Voluntary pension savings rise as workers prioritise future

Workers are voluntarily increasing their contributions to the pension scheme as they focus on the future in the face of economic uncertainties.

Data from the National Pension Commission (PenCom) shows that Additional Voluntary Contributions (AVCs) under the Contributory Pension Scheme (CPS) have more than tripled in the last two years.

The total AVCs rose from N1.08 billion in second quarter 2022 to N3.46 billion in second quarter 2024, indicating a 220.4 percent increase over the two-year period.

This sharp increase in voluntary savings suggests a growing awareness of the need for long-term financial security, even when short-term budgets are tighter than ever, analysts said.

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Oguche Agudah, chief executive officer, Pension Fund Operators Association of Nigeria (PenOp) said, “Increased awareness about AVC is empowering individuals to boost their retirement savings and secure their financial future.”

According to him, education by both PenOp and operators is playing a pivotal role in helping people to understand the value of AVC.

“Research shows that economic uncertainty prompts people to save more, and the current concerns about Nigeria’s economy are pushing many to plan for a rainy day.”

Agudah further said that AVCs provide a reliable tool for individuals to protect their future amidst economic anxiety.

He noted the impact of increased salary for employees since the current economic hardship in the country, saying, “As salaries increase, so does the willingness to invest in AVC, driving better financial security.”

In November 2017, the National Pension Commission (PenCom) issued a circular specifying new rules for additional voluntary contributions to Retirement Savings Accounts (RSAs).

The new rules require that 50 percent of voluntary contributions for employees covered by the PRA 2014 be treated as ‘contingent’ and can be withdrawn once every two years on an incremental basis, subject to the Five-Year Tax Rule, while the balance of 50 percent can only be withdrawn at the point of retirement alongside the rest of the RSA.

Analysts at PenOp said the AVCs in the pension industry have demonstrated notable growth over the past five years, reflecting increasing interest from contributors.

“In Q2 2024, voluntary contributions reached N3.46 billion, compared to N1.08 billion in Q2 2022, a growth of over 215 percent. This surge highlights the rising confidence in the pension system and the attractiveness of voluntary contributions as a tool for long-term financial planning,” they said.

“With this upward trend, the industry is poised to see continued growth in voluntary contributions, further strengthening the overall pension ecosystem in Nigeria, the analysts further said.

Omagbitse Barrow, a strategy and innovation consultant and author of ‘Pension Fund Administration in Nigeria,’ had told an audience in a recent presentation that voluntary contribution is not meant for such short-term exploitation.

He said it is designed in a Defined Contribution (DC) to help people bolster their ultimate retirement benefits, save more and enjoy some tax savings.

“It is a very important component of any successful DC Scheme and should be used for that purpose and nothing else. Anything else would be an abuse and a negation of its purpose.”

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According to analysts at Oak Pensions, “Voluntary contribution is a personal contribution that can be made in addition to your mandatory pension contributions. These funds would be deducted from your monthly salary by your employer and remitted into your Retirement Savings Account (RSA), along with your regular pension contributions.”

Oak Pension said AVCs differ from other regular savings, as they are deducted from the salary before tax.

“This is a significant advantage of the AVCs, as it means the contributions are tax-free and lower your overall tax liability.”

Explaining further, Oak Pensions said every employee covered under the CPS is eligible to make voluntary contributions.

“In the event you decide to withdraw from, or liquidate your voluntary contributions, all you need to do is complete and submit our benefit withdrawal form, attaching a passport photograph and letter requesting for your funds.”

Vincent Duru, a pension benefit expert, said the uncertainty of global economies has led to a heightened sense of urgency around planning for retirement.

According to him, a shift in mindset has occurred, with more people realising the value of early retirement planning to avoid financial hardships later in life.

“Additionally, changes in workplace benefits and tax incentives may have also played a role in encouraging employees to increase their retirement contributions,” he noted.

As the year draws to a close, this surge in retirement savings not only reflects individuals’ resilience but also signals an evolving culture of long-term financial planning that is gaining traction in an unpredictable world, Duru added.