CAPACITY BUILDING WORKSHOP & RECERTIFICATION COURSE. CONTRIBUTORY PENSION SCHEME AND EMPLOYEE BENEFITS USMAN B. SULEIMAN AUGUST,2010
INTRODUCTION The Pension Industry Before the Reform • The first pension legislation in Nigeria was the 1951 Pension Ordinance (Pension Act 1951) which was enacted by the colonial administration to initially cover the colonial officers but later extended to the indegenous staff of the civil service.
The Industry Before Cont. • Other than the 1951 Pension Act and its subsidiary legislations, the retirement benefits of most public servants in the country were up till 1974 covered by four rules and administrative circulars, namely: • Standard Directives for the Grant of Retirement Benefits to Native Authority Staff in Northern Nigeria.
The Industry Before cont. • Non-Government Certificated Teachers’ Superannuation Scheme Rules, 1968 • Un-certificated Teachers’ Superannuation Scheme Rules, 1973 • Circular No. 5/1973, Federal Ministry of Establishment for Non-Pensionable Public Servants.
The industry Before Cont. • Following recommendations of the Udoji Commission of 1973/74 on Review of Salaries and Wages however, several administrative rules and circulars were initiated by the Federal government culminating in the promulgation of the Pensions Act No. 102 of 1979 with a commencement date of 1st April 1974. This act became the basic legistlation from which other subsidiary acts were drawn.
The Industry Before Cont. These legislations included: • The Armed Forces Pension Act No. 103 of 1979 • The Pension Rights of Judges Act No. 5 of 1985 • The Academic Staff of Federal Universities Act No. 11 of 1993 • The Police and Other Agencies Pension Offices Act No. 75 of 1993 • The Police Pension Rights of Inspector-General of Police Act, 1993
The Industry before Cont. • The main feature of the Pensions Act 1979 was that it covered all public officers who hold permanent and pensionable appointments and retire in pensionable circumstances. It is a defined benefit scheme with scale of benefits graduated on the basis of an officer’s length of pensionable service and last total annual emolument.
The Industry Before Cont. • Provision of pension coverage for private sector employees on the other hand, came into being with the enactment of the National Provident Fund Act, 1961 and the setting up of the National Provident Fund (NPF) in the same year. Membership of the fund was made compulsory for all employers with five employees or more not covered by the public service pension scheme.
The Industry Before cont. • The act provided for a contributory scheme with three classes of benefits, namely: • Main benefits in respect of age, survivorship and invalidity; • Subsidiary benefits in respect of sickness; and • Withdrawal benefits in respect of emigration and withdrawal from the fund.
The Industry Before cont. • The National Provident Fund Act, 1961 remained in force but underwent several amendments until it was replaced by the NSITF Act, 1993 which set up the National Social Insurance Trust Fund in succession to the National Provident Fund. In addition most corporate bodies had specific pension and/or gratuity arrangements as part of their contract of employment.
The Industry Before cont. Most of these were defined benefit schemes guided by Trust Deed and Rules approved by the Joint Tax Board. The schemes were managed by Board of Trustees who carried out investment activities directly and through insurance companies. That was the status up to the coming into force of the new system in 2004.
The Industry Before Cont. Consequently, up until the enactment of the PRA 2004 and commencement of the reform, pension fund administration had been performed in the private sector and in self-funded public sector agencies, in a disjointed and haphazard manner by the following institutions:
The Industry Before Cont. • The Nigerian Social Insurance Trust Fund (NSITF) • Insurance companies • In-house managed funds • A few asset management companies With the coming into force of the Act however, only duly licensed PFAs could carry out pension fund administration under the supervision of the PenCom.
DRAWBACKS OF THE OLD SYSTEM The major drawbacks of the old system can be summarized as follows: • Persistent deficit in funding; • Delayed/non-payment to retirees as at when due; • Improper documentation and problematic record keeping; • Prevalence of fraud and corruption; and • Strain on Government budget.
