An Overview of the
Pension Reform Act
2004
by
M.K. Ahmad
National Pension Commission
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
1
Agenda
• Rationale & Objectives of Pension Reform
• Coverage and Exemption
• Nature of the Scheme
• Pension Fund Administrator & Pension
Assets Custodian
• Transitional Arrangements
• National Pension Commission
• Safeguards for the Scheme
• Benefits of the Scheme
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
2
Pre - Pension Reform Act:
Public Sector Schemes
• Unfunded and inadequate budget allocations
– Budget far short of promised benefits
– Late releases of funds
• Unsustainable outstanding pension liabilities
estimated at N2 trillion
– Pension arrears to 216,000 pensioners in
Military, Police, Civilian, & CIPPO was over
N56 Billion
– Proportion of pension to salaries increased
between 1995 and 1999 from 16.7% to
30%
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
3
Pre - Pension Reform Act:
Public Sector Schemes
• Weak and inefficient administration
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– Protracted delays in processing and payment
– Less transparent and cumbersome processes
– Require about 14 documents to file pension claim
Demographic shifts and aging make defined benefit scheme
unsustainable
– No link between contribution and benefits
– Support ratio continued to fall making old scheme
unsustainable
Most of the over 300 parastatals schemes were bankrupt
– Largely unfunded & weak and restrictive investment
practices /
– Mismanagement
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
4
Pre - Pension Reform Act:
Private Sector Schemes
• Most workers not covered by any form of
retirement benefit arrangements
• Pension Schemes had been largely
unregulated
with highly diversified
arrangements
• Most were “resignation” than retirement
schemes
• Weak and inefficient administration
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
5
Overall Philosophy of the
Pension Reform
• Ensure that every worker receives his retirement
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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
Adopted major reform instead of cosmetic
adjustments of the past
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
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Nature of the Scheme
• Contributory
• Fully Funded
• Individual Retirement Savings Accounts
• Privately Managed & third party custody of
pension assets
• Strictly regulated and supervised
March 30, 2005
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Objectives of the Pension Reform
• Establish sustainable pension system
• Empower the worker
– Control over Retirement Savings Account
– Promotes labour mobility
– Minimises incentives for early retirement
• Ensure transparent & efficient management
of pension funds
• Promote savings culture
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
8
Objectives of the Pension Reform
• Secure compliance & promote wider
coverage
– Pension coverage in Nigeria is very low: 1990
to 1999 was 1.3% as against 17% and 60%
for Cameroun and Mauritius respectively
• Establish strong regulatory & supervisory
framework
– Provides for single regulator
– Eliminates regulatory overlap and arbitrage
March 30, 2005
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9
Coverage & Exemption
• For Public Service of the Federation and all
Employers of five employees and above in
the private sector
• Employees with 3 years or less to their
retirement and those covered by Section
291 of the Nigerian Constitution are
exempted
• Existing pensioners are also exempted
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
10
Retirement Savings Account
• Employee opens a Retirement Savings Account
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(RSA) with a Pension Fund Administrator (PFA)
Employer and employee to jointly contribute
minimum of 15% employee’s basic salary, housing
& transport allowances to RSA
– 7.5% by employer and 7.5% by employee in govt.
