The new Pension scheme is a contributory privately managed scheme. Every eligible Employee shall maintain a Retirement Savings Account in his name with the Pension Fund Administrator (PFA) of his choice. The employee shall notify his employer of the PFA chosen and the identity of the Retirement Savings Account (RSA) opened.
The employee and employer contribute a minimum statutory percentage of the employee’s monthly emoluments (comprising basic salary, housing allowance and transport allowance) into the Retirement Savings Account of the employee.
The contributions would be managed and administered by professional Fund Administrators and held in custody by licensed Pension Fund Custodians (PFC). At retirement, the amount in the employee’s Retirement Savings Account would be the total contributions plus income and capital gain earned on the contributions made.
The scheme will not affect existing pensioners and those who as at the commencement of the Act had 3 years or less to retire as well as persons under S.291 of the Constitution of Federal Republic of Nigeria, that is, Judicial Officers of the Supreme Court and Appeal Court and any other Court as specified in the Constitution. However, all other employees in the Federal Public Service, the Federal Capital Territory (FCT) and the private sector (where there are three or more employees) are affected by the new scheme.
The objectives are:
- To ensure that every eligible person who has worked in either the public or private sector receives his retirement benefits as and when due;
- To assist employees by ensuring that they save to cater for their livelihood during old age; and,
- To establish a uniform set of rules and regulations for the administration and payment of retirement benefits in both the public and private sectors
How much will the employer and the employee need to contribute under the new Pension Scheme and what happens to the contributions?
An employee contributes a percentage of his monthly emolument that is, sum of basic salary, transportation and housing allowance and the employer also contributes a percentage of the employee’s monthly emolument towards the retirement benefits of the employee.
For workers in the public and private sectors, the employee contributes a minimum of Eight percent of his monthly emolument
Employers in the public and private sectors are required to contribute a minimum of Ten percent of the Employee’s monthly emolument. An employer may however elect to bear the full burden of the scheme provided that the total contribution is not less than Eighteen percent of the Employee’s monthly emolument.
The total contribution (employee’s and employer’s) will be paid out by the employer directly to the Pension Fund Custodian (PFC) and the funds will be managed and invested by a Pension Fund Administrator (PFA) of the employee’s choice.
A Pension Fund Administrator (PFA) is charged with the responsibility of managing and investing the pension funds and assets. It is the responsibility of the PFA to;
- Open a Retirement Savings Account (RSA) for all employees who choose it
- Invest and manage pension funds and assets
- Maintain books of account on all transactions relating to pension funds managed
- Provide regular information on investment strategy
- Market returns and other performance indicators to the RSA holders
- Provide customer service support to RSA holders
- Ensure that retirement benefits are paid to employees and be responsible for all calculations in relation to retirement benefits.
The Pension Fund Custodian (PFC) is charged with holding contributions and investment instruments on behalf of the Pension Fund Administrator. Within seven (7) days of the payment of salaries, the employer remits the contributions to the PFC, who receives it on behalf of the PFA and within 24 hours notifies the PFA of receipt of the contributions. The PFC’s functions also include holding all the pension fund and assets in safe custody and settling transactions and undertaking activities relating to the administration (such as collection of dividends) on behalf of the PFA.
The main difference between the PFA and the PFC is that the PFA manages the pension funds and decides which kind of investments to make while the PFC holds the pension funds and assets and acts on the order of the PFA.
The National Pension Commission (PenCom) is charged with the regulation and supervision of the pension schemes and has powers to formulate, direct and oversee the overall policy on pension matters in Nigeria.
No. The employer sends his contribution as well as the employees, directly to the PFC who collects it on behalf of the PFA.
Once you open a Retirement Savings Account (RSA) with a Pension Fund Administrator (PFA) of choice, your PFA will issue periodic statements of account showing how much has been contributed and returns on the contributions to date.
Yes, you have the freedom to transfer your Retirement Savings Account from one PFA to another once a year without adducing the reason for such transfer. This will be subject to the Commission’s implementation of the transfer window .
Yes, you can make voluntary contributions to your RSA in addition to the contributions made by yourself and your employer. Also, people exempt from the scheme who wish to save towards their retirement may open a Retirement Savings Account and make Voluntary contributions to their RSA.
Note: Voluntary contributions may be withdrawn from the RSA at any time but the Income generated will be liable to tax if withdrawn within 5 years of the date the voluntary contribution is made.
At your retirement or upon attaining the age of 50, whichever comes later, you may utilize the balance standing to the credit of your Retirement Savings Account (RSA) for;
Programmed or monthly withdrawals calculated on the basis of an expected life span or
You may purchase an annuity for life from a life insurance company with monthly or quarterly payments or
You may withdraw a lump sum provided that the amount left will be enough to procure an annuity or fund programmed withdrawals that will produce an amount not less than 50% of your annual remuneration as at the date of retirement.
If an employee retires before the age of 50 years in accordance with the terms and conditions of his employment, or as a result of physical or mental disability, he may withdraw a lump sum of money of not more than 25% of the amount in his Retirement Savings Account (RSA), provided that such withdrawals shall only be made after four months of retirement and the retired employee does not secure another employment.
