Nige­ria’s new pen­sion act strengthens in­dus­try

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker

Pen­sion as­sets will be made safer, and new in­vest­ment av­enues ex­pected to as­sist na­tional devel­op­ment

THE first World Pen­sion Sum­mit (Africa) was hosted in Abuja, Nige­ria, on 7-8 July this year. The sum­mit fo­cused on de­vel­op­ments in the pen­sion in­dus­try in Africa and co­in­cided with the 10th an­niver­sary of pen­sion re­form in Nige­ria that led to the Pen­sion Re­form Act No 2 of 2004.

Nige­ria’s 2004 act in­tro­duced the con­trib­u­tory pen­sion scheme, which is fully funded and based on in­di­vid­ual ac­counts that are pri­vately man­aged by pen­sion fund ad­min­is­tra­tors, with the pen­sion fund as­sets held by pen­sion fund cus­to­di­ans. The Na­tional Pen­sion Com­mis­sion was es­tab­lished as a reg­u­la­tor to strengthen cor­po­rate gov­er­nance ar­range­ments in the pre­vi­ously mismanaged pub­lic sec­tor pen­sion schemes.

At the sum­mit Pres­i­dent Good­luck Jonathan said the last 10 years saw a sig­nif­i­cant im­prove­ment in the con­fi­dence and cred­i­bil­ity of the Nige­rian pen­sion sys­tem and ad­min­is­tra­tion, re­sult­ing in an im­prove­ment of pen­sion in­sti­tu­tions’ fi­nan­cial po­si­tion from a deficit of $12.9bn in 2004 to ac­cu­mu­lated pen­sion as­sets of more than $27.2bn by March this year.

On 1 July Pres­i­dent Jonathan signed into law the new Pen­sion Re­form Act 2014, which re­pealed the 2004 act and will be gov­ern­ing and reg­u­lat­ing the ad­min­is­tra­tion of the con­trib­u­tory pen­sion scheme for the pub­lic and pri­vate sec­tor in Nige­ria go­ing for­ward. The pres­i­dent high­lighted that “the new law seeks to con­sol­i­date the gains of re­forms, ad­dress the iden­ti­fied im­ple­men­ta­tion chal­lenges and pro­vide the en­abling le­gal en­vi­ron­ment”.

The com­mence­ment date of the new act was 1 July, which un­for­tu­nately left no time for em­ploy­ers to pre­pare for the im­ple­men­ta­tion of the new pro­vi­sions, in­clud­ing the rise in em­ploy­ment cost re­sult­ing from the in­crease in min­i­mum con­tri­bu­tion rates.

The new act pro­vides for stiffer penal­ties in the case of mis­man­age­ment or di­ver­sion of pen­sion funds. Op­er­a­tors who mis­man­age pen­sion funds will be li­able on con­vic­tion to not less than 10 years im­pris­on­ment, or a fine of an amount equal to three times the amount mis­ap­pro­pri­ated or di­verted, or both im­pris­on­ment and a fine. In ad­di­tion, a con­victed person would be re­quired to re­fund the amount mis­ap­pro­pri­ated and for­feit to the fed­eral govern­ment any prop­erty, as­set or fund which ac­crued in­ter­est or the pro­ceeds of any un­law­ful ac­tiv­ity. Crim­i­nal pro­ceed­ings may now also be in­sti­tuted against em­ploy­ers who per­sis­tently fail to deduct and/or re­mit pen­sion fund con­tri­bu­tions by the dead­line date.

The new act ex­pands the cov­er­age of the con­trib­u­tory pen­sion scheme in the pri­vate sec­tor to or­gan­i­sa­tions with at least 15 em­ploy­ees. Em­ploy­ees of or­gan­i­sa­tions with fewer than three em­ploy­ees or self­em­ployed per­sons would be en­ti­tled to par­tic­i­pate un­der the scheme in terms of the guide­lines to be is­sued by the com­mis­sion. It is ex­pected that the com­mis­sion will pro­vide clar­i­fi­ca­tion re­gard­ing the con­tri­bu­tions by em­ploy­ers with three to 15 em­ploy­ees.

