How Employers & Employees Can Enhance Retirement Benefits Under CPS
Pension administration in Nigeria has a chequered history due to weak structures and financial inadequacy. To solve the challenges, the Federal Government of Nigeria (FGN) introduced the Contributory Pension Scheme (CPS) in 2004.
The CPS represented a radical departure from the Defined Benefits Scheme, which was the primary pension arrangement before the reform initiated by the FGN in 2004. The primary purpose of the Pension Reform is to introduce a sustainable pension system that can achieve the ultimate goal of providing a stable, predictable, and adequate source of retirement income for each employee in Nigeria.
The CPS is an arrangement where both the employer and the employee take responsibility for the employee’s pension contributions. It was established by the Pension Reform Act 2004, which was later repealed and re-enacted as the Pension Reform Act 2014 (PRA 2014).
The design of the CPS is holistic and directs key elements at specific issues. Firstly, the Scheme is financially sustainable as both the employer and employee make monthly contributions of 10% and 8% of the employee’s monthly emoluments, respectively. The contributions are paid into a Retirement Savings Account (RSA) opened by the employee in a Pension Fund Administrator (PFA) of the employee’s choosing.
The PFAs professionally manage and invest the contributions for the employee until the end of his working life when he is paid his retirement benefits. As of May 2022, the total pension funds standing to the credit of RSA holders was N14.2 trillion. These pension funds have been transparently invested by the PFAs thereby promoting the economic development of Nigeria. The funds are also facilitating the development of the mortgage and capital markets and the insurance industry.
Secondly, the CPS facilitates retirement planning. Therefore, a worker can envisage his life at retirement and start to plan to make it happen. Conversely, employers can provide enhanced retirement benefits to their workers and attract workers with the right skills and competencies.
Against the above background, one can opine that the recent agitation by some groups seeking to exit the scheme results from inadequate knowledge of the CPS. The common thread in the agitation is the grievance about pension inadequacy or low pensions under the CPS. Indeed, the PRA 2014 only set minimum contribution rates to ensure that every person who worked for the FGN, the Federal Capital Territory, States Government, Local Government, and the Private Sector gets paid his retirement benefits as and when due.
However, under the CPS, an employer can elect to contribute more than the 10% minimum stipulated contribution rate. Furthermore, the employer may bear the entire contribution burden as long as what he contributes is not lower than 18%. In addition to the above, the employer can institute an additional employee benefits scheme, which can be in the form of gratuity or other similar arrangements. Therefore, employers in public or private sectors have ample opportunity within the CPS’s ambit to increase their workers’ retirement benefits.
Section 4 (3) of the PRA 2014 allows the employee to make voluntary contributions in addition to the total contributions being made by him and his employer. To make voluntary contributions, the employee must notify his employer in writing of his intention to make voluntary contributions and the amount to be deducted from his monthly emoluments. Voluntary Contributions are made from an employee’s salary and must not exceed 1/3 of the month’s salary in line with the Labour Act, 1990.
Employers and employers are urged to explore the options discussed above to mitigate the challenge of low pensions under the CPS. Seeking to exit the Scheme and return to the Defined Benefit arrangement will be counter-productive. Lessons and the experience of other countries validate this fact.
The CPS has gained acceptance nationally and internationally and has recorded tremendous achievements, which continue to date. Within the eighteen (18) years of its implementation, the CPS has stemmed the growth of outstanding pension liabilities of the Federal Government. The CPS has also reduced fiscal costs to FGN, stimulated domestic savings, generated a pool of long-term funds for developmental projects, and increased private investments in Nigeria.
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