The Pension Reform Act 2004
As is typical worldwide, the Pay As You Go Defined Benefit Scheme that is currently operated in Nigeria is burdened with a lot of problems and has increasingly become unsustainable.
Against the backdrop of an estimated N2 trillion deficit, arbitral increases in salaries and pensions as well as poor administrative structures, the need for pension reform is glaring. This led to signing into law of the Pension Reform Act 2004.
Establishment & Objectives: The Act was enacted by the National Assembly of the Federal Republic of Nigeria and signed into law by President Olusegun Obasanjo on 25th June, 2004, to establish a Contributory Pension Scheme for payment of retirement benefits of all employees in the Public Service of the Federation, Federal Capital Territory and the Private Sector- organizations with 5 or more employees.
The 3 main objectives of the scheme according to section 2 of the Act are to:
- Ensure that every person who worked in any of the covered sectors receives his retirement benefits as and when due;
- Assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age; and
- Establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits....
Another important philosophy of the Pension Act is the establishment of a system that is financially sustainable, simple, transparent, and safe and promotes savings.
Features of the new Scheme:
- Provides for a Contributory, fully-funded Pension system where the employee (in public – currently restricted to the Federal Government and FCT workers and private sectors) and the employer each pay a minimum of 7.5% of the employee's total emoluments. For military personnel – 12.5% by employer and 2.5% by employee.
- Contributions are to be credited into Retirement Savings Account (RSA). There is a room for Additional Voluntary Contribution (AVC) to maximize the contributor's resources on retirement.
- Two main operators, duly licensed by the regulatory authority – (the National Pension Commission - PENCOM) are to manage the scheme. They are:
- Pension Fund Administrators (PFA's), who privately and professionally record and manage the contributions; and
- Pension Funds Custodians (PFC's), who undertake the safe custody of pension assets.
- The scheme will be strictly regulated and supervised by PENCOM.
- The only exemptions from the scheme are employees with 3 years or less to their retirement, certain categories of public officers mentioned in section 291 of the constitution and existing pensioners.
- Withdrawal from Retirement Savings Account (RSA): An RSA account holder may withdraw from his/her RSA account
- upon retirement or attaining the age of 50 years, whichever is later,
- or before age 50 if he/she is retired on medical grounds, or retires in accordance with the terms and conditions of his/her employment.
See link for your copy of the Pension reform Act 2004 (PRA 2004)