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The Contributory Pension Scheme (CPS), introduced in 2004, was a strategic response to the inefficiencies and unsustainability of the old Defined Benefit Scheme (DBS), according to Omolola Oloworaran, Director-General of the National Pension Commission (PenCom).
Oloworaran highlighted that under the DBS, retirees often faced significant delays in receiving their pensions due to various inefficiencies, including corruption and other systemic challenges, leaving many retirees in financial distress and dependent on family support for survival.
In contrast, the CPS offers a more transparent and predictable pension system. Under this scheme, workers’ contributions are managed by Pension Fund Administrators (PFAs) under the regulation and supervision of PenCom. The CPS ensures that both employees and employers contribute to a Retirement Savings Account (RSA), creating a pool of funds that is invested to generate returns. These returns help secure retirees’ futures by ensuring a stable income after retirement.
Unlike the DBS, where pension payments were subject to government budget allocations and associated uncertainties, the CPS guarantees that workers’ pension savings are readily available for the payment of retirement and terminal benefits. This structure provides a more reliable and sustainable approach to pension management.
Despite the significant successes recorded in the implementation of the CPS in Nigeria, concerns about low pensions, particularly among public sector retirees who often have lower salaries compared to those in the private sector, persist. Oloworaran attributed the issue of low pensions under the CPS to several factors, including low contribution rates and short contribution periods.
Low Contribution Rates:
“The pension amount paid to a retiree is directly related to the contributions made during the retiree’s working years. The Pension Reform Act 2014 (PRA 2014) mandates a minimum of 18 percent of the employee’s monthly emolument to be contributed to the RSA—10 percent by the employer and 8 percent by the employee. However, this is only a minimum. Both parties can increase the contribution rates, or the employer may choose to bear the full responsibility of the prescribed or higher contribution rate, resulting in higher pensions for employees upon retirement.”
Short Contribution Period:
Oloworaran explained that shorter participation periods in the CPS lead to limited accumulated pension savings. “This issue particularly affected early retirees under the CPS, especially those who retired a few years after the scheme’s commencement on July 1, 2007. However, as the CPS gains more momentum, having been in existence for 20 years, this issue is expected to diminish. Some retirees, who had a short contribution period before leaving active service, have insufficient accumulation for higher pensions. This was a transitional challenge that will no longer be significant as the scheme matures.”
Impact of Lump Sum Withdrawals:
“Retirees are allowed to withdraw a portion of their pension savings as a lump sum upon retirement. However, pension and lump sum withdrawals have an inverse relationship: the higher the lump sum, the lower the pension, and vice versa. The key principle of pension management is balancing immediate lump sums with the long-term sustainability of monthly payments. It is important to understand that the primary objective of the pension reform in Nigeria is to ensure timely pension payments to protect retirees from financial hardship in their golden years.”
RSA Holder’s Decisions:
“The CPS offers flexibility, allowing RSA holders to make decisions that directly influence their pension savings. For instance, younger RSA holders with many years ahead in their careers may benefit from choosing an aggressive investment fund within the Multi-Fund Structure, potentially leading to higher pension outcomes. Another crucial decision is the selection of a PFA. RSA holders can also switch PFAs for better service quality and improved returns. However, it is important to note that withdrawals from the RSA before retirement, such as in cases of temporary job loss or as equity contributions for residential mortgages, can reduce the size of the monthly pension at retirement. An RSA holder who avoids early withdrawals is on a more prudent path to ensuring higher pensions in the future.”
Addressing the path to increased pensions, Oloworaran stated that while there are factors contributing to low pensions, the PRA 2014 allows employers to establish Additional Benefits Schemes (ABS) to provide enhanced retirement benefits, including gratuity payments, to their employees.
She clarified that contrary to misconceptions, the CPS has not abolished the payment of gratuities. Many organizations have implemented ABS from which gratuities and other retirement benefits are paid to retirees in addition to the RSA balances. This flexibility enables employers to offer additional benefits beyond the mandatory provisions, depending on employment terms, affordability, and collective bargaining.
“It is crucial to understand that profits generated from pension fund investments continue to be reflected in retirees’ RSA balances, further boosting their pensions. Consequently, in 2017, PenCom introduced the periodic enhancement of pensions for CPS retirees, as the returns generated by the PFAs on the RSAs of most retirees were sufficient to enhance their monthly pensions. Over the years, many RSAs have seen significant growth due to high returns from PFAs, despite ongoing monthly pension payouts.”
Oloworaran emphasized that various options are available to employers and employees to improve pension adequacy, particularly for public service retirees who are disproportionately affected by lower pay. Offering additional retirement benefits can attract and retain talent, boost employee morale and loyalty, and enhance an organization’s reputation, she added.
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