20yrs after: Challenges, gains of pension reforms in Nigeria

The Contributory Pension Scheme (CPS), introduced by the Pension Reform Act (PRA) of 2004, marked a critical shift in Nigeria’s pension landscape as the country transitioned from pension administration under the Defined Benefit Scheme (DBS).

Twenty years down the line, industry stakeholders believe that although there has been some progress in the scheme, inherent challenges such as agitations to exit the scheme, accrued rights and accumulated liabilities are critical areas that must be addressed as a matter of urgency

Background

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Checks by the Daily Trust show that before the advent of the CPS, Nigeria’s pension system operated on a Defined Benefit (DB) structure, where the government bore the entire responsibility for pension payments. The system was fraught with challenges as pensioners often went for years without receiving payments due to insufficient budget allocations. Backlogs grew as governments struggled to pay pensions owed to retired workers, resulting in hardship for retirees.

The Defined Benefit Scheme was underfunded and financially unsustainable, especially as the workforce grew larger and the average lifespan increased, placing more strain on pension obligations. These challenges prompted a pension overhaul, leading to the enactment of the Pension Reform Act of 2004, which established the CPS under the leadership of former President Olusegun Obasanjo.

The Pension Reform Act (PRA) of 2004 was one of the legislations that revolutionised pension administration in Nigeria by introducing the Contributory Pension Scheme (CPS). Under this law, employees and employers jointly contribute to a Retirement Savings Account (RSA) for each worker, making pensions more sustainable. Contributions were set at a combined minimum of 15% of an employee’s monthly earnings.

The Pension Reform Act of 2014, which amended the 2004 law, further improved the CPS by increasing contributions to a combined minimum of 18% and tightening regulations to ensure compliance by both private and public sector employers.

The amendment also introduced harsher penalties for defaulters and provided clearer guidelines for pension fund investment diversification.

Challenges of contributory pension in 2024

Major challenges of the current contributory pension scheme include the issue of accrued rights, incessant exit agitations and pension liabilities.

Accrued rights

It would be recalled that when Nigeria transitioned from the Defined Benefit (DB) scheme to the CPS, one major issue was accrued pension rights. These are the pension benefits earned by workers who had already spent years in service under the old DB system before the CPS came into effect.

The challenge was that many of these workers had not had their accrued benefits transferred to the CPS, creating a backlog of unpaid pensions for employees who retired after the CPS was introduced.

While the CPS guaranteed contributions from the time of its establishment, many employees were left waiting for the government to reconcile and pay their accrued rights.

According to a report by the National Pension Commission (PenCom), the federal government in 2021 released N100.29 billion for payment of accrued rights, bringing the total amount it released from the inception of the scheme to N980.18 billion. In March 2022, the government also released N14.92 billion for payment of accrued rights.

The Pension Fund Operators Association of Nigeria (PenOp) report shows that the government released funds up till February 2023, but these were for 2022 arrears, with no payment made ever since. The implication is that most of the federal government’s employees who retired in 2022 and 2023 have yet to be able to access their pensions till date.

Pension industry stakeholders had alluded to the fact that the backlog of accrued rights owed by the federal government had risen to over N200 billion.

However, recently, the Director General of the National Pension Commission, Omolola Oloworaran, announced that the sum of N44 billion was released as accrued rights for federal pensioners under the CPS.

Incessant exit agitations

One of the controversies that rocked the pension sector in the past two years was the agitation to exist the Contributory Pension Scheme by police officers, especially those of the rank and file as well as the retired ones.

There have been several bills, which were introduced by both chambers of the National Assembly, the last was the bill to set up the Police Pension Board to administer pensions for the force, which will see the police exit the contributory scheme.

In the ninth Senate, Senator Elisha Abbo sponsored a bill seeking to exit the Nigeria Police Force (NPF) from the Contributory Pension Scheme (CPS) and return the force to the old Defined Benefit Scheme (DBS), in which a police pension board will now oversee operations just like what is obtainable with the military.

However, the bill did not see the light of the day as former President Muhammadu Buhari declined assent to it. The Daily Trust understands that the bill has now been reintroduced in the 10th senate.

Gains

Despite the challenges, there are some few gains made by the scheme which need to be improved upon. These gains include prompt payment of pension and reduction in liabilities among a few others.

Among them is the timely payment of pensions. Under the CPS, retirees no longer face long delays in receiving their pensions as payments are based on the balances in their RSAs, making the system more predictable and transparent.

This is a contrast to what was obtainable in the past where pensioners had to wait for months, and in some cases years, before accessing their gratuity and pensions.

Also, the scheme has significantly reduced the pension burden on federal and state governments by shifting some responsibility to employers and employees. This has led to better budget management and reduced fiscal pressure.

Similarly, the CPS has enhanced transparency in the sector as each worker now has a personalised Retirement Savings Account (RSA), which offers transparency, as contributors can track their savings, contributions, and returns. This is a significant improvement over the DBS system, where workers had little control over the fate of their pension.

Consequently, The National Pension Commission (PenCom) was established to regulate and supervise the pension industry under the CPS. PenCom’s primary role is to ensure the effective administration of the CPS by enforcing compliance, managing pension fund administrators, and ensuring that pensions are paid to retirees on time.

PenCom also sets guidelines for pension fund investments, ensuring that funds are managed in a way that balances return with security. Additionally, it monitors the industry to prevent fraud or mismanagement and ensures that Pension Fund Administrators (PFAs) remain accountable to contributors.

The DG of PenCom had projected the year 2024 to end with pension funds hitting N22tln.

Where CPS can be improved upon – Expert

A pension expert and founder of the Contributory Pension and Happy Retirement Advocacy (COPEHRA), Mr Sani Mustapha, while speaking to Daily Trust, said going forward, there is a need for states to fully participate in the scheme.

He also added that although PenCom, in partnership with operators has commenced a campaign to bring the informal sector to the scheme through the micro pension scheme, there is a need for more public awareness.

“It is 20 years after the Contributory Pension Scheme came on board and to date, many states are yet to fully transition to the CPS. Therefore, there is a need to dialogue with these states so they can key in.