Why Contributory Pension Scheme Remains the Solution to Retirement Challenges in Nigeria
The Contributory Pension Scheme (CPS) introduced in 2004 addressed the challenges of the Defined Benefits Scheme (DBS), which caused hardship to retirees. Before the CPS, the Federal and State Governments were unable to meet their pension obligations to their retirees because funds were not set aside to meet the retirement obligations of the retirees. The situation led to the accumulation of substantial pension liabilities. In the private sector, retirement plans before the CPS were characterized by low pensions.
The CPS brought the following innovations that completely transformed the pension and retirement experience in Nigeria:
Individual Retirement Savings Account
One of the benefits of the CPS is that employees are allowed to open individual Retirement Savings Accounts (RSA) where contributions are accumulated till retirement; therefore, the CPS is fully funded. Consequently, once an employee retires from active service, funds are available for immediate payment of their retirement benefits. The CPS also permits employees to make voluntary contributions from their salaries to boost their RSA balance. The mandatory requirement that PFAs provide regular/periodic statements of accounts to contributors ensures that RSA holders are informed on the progress of their RSAs, especially when their employers pay pension contributions.
Mobility of Labour
The CPS facilitates labour mobility across sectors and different tiers of Government. Once RSAs are opened and Personal Identification Numbers (PINs) issued to employees, the PINs are tied to each employee throughout their lifetime. Thus, when an employee moves from one employer to another, It suffices for him only to provide the new employer with his PIN and PFA.
Contributors’ Rights
Firstly, the CPS allows participants to select any PFA of their choice to open their RSA. Secondly, the right of RSA holders to transfer their RSA from one PFA to another once a year is guaranteed by the Pension Reform Act 2014. Thirdly, participants retiring under the CPS can decide on their retirement benefit payment mode. Specifically, retirees under the CPS can choose either the Programmed Withdrawal (PW) mode or Retiree Life Annuity (RLA) method to receive their pensions. The PW is a product offered and administered by the PFAs under the regulation and supervision of PenCom. PW offers a retiree the option of a lump sum and regular monthly or quarterly pension payments. In contrast, the RLA is a product of Insurance Companies regulated by NAICOM. The RLA offers periodic payments calculated based on an expected life span.
Furthermore, employees in service before 2004 are assured of their pensions earned under the DBS, called Accrued Pension Rights. The Accrued Pension Rights represent an employee’s benefits for the past years of service up to June 2004, when the Pension Reform Act (PRA) that birthed the CPS came into being. Finally, RSA holders under 50 who lose their jobs and cannot secure another job within four months can access 25 percent of their RSA balances.
Benefits payments under CPS
During the fourth quarter of 2022, PenCom approved 7,471 requests for retirement benefit payments. The amount consists of 4,721 payment requests under Programmed Withdrawal (PW) and 2,750 under Retiree Life Annuity (RLA). The sum of N28,550.54 billion was approved as lumpsum, while the monthly pension and annuity payment were N593.03 million. PenCom also approved PFAs to pay N6.31 billion to 9,966 RSA holders under the age of 50 years that lost their jobs and were unable to secure another employment after four months of losing their jobs in the last quarter of 2022.
Accumulation of Long-term Funds
The CPS has generated a pool of long-term funds that have been invested in the economy. The Scheme has generated N14.99 trillion from 9.8 million contributors as of 31 December 2022. Thus, the CPS has directly fulfilled the objective of transferring resources and pooling funds efficiently and effectively. The pooling of funds for long-term investments significantly impacts capital formation and investment, hence Gross Domestic Product (GDP) growth.
In conclusion, the CPS is inevitable given the issues associated with the old DBS, including but not limited to coverage, funding, transparency, and inability to pay retirement benefits. These challenges led to the accumulation of huge pension liabilities that are yet to be fully settled. The CPS has reformed pension administration in Nigeria so that workers get their retirement benefits immediately after retirement.
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