
Worldwide, pension funds are noted to be competing intermediaries for household savings and corporate financing which foster competition and may improve the efficiency of the loans and primary securities markets resulting in a lower spread between lending rates, and lower cost to access capital markets. PFAs also complement banks by purchasing long-term debt securities and investing in long-term bank deposits.