Nigeria’s new pension act strengthens industry
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On 1 July President Jonathan signed into law the new Pension Reform Act 2014, which repealed the 2004 act and will be governing and regulating the administration of the contributory pension scheme for the public and private sector in Nigeria going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.