Until June 2004, Nigeria had operated especially in the public sector, a defined benefit pension scheme, which was largely unfunded and non-contributory. The system was characterized as a pay-as-you-go scheme (PAYG) since withdrawals were not to be backed by their previous contributions but by annual budgetary provisions, hence the massive accumulation of pension debt, which was estimated at more than one trillion of nairas.
Following the apparent collapse of the public sector pension scheme, as evidenced by the thousands, if not millions, of poor and bitter retirees produced over the years and an equally large number of private sector workers who have changed little, the Nigerian government acted wisely to reform the system. system with the Pensions Law in 2004.
The entry into force of the Pension Reform Act in 2004 has been hailed as a very viable solution to the problem of pensions, which for most employees today remains the likely source of income in their retirement years.
The new pension scheme replaced the previous defined benefit scheme. The new scheme is a defined contribution scheme, which is contributory in nature, so it is mandatory for employers and workers (in the public sector and in private sector organizations with five or more employees) to contribute 7.5% of each one of the employee’s emoluments to a Retirement. Savings Account (RSA). However, for the military, the contribution rate is 2.5% and the government contributes 12.5%.
Under the old defined benefit scheme, no contributions were made and the employer required the employer to make projections of each employee’s pension entitlements, determined by the employee’s years of service and earnings. Thus, the obligations are effectively the debt obligation of the employer, who assumes the risk of having insufficient funds to satisfy the contractual payments that must be made to retired employees.
However, under the defined contribution scheme, the employer is responsible only for making specific contributions on behalf of qualified participants. However, the employer does not guarantee a certain amount in retirement. The payment that will be made to eligible participants upon retirement will depend on the growth of plan assets. The main goal of the plan is to accumulate sufficient funds to guarantee regular monthly payments to the taxpayer after retirement.
A taxpayer has the option of purchasing an annuity from an insurer or withdrawing a direct payment from his Retirement Savings Account (RSA) balance to an insurer in exchange for a guaranteed monthly or quarterly payment for an agreed period; This could be risky as such payment could stop when the retiree passes away.
On the other hand, you may have an arrangement for scheduled withdrawals from your Retirement Savings Account (RSA), which could guarantee a lifetime payment and a one-time payment to a taxpayer’s survivors in the event of death before they are depleted. funds. The scheme also provides an allowance for bulk payments to allow a retiree to buy a home or start a business as long as the taxpayer’s Retirement Savings Account (RSA) balance can fund a monthly payment for the rest of the life of the taxpayer that is not less than half of the taxpayer’s last salary.
For example, if your total contribution to an RSA amounts to N20,000 per month over a 20-year period with an average annual return of 10% and life after retirement is expected to be 25 years, you are entitled to a monthly payment of approximately N138,000 for that period.
Suppose you are now retiring with a final monthly salary of N150,000 and you want a lump sum payment, which means that you will need to provide a monthly retirement benefit of N75,000, therefore you can take a lump sum of N12. 9 million or retirement based on accumulated funds.
However, for a person starting early to contribute the same amount over 40 years at the same rate of return, they would have accumulated N126 million in their RSA and would be entitled to a monthly payment of N1.1 million.
Since the defined contribution scheme encourages flexibility in the labor market, the worker is free to move with his account when moving to another place of employment or residence. Finally, the direct contribution scheme is believed to have the potential to generate positive economic externalities, including promoting a deeper, more competitive and more liquid financial market.
PENSION FUND ADMINISTRATORS (PFA)
Pension fund managers and pension fund custodians must retain and manage contributions until the taxpayer retires at age 50 or older. Regulation of the scheme is provided by the pension commission to prevent abuses and safeguard the funds under administration. However, care must be taken when choosing a PFA (pension fund manager) to manage your retirement savings account. Most of the Pension Fund Administrators are basically emerging companies, although they are all linked to one group of financial institutions or another, such as banks and insurance companies.
Attributes such as a proven knowledge of large fund management, transparency and integrity, as well as customer service issues should be considered. A little research on the backgrounds and track record of achievement of the owning institutions and their directors would help make the right decisions. Remember that no employer can compel any staff member to use a particular Pension Fund Manager, while the law allows a taxpayer to correct any choice errors by moving their account from one Pension Fund Manager to another once per year without having to give reasons.
