Pension Act Reform 2014

Date: 3 May 2023 Slide Number:1

THE NIGERIAN PENSION REFORM ACT 2014

Date: 3 May 2023 Slide Number:2

Table of Contents

Definition of key terms Prior to 2004 Salient features of the Pension Reform Act

of 2004 The Pension Reform Act 2014 Major differences and novel provisions Implications of the Act Navigating the Grey

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Definition of Key Terms Pension:- A pension is a fixed sum to be paid regularly to a

person, typically following retirement from service. Pension Fund:- A fund established by an employer to facilitate

and organize the investment of employees' retirement funds contributed by the employer and employees

Pension Fund Administrator:- An individual/body responsible for managing the day-to-day affairs and the strategic decisions involved with a group's pension fund/plan.

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Prior to 2004

The scheme was modelled after the British structure. Kicked off in 1951 through an instrument called Pension Ordinance. It had a retroactive effective from 1946 and applied only to United

Kingdom officials posted to Nigeria. A Defined Benefit (DB) pension scheme was operated which was largely

unfunded and non-contributory. In the private sector, many employees were not covered by the pension

schemes put in place by their employers and many of these schemes were not funded with a lot of malpractices in place.

In a bid to resolve these issues, the President Obasanjo led administration in June 2004 enacted the Pension Reform Act of 2004

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Salient features of the Pension Act Reform of 2004 Contributions to the Scheme are expected to come from the employee’s

monthly emoluments. The rates of contributions to be made under the new Scheme by both

the employer and employee are a minimum of 7.5% and 7.5% respectively (Private & Public sector employees).

Where an employer elects to take full responsibility, the contribution shall not be less than 15% of the employee’s monthly emolument.

The provisions of the Act apply to all organizations with at least 5 employees

Employees are only granted access to their funds at retirement or at the attainment of 50 years of age . The only exception will occur when there is job loss

For misappropriation of funds, a fine equal to three times the amount and/or a 10 year jail term is applicable.

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The Pension Reform Act 2014 Employers and employees are required to make a minimum contribution of 10% and

8% respectively (Private and Public sector employees) Where an employer elects to take full responsibility, the contribution shall not be less

than 20% of the employee’s monthly emolument. Mandatory contribution is applicable to private organizations in which there are 15 or

more employees Contribution is applicable to informal private entities in which there are 3 or more

employees Interests, profits, dividends, investment and other income accruable to pension funds on

asset are not taxable. Tax is limited only to the returns on such contributions if withdrawn within 5 years.

An employee who disengages from employment or is disengaged before the age of 50 and is unable to secure employment within 4 months of disengagement is allowed to make withdrawals from the account not exceeding 25% of the total amount credited to the retirement savings

For misappropriation of funds, a fine equal to three times the amount and/or a 10 year jail term is applicable coupled with the forfeiture to the Federal Government, any asset or property acquired with such fund

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Major Differences and New Provisions Increase in minimum contribution rates. Reduction in the number of employers and employees that are

likely to benefit from the scheme. Employees now have access to a fraction of their fund before

the attainment of 50 years as opposed to the 2004 Act. Voluntary withdrawals within 5 years are non- taxable There is a drive towards informal sector participation. Stringent penalty and punishment for misappropriation of

funds The Act expands the scope of investments in which pension

funds can be invested and this includes specialist investment funds and other financial instruments PenCom may approve. i.e. Telecom, Infrastructure development, Agriculture etc.

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Implications of the 2014 Pension Reform Act Increase in staff cost for employers (especially small and micro

entities) that predominantly operate in the informal sector. Unavoidable non-compliance by most employers in the above

sector. Potential employee retrenchment in order to reduce cost. Reduction in disposable income due to likely restructuring of

employee salaries which will lead to decrease in consumption in the economy.

Increase in savings for the future due to increased rates. Due to the marginal increase (2%) for sole contributors,

employees might be discouraged from taking full responsibility. Likely reduction in fraudulent practices by Pension Fund

Administrators.

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Navigating the Grey The Pension Reform Act 2014 (Act) signed into law on July 1, 2014 has no

specific commencement date.

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