ministries and agencies
– 12.5% by employer and 2.5% by employee in Military
– In other cases, minimum of 7.5% each by the employer
& employee
• Employer may bear the full burden, i.e. not less
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than 15%
Contributions can only be reviewed upwards
March 30, 2005
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University of Agriculture Makurdi
11
Retirement Savings Account
Cont’d
• Employer to deduct and remit to Pension
Assets Custodian (PAC) within 7 days of pay
day
• PAC to notify, within 24 hours, the PFA who
would credits the employee’s RSA
• Contribution by government shall be a first
charge on the Consolidated Revenue Fund
of the Federation
• Contributions and retirement benefits are
tax-exempt
March 30, 2005
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12
Withdrawal from Retirement
Savings Account
• Account holder must be 50 years or upon
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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
March 30, 2005
Sensitisation Seminar for the
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Withdrawal from Retirement
Savings Account
• 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
March 30, 2005
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14
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
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
15
Functions of Pension Fund Administrator
• Opens and maintains Retirement Savings
Account (RSA) for every employee
• Invests & manages pension fund assets
• Pays retirement benefits to employees
• Provides customer support service including
access to customer account balances and
statements
• Shall have Investment & Risk Mgt
Committees for efficient operations of the
PFA
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
16
Licensing Requirements for a PFA
• Limited liability company whose object is to
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manage pension funds
Minimum paid up share capital of N150million
Professionally competent to manage pension funds
and administer retirement benefits
Applicant company, its Subscribers, Directors or
Officers are not linked to distressed or
mismanaged fund
Shall not engage in any other business other than
management of pension funds
Satisfies any other requirements set by the
Commission
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
17
Functions of Pension Assets Custodian
• Receives the total contributions remitted by
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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
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
18
Licensing Requirements for a PAC
• A licensed financial institution with a minimum net worth of
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N5billion or is wholly owned by a company with a
minimum net worth of N5billion
Min total Balance Sheet of N125billion or is wholly
owned by a licensed financial institution with a total
balance sheet of at least N125billion
Possess professional and technical capacity to perform
functions of a Custodian
To issue a guarantee to the full value of Assets held
Never involved in distressed or mismanaged fund
Undertakes to hold pension fund assets in safe custody on
trust for the employees and beneficiaries of the retirement
benefits
Satisfies any other requirements set by the Commission
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
19
Investment Of Pension Fund
• Pension Funds shall be invested by PFA in safe and
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high yielding instruments subject to guidelines and
regulations issued by the Commission
Investment portfolio may contain a mixture of:
 Bonds, Debentures, & Preference Shares listed on the
Stock or securities issued and guaranteed by FGN &
CBN
 Ordinary shares of listed public ltd companies with track
record of dividend payment of over 5 years
 Bank Deposits & Real Estate, etc.
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
20
Transitional Arrangements for Public
Sector: Retirement Benefits Bond
• Employees with over 3 years to retire will be
issued with Bonds for the value of their
accrued pension rights
• Accrued pension rights ( gratuity & pension)
are guaranteed & will be actuarially
determined for each employee transiting to
the new scheme at the cut-off date
• The Commission supervises and manages
the issuance and redemption of the Bond
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
21
Transitional Arrangements for Public
Sector: Retirement Benefits Bond
• CBN to establish, invest and manage
Retirement Benefit Bond Redemption Fund
(RBBRF)
• Fed. Govt to 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
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
22
Transitional Arrangements for
Public Sector: Pension Departments
• Pension Departments
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(6) 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
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
23
Transitional Arrangements for
Private Sector : Existing Schemes
• Pension Schemes in the private sector will
continue to exist provided that they:
Are fully funded at all times
Undertake to make up any shortfall within
90 days
Demonstrate capacity for the management
of pension fund assets
Must have managed pension fund assets for
at least 5 years before commencement of
Act
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
24
Transitional Arrangements for
Private Sector : Existing Schemes
• Pension Fund Assets to be:
 Held by a Custodian
 Segregated from assets of the company
• Membership of existing schemes
 Restricted to current members
 Optional to current members
• Operate under supervision of Commission
• Actuarial valuation must be done every year in the
case of Defined Benefit Scheme
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