THE PRA 2004, A SOLUTION TO THE DRAWBACKS A solution to these problems was ultimately found in the system being made contributory, with the Government/Employer and the Employee bearing proportionate part of the retirement benefit liability and its custody and management handed over to private sector operators. This solution was instituted through the enactment of thePension Reform Act in 2004(PRA 2004).
OBJECTIVES OF THE ACT The major objectives of the PRA 2004 are: • To address the drawbacks characterizing the old system; • To establish a uniform set of rules, regulations and standards for the administration and payment of retirement benefits for both the public and the private sectors;
OBJECTIVES OF THE ACT Cont. • To ensure that individuals save during their working lives in order to carter for their livelihood during old age; and • To ensure that every person who worked receives his retirement benefits as at when due.
COVERAGE OF THE ACT The Act made it mandatory for a contributory pension scheme to be applicable to: • All employees in the public sector of the federation and the Federal Capital Territory; and • All employees in the private sector, who are in employment in an organization in which there are 5 or more employees.
EXEMPTIONS FROM THE ACT The Act exempts persons covered by the provisions of section 291 of the 1999 Constitution of the Federal Republic of Nigeria, namely; judicial officers.
MAIN FEATURES OF THE ACT The main features of the PRA 2004 are: • Uniform contributory scheme for both the public and private sectors. • Funding of retirement benefit by both the employer and the employee. • Privatization of the management of all pension assets in the country. • Separation of custody of pension assets from management of the assets and administration of benefits.
MAIN FEATURES OF THE ACT Cont. • Establishment of the National Pension Commission with powers to license and regulate all operators in the industry and supervise all pension schemes and all matters connected to pension in the country. • Provided for a transitional arrangement and allowed for the continuation of some existing scheme.
ADVENTAGES OF THE NEW SYSTEM • Ensuring availability of funds for payment to beneficiaries as and when due, thus eliminating the agony of delayed payment associated with the old system; • Ensuring that all workers in the country are captured in the social security net provided by pension scheme, thus eliminating destitution and social dislocation of the elderly;
ADVANTAGES OF THE NEW SYSTEM Cont. • Removing the heavy budgetary burden that the old system has placed on the government, thus freeing funds for allocation to infrastructural, social and other developmental projects; • Removing the ghost pensioner syndrome and other fraudulent and corrupt tendencies that have become prevalent in the public sector pension schemes;
ADVANTAGES OF THE NEW SYSTEM Cont. • Bestowing ownership and decision making powers to the beneficiary; and • Providing for a comprehensive regulatory framework and a level playing field for all operators in the industry.
CHALLENGES FACING THE SYSTEM • Enforcing compliance in the private sector. • Providing a regulatory framework for the informal sector. • Identifying and approving alternative investment avenue and asset classes for the operators. • Coping with the large number of operators in the system.
CHALLENGES FACING THE SYSTEM Cont. • High infrastructural and set up cost. • High cost of business acquisition. • Paucity of investment outlets. • Poor compliance by private sector employers. • Difficulty in achieving regular remittance of contributions. • Nonchalant attitude of most state governments to the scheme.
PARTIES TO THE SYSTEM There are four parties invovled in the contributory pension scheme, namely: • The Regulator (PenCom) • The Operators (PFAs, CPFAs & PFCs) • The Employers • The Employees At present there are 25 PFAs, 7CPFAs and 5 PFCs in the system and about 4.5 million employees have been registered.
PARTIES TO THE SYSTEM Cont. • The Regulator: National Pension Commission (PenCom) established under sec.14 of the act, has responsibility for overall regulation and supervision of the scheme. • The Operators: As from the commencement of the act, pension funds & assets shall only be managed by The Pension Fund Adminisrators (PFAs) and held by Pension Fund Custodians (PFCs).
PARTIES TO THE SYSTEM Cont. Duties/Responsibilties of a PFA • Open a Retirement savings Account (RSA) for employees with a Personal Identity Number (PIN) attached. • Invest and manage the funds and assets. • Provide customer service support to the RSA holders. • Administer benefits payment to retirees.