The balance of 75% will be used to purchase an annuity from a life insurance company or to fund programmed withdrawals from the RSA upon the attainment of age 50. On the other hand, the balance is paid EnBloc provided that it is less than or equal to N550,000.00
Your PFA shall invest the pension funds strictly within the guidelines provided by the National Pension Commission (PenCom). Every PFA is mandated to have both an Investment Strategy Committee and a Risk Management Committee.
The functions of these committees include the formulation of strategies for complying with the investment guidelines issued by PenCom and determining the risk profile of any such Investment.
What happens to the amount in an employee’s Retirement Savings Account in the event of the employee’s Death?
In the event of the employee’s death, the amount in an employee’s Retirement Savings Account (RSA) would be paid out by the Pension Fund Administrator (PFA) as follows:
- To a beneficiary under a will or
- To the spouse and children of the deceased; or in the absence of spouse and children or
- To the recorded next-of kin/any person designated by the deceased when he was alive or (in the absence of such designation)
- To any person appointed by the probate registry as administrator of the estate of the deceased
All contributions are tax deductible in the computation of tax payable by an employee and his employer and all retirement benefits are tax exempt. Where a contributor however wishes to withdraw a voluntary contribution within 5 years of making such voluntary contribution, then the Income generated on the Voluntary Contribution shall be taxed at the point of the withdrawal.
No, the funds in an RSA cannot be used as security for borrowing.
A goal of the PFA is to effectively manage your contributions in such a manner as to minimize the effect of inflation on the contributions while still keeping strictly within the guidelines issued by the National Pension Commission.
For this reason you should choose a PFA with professional competence and expertise in investment whose informed investment decisions will achieve good returns on your contributions and duly minimize the effect of inflation.
As of the commencement of the Pension Reform Act, all contributions to NSITF should have ceased. Contributions already held by NSITF may be retained by NSITF for 5years from the commencement of the Act, after which every employee is at liberty to transfer such funds to his/her RSA opened with his chosen PFA.
What happens to the retirement benefits under the pension scheme existing before the commencement of the Pension Act?
What happens to the retirement benefits under the pension scheme existing before the commencement of the Pension Act?
- In the case of the Federal Public Service and the FCT where the previous scheme was unfunded, the government will calculate the amount due to each employee and issue a Federal Government Retirement Bond to the employee. The employee shall hold this bond as evidence of government liability. Upon retirement the bond shall be redeemed by the Central Bank of Nigeria (CBN). The proceeds shall be transferred to the credit of the Retirement Savings Account of the employee.
- For employees in self-funded Agencies, the employer shall credit their RSA with any funds to which the employee is entitled from prior schemes. If the funds are not sufficient to meet the accrued liabilities to the employee, the employer shall issue to the employee a written obligation on the liabilities, and the obligation shall have the same priority as salary. The terms of repayment of such obligations shall be agreed with the employee.
- For private sector employees, the employer shall credit their RSAs with any funds to which the employee is entitled. In the event that the funds are not sufficient to meet the accrued liabilities, a written obligation to that effect shall be issued to the concerned employee and the terms of such obligation shall be agreed with the employee.
The Federal Government shall pay into Redemption Funds Account with the Central Bank, an amount equal to 5% of the total monthly wage bill payable to employees in the public service of the Federation and FCT. The amount paid into the CBN shall be used to redeem any Retirement Bonds issued.
Who would be responsible for managing the affairs of current pensioners and those not affected by the new Pension Act?
In the Federal Public Service and FCT, a Pension Transitional Arrangement Department would be established. This Department will be made up of existing pension boards/offices and it shall carry out the existing functions of the relevant pension boards or offices. Among this function is the payment of gratuity and pension to existing pensioners and those exempted by the Act.
The Pension Reform Act, 2014 correctly spells out operational independence of the Pension Fund Administrator (PFA) from the Pension Fund Custodian (PFC) .The PFA invests and manages the funds while the PFC has custody of the funds. The National Pension Commission (PenCom) strictly and effectively supervises and regulates the pension funds and all operators involved in the management and custody of pension funds.
If after 7 days of the payment of salaries, any employer refuses or fails (for whatever reason) to remit the pension contributions of his employee to the PFA where such employee has opened a Retirement Saving Account (“RSA”) , the PFA is obligated to report the employer to the National Pension Commission if the funds are not received by the 14th day from the payment of salaries. Such employer will be liable to a penalty in addition to the funds due.
What if my employer places conditions on the making of contributions, (e.g. minimum duration of service)?
The Act makes it mandatory for all employers in the private sector with 3 or more employees to make the deductions and remittance and no employer may introduce any conditions to the remittance of such deductions as it will be in violation of the Act. Under the Act, there is no minimum duration of employment before the employee is eligible. All employees of companies with 3 or more staff must be under the Act.
In the event of the liquidation of the Pension Fund Administrator (PFA) or Pension Fund Custodian (PFC), do remember that the management and custody of the funds are held by separate and unrelated entities. The funds are managed by the PFA while custody is in the PFC. Where a PFA is liquidated, the funds are in the custody of the PFC and so the employee appoints another PFA to manage and administer his pension fund. If on the other hand, it is the PFC that becomes liquidated, the Act provides that the pension fund assets are completely exempt from the assets of the PFC and cannot be used to meet the claims of any of the PFC’s creditors. The Pension Fund Assets in the custody of such liquidated PFA will be transferred to another PFC under the strict supervision of the National Pension Commission.