25
Transitional Arrangements for
Private Sector : Closed PFA
• An employer may apply directly or through
a wholly owned subsidiary for a closed PFA
licence if;
Pension fund assets are N500 million and above
It has capacity to manage pension funds
Satisfies other requirements of Commission
Transfer assets to a PFA if pension fund assets
are less than N500 million
Maintain existing investments subject to
regulations by Commission
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
26
Transitional Arrangements for
Private Sector : NSITF
• The NSITF shall establish a company to undertake
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the business of a PFA in accordance with the Act
Funds contributed so far shall be computed & paid
into respective Retirement Savings Accounts of
contributors
Contributors to choose PFA to manage pension
funds standing to their credit but only after 5
years of commencement of the Act
Pension Funds & Assets to be held by a Custodian
The Commission to supervise the NSITF
NSITF Act is amended for full compliance with the
Pension Reform Act 2004
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
27
National Pension Commission
• Apex body to regulate and supervise pension
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schemes
Formulate, direct and oversee the overall policy on
pension matters in Nigeria
Approve, licence and supervise PFA, PAC and other
institutions relating to pension matters
Maintain National Data Bank on pension matters
Receive and investigate complaints against PAC,
PFA and Employer
Membership include NLC, NECA & National Union
of Pensioners, SEC, CBN, MOF & HOSF
March 30, 2005
Sensitisation Seminar for the
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28
National Pension Commission:
Supervision and Examination
• Commission conducts inspection &
examination of PFA, PAC
and Pension
Departments once a year
• Commission investigates the affairs of
various operators in the pensions industry
• Commission publishes list of PFAs & PCAs
on yearly basis
• External Auditors of PFAs & PACs under
obligation to report specific problems to the
Commission
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
29
National Pension Commission:
Sanctions for Non-Compliance
• Sanctions for operators range from N250,000 to
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N5 million and up to 10 years imprisonment
Directors or officers of PFAs and PACs or other
persons can be sanctioned up to N10 million or 3
years imprisonment
Commission to revoke licence for persistent
contravention
Commission to penalize employer that violates
Pension Reform Act 2004
Dispute resolution framework provided to
minimise litigations
March 30, 2005
Sensitisation Seminar for the
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Implementation Update
• Collection of contributions in the public service of
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the federation commenced in July 2004
Contributions lodged in CBN pending licensing of
PFAs & PACs
Compilation of employees profile in progress
Draft guidelines being prepared
Data compilation on retirement benefits schemes
started
Public Education & Enlightenment for various
stakeholders
Some
state
governments
commenced
arrangements for implementation
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
31
Safeguards for the Scheme
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Separation of functions of PFA and PAC
Pension Assets Custodian Guarantee
Risk Rating of Investment Instruments
Compliance Officers
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
Sale of pension assets, grant of loan or use as
collateral is prohibited
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
32
Safeguards for the Scheme
• Appointment of top management or Directors of
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PFA, PAC or other institutions must be approved
by the Commission
Reporting requirements by PFAs, PACs & Pension
Departments & adequate sanctions
Statutory Reserve Fund by PFA & Minimum
Pension Guarantee
Public Disclosure of Information by operators in
the industry
Government contribution shall be a first charge on
Consolidated Revenue Fund of the Federation
March 30, 2005
Sensitisation Seminar for the
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Benefits of the Scheme
• Pensioner no longer at the mercy of employer and
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is assured of regular payment of retirement
benefits
Employee has up to date information on his
Retirement Savings Account
Contributor has the freedom to choose who
administers his retirement benefits account
Retirement Savings Accounts are portable
Stems further growth of pension obligations and
provides a platform for addressing this liability
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
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Benefits of the Scheme: Cont’d
• Imposes fiscal discipline on the nation and is
a solid foundation for economic development
• Creates a huge pool of long term funds and
enhanced accountability
• Introduces
clear
legal/administrative
sanctions
• Separation of investment, administration and
custody of assets
• Enhances
transparency
in
pension
administration
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
35
Consequential Amendments &
Repeal / Savings of Acts
• Armed
Forces Pensions Act 1990
consequentially amended
• Save as provided, Pension Act 1990, Police
and Other Agencies Offices Act 1993 &
Police Pension Rights of IGP Act 1993 are
repealed
• Pension Reform Act 2004 shall prevail in
case of inconsistency with other laws
relating to pension matters
March 30, 2005
Sensitisation Seminar for the
University of Agriculture Makurdi
36
Pension Reform Act 2004
Frequently Asked Questions
March 30, 2005
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