PARTIES TO THE SYSTEM Cont. Duties/Responsibilities of a PFC • Receive contributions remitted by the employer, on behalf of the PFA. • Hold the pension fund & assets in safe custody on trust for the employee. • Settle investment transactions on behalf of the PFA and undertake related activities such as colletion of dividends, execution of proxy at AGMs, etc.
PARTIES TO THE SYSTEM Cont. Duties/Responsibilities of an Employer • Comply with the act by ensuring the opening of RSA by all employees and subscribing to group life insurance with a life Inssurance Company licenced by NAICOM. • Deduct a minimum of 7.5% of each employee’s monthly salary (Basic, Housing & Transport), contribute a minimum of 7.5% and remit the total amount to the employee’s RSA.
PARTIES TO THE SYSTEM Cont. Duties/Responsibilities of an Employer cont. • Ensure remittance of the total contribution together with the relevant schedule, to the PFC of the employee’s PFA within 7 working days from the date of salary payment. • Ensure remittance of any backlog of contribution from commencement of the act to the date registration.
PARTIES TO THE SYSTEM Cont. Rights /Responsibilities of the Employee Employee rights include: • Freedom to chose his/her own PFA • Access to account balance and statements • Access to customer customer service support • Freedom to transfer his/her RSA once a year without giving reason. While their responsibilities include:
PARTIES TO THE SYSTEM Cont. Rights /Responsibilities of the Employee Cont. • Ensure the completeness, correctness and truthfulness of information provided. • Ensure prompt update of information (e.g. change of employer, contact address, phone/email, next of kin, etc). • Ensure commencement of retirement documentation six month from the effective date of retirement.
SECURITY OF THE PENSION FUNDS AND ASSETS Major Risk Areas There are three major risk areas to the RSA,namely:- • Agency Risk – The risk of the PFA going out of business or its employees indulging in fraud and/or mismanagement; • Investment Risk – The risk of loss or sub-optimal return on investment of the assets; • Systemic Risk – The risk of the whole system failing.
SECURITY OF THE PENSION FUNDS AND ASSETS Cont. Major Risk Mitigants PRA 2004 has made pension funds & assets under the scheme fully secure in all circumstances by:- • The regulatory and supervisory powers vested in PenCom. The Commission has full powers of licencing, regulation, supervision and sanction. Consequently it for example, ensures -
SECURITY OF THE PENSION FUNDS AND ASSETS Cont. Major Risk Mitigants Cont. - The integrity and professional credentials of the owners, Directors and Management of the PFAs and the PFCs. - Strict compliance with its regulatory guidelines, - Daily, Weekly, Monthly, Quarterly, Half-Yearly and Annual Returns, - Annual Routine Examination, - Special Examination and action where there is course for concern.
SECURITY OF THE PENSION FUNDS AND ASSETS Cont. Major Risk Mitigants Cont. • The complete and total segregation of management of the funds & assets from their custody. Hence, liquidation/windup of a PFA will not in any way affect such funds & assets. • The stiff penalties provided for non-compliance with prescribed investment and custodial guidelines
SECURITY OF THE PENSION FUNDS AND ASSETS Cont. Major Risk Mitigants Cont. • The stiff penalties provided for fraud and mismangement of pension funds. • Exemption of pension funds & assets from the liquidation process in the event of liquidation or cessation of business of a PFC or its parent bank. Thus, liquidation/windup of a PFC will not in any way affect the pension funds & assets in its custody.
BENEFITS ADMINISTRATION Pension Fund Administration involve three basic activities, namely: • Accumulation – Contribution and Returns. • Investment – Safe but significant growth in line with PenCom’s Investment Guidelines. • Benefits Administration – Disbursement (Payout) to beneficiaries (Retirees and Next of Kin). Benefit administration therefore, involve the RSA holder’s access to his account and enjoyment of the benefit of the scheme.
BENEFITS ADMINISTRATION Cont. Access to the Retirement Savings Account The RSA can only be accessed by : • Retirement - This could take the form of :- - Mandatory Retirement on attainment of 60 years of age or 35 years of service in the public sector. - Voluntary Retirement before mandatory age but not earlier than 50 years. - Retirement on Medical Ground. - Retirement before 50 years in line with the Terms and Conditions of employment.