The min­i­mum rate of pen­sion con­tri­bu­tion is in­creased from 15% to 18% of an em­ployee’s to­tal monthly emol­u­ment (as de­fined in the em­ployee’s em­ploy­ment con­tract, but which shall not be less than the ag­gre­gate of the ba­sic salary, hous­ing al­lowance and trans­port al­lowance), where 10% is to be con­trib­uted by the em­ployer and 8% by the em­ployee. An em­ployer may also elect to bear the full re­spon­si­bil­ity for con­tri­bu­tions un­der the new act. How­ever, in such a case, the new act stip­u­lates that the em­ployer’s con­tri­bu­tion shall not be less than 20% of the em­ployee’s monthly emol­u­ments. This does not seem to make sense in light of the ag­gre­gate stan­dard min­i­mum con­tri­bu­tion rate of 18%, which is another item for clar­i­fi­ca­tion by the com­mis­sion.

Un­der the 2004 act, em­ploy­ers and em­ploy­ees each con­trib­uted 7.5% of the em­ployee’s monthly ba­sic salary, hous­ing and trans­port al­lowances and each em­ployee was to open a re­tire­ment sav­ings ac­count in his name with a pen­sion fund ad­min­is­tra­tor of his choice. This ac­count be­longs to the em­ployee through­out his life and is not af­fected by a change in em­ploy­ers.

In terms of the new act, an em­ployer is com­pelled to open a tem­po­rary re­tire­ment sav­ings ac­count on be­half of an em­ployee who failed to open a re­tire­ment sav­ings ac­count within three months of as­sump­tion of duty.

The new act ex­pands the scope in which pen­sion funds can be in­vested, in­clud­ing spe­cial­ist in­vest­ment funds and other fi­nan­cial in­stru­ments ap­proved by the pen­sion com­mis­sion. In­vest­ment in in­fra­struc­ture and real es­tate devel­op­ment is ex­pected to sup­port ini­tia­tives for na­tional devel­op­ment.

The com­mis­sion is em­pow­ered by the new act to take proac­tive cor­rec­tive mea­sures against li­censed op­er­a­tors whose sit­u­a­tions, ac­tions or in­ac­tions jeopardise the safety of pen­sion as­sets, whereas the 2004 act pro­vided only for the re­vo­ca­tion of the li­cense of erring pen­sion op­er­a­tors.

The new act con­firms the 2004 act’s in­ten­tion that any in­ter­est, prof­its, div­i­dends, in­vest­ments and other in­come ac­cru­able to pen­sion funds are ex­empt from tax.

De­spite the na­tion’s work­ing pop­u­la­tion be­ing es­ti­mated at more than 80-mil­lion peo­ple, Nige­ria’s con­trib­u­tory pen­sion scheme has man­aged to en­list only 6.4-mil­lion Nige­rian work­ers dur­ing its first decade of op­er­a­tion. Pre­mium Pen­sion Ltd, one of the lead­ing pen­sion fund ad­min­is­tra­tors in Nige­ria, has re­sponded pos­i­tively to the new act, say­ing “it would push up sav­ings habit among Nige­ri­ans and lead to another phase of growth in the coun­try’s pen­sion in­dus­try”.

Pres­i­dent Jonathan is con­fi­dent that the new act will “pro­vide an en­abling le­gal en­vi­ron­ment which will fa­cil­i­tate the cre­ation of ap­pro­pri­ate in­stru­ments with which pen­sion as­sets can be pri­mar­ily in­vested on vi­tal in­fra­struc­ture and real es­tate devel­op­ment”.

Celia Becker is an Africa reg­u­la­tory and busi­ness in­tel­li­gence ex­ec­u­tive at ENSafrica.

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