BENEFITS ADMINISTRATION Cont. Access to the Retirement Savings Account Cont. • Compulsary Disengagement from Service :- This concerns an RSA holder disengaged from service before attainment of age 50 for whatever reason other than medical, and remain unemployed for six months or more. • Death
BENEFITS ADMINISTRATION Cont. Benefits Payment A retiree other than one who retires according to terms of employment or compulsarily disengaged before attainment of age 50, is entilled to: • Lump Sum withdrawal – This is at the descretion of the retiree but has the implication of reduction in RSA balance and consequent reduction in future pension payments; and • RegularPension payment. A retiree can choose either Programmed Withdrawal from the PFA or purchase of Life Annuity from a Life Insurance company.
BENEFITS ADMINISTRATION Cont. Benefits Payment Cont. • Determining the Lump Sum - The law provides that a retiree can make lump sum withdrawal provided the balance in the account after such withdrwal will purchase minimum pension, i.e. procure an annuity or programmed withdrawal that will produce an amount not less than 50% of his/her remuneration as at the date of retirement. However due to the infancy of the industry, minimum pension has not yet been implemented. Hence, the lump sum is determined by the balance in the RSA as at the date of retirement based upon a formula specified by PenCom.
BENEFITS ADMINISTRATION Cont. Benefits Payment Cont. • Determining RegularPension :- - Where a retiree decides to purchase Life Annuity, the balance in the RSA is transferred to the Insurance Company. This provides for regular pension payment for life. Age is the major determinant of the cost or level of benefit secured by the puchase money.
BENEFITS ADMINISTRATION Cont. Benefits Payment Cont. - Where a retiree decides on a Programmed Withdrawal, the law provides that the balance in the RSA be drawn over the retiree’s expected life span based upon appropriate mortality table determined by PenCom. In practice however, due to the infancy of the industry, the amount is determined by the balance after the lump sum withdrawal and based upon a formula provided by pencom.
BENEFITS ADMINISTRATION Cont. Benefits Payment Cont. • Adventages/drawbacks of each of the options: - The major adventage of annuity is that the annuitant is guaranteed payment for life and thus free from longevity and investment risks. The major drawback of this option however, is that payment stops upon death of the annuitant. Thus, there will be nothing to bequeath to the next of kin. - The major adventage of programmed withdrawal on the other hand is that the balance in the RSA will be paid to the beneficiaries/next of kin upon death. However, if the balance in the RSA is fully drawn while the retiree is still alive payment will stop.
BENEFITS ADMINISTRATION Cont. Benefits Payment Cont. • Payment before age 50: - Where an RSA holder retires before attaining 50 years in line with the terms and conditions of his/her employment or is compulsarily disengaged from service and remains unemloyed for a period of six month, he is allowed to apply for withdrawal of 25% of the balance standing in his account. Further withdrawal will however, be subject to the attainment of age 50.
BENEFITS ADMINISTRATION Cont. Documentation for Accessing Retirement Benefits • Application for withdrawal of benefits • Official letter/notice of retirement • Duly completed Standard Notice of Retirement Form • Final payslip, duly signed and stamped by employer • Birth Certificate/Statutory Declaration of Age • Employer’s confirmation of status of accrued pension rights • Certified Terms and Conditions of employment • Recent passport-sized photographs. • Details of Bank Account
BENEFITS ADMINISTRATION Cont. Documentation for Accessing Death Benefits • Application for withdrawal of benefits • Medical Certificate of Death • Certificate of Registration of Death • Police Report (if death is by accident) • Letter of Administration or Will submitted to Probate • Declaration of Wish/Evidence of Nomination of NOK • Means of identification of NOK • Employer’s confirmation of status of accrued pension rights • Remittance of the life insurance proceeds into the RSA NB. Where an employee dies without opening an RSA the NOK will be required to open a DBA into which the benefits will be paid before proceeding to withdraw.