THE IMPACTS OF PENSION REFROM ACT 2004 ON PENSION ADMINISTRATION NIGERIA: A CASE STUDY OF NATIONAL PENSION COMMISSION, ABUJA (2004-2010).

CHAPTER ONE

1.1 INTRODUCTION

Pension systems are under increasing strain in a developing country like

Nigeria. Most employees neither have any meaningful retirement benefits

nor earn enough during their working life to cater for their retirement. The

extended family system and other traditional ways of supporting the old are

already weakened under the pressure of urbanization, industrialization and

increased mobility or westernization.

Prior to the enactment of the Pension Reform Act 2004, pension schemes in

Nigeria had been bedeviled by many problems. The public service operated

an unfounded defined benefits scheme and the payment of retirement

benefits were budgetary allocation for pension was offer one of the most

vulnerable items in budget implementation in the high of resource

constraints. In many cases, everywhere budgetary provisions were made,

inadequate and untimely release of funds resulted in delays and

accumulation of arrears of payment of pension right. It was obvious

therefore that, the defined benefits scheme could not be sustained (Pencom,

2007).

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In the private sector on the other hand, many employees were not covered by

the pension scheme put in place their employers and many of these schemes

were not funded, the management of the pension fund was full of

malpractices and manipulation between the fund managers and the trustees

of the pension funds (Pencom, 2007).

This scenario necessitated a re-think of pension administration in Nigeria

accordingly, the pension reform was initiated in order to address and

eliminate the problems associated with pension schemes in the country. The

outcome of the reform was the enactment into law of the Pension Reform

Act 2004. (Pencom 2009).

The Pension Reform Act 2004 established the National Pension Commission

(PENCOM) as the body to regulate, supervise and ensure the effective

administration of pension matters in Nigeria. It licenses, regulates, and

supervises pension operations include Pension Fund Administration (PFAs)

Pension Fund Custodians, (PFCs), Closed Pension Fund Administrators,

existing schemes that are approved to continue by the Commissions.

(Economic Confidential, Dec. 2007)

National Pension Commission is also charged with the responsibility to

provide regulatory framework and guidelines for efficient management of

pension funds in Nigeria. (Pension, 2009).

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This study give an insight to the new Pension Act 2004 and also look at the

Chilean-type pension reform adopted by the Nigerian policy makers to see

whether it would be suitable for the Nigerian economy. The study also looks

at the roles of the key players in the new pension reform and assesses their

contribution towards the development to the pension industry. Lastly, the

study will provide an alternative approach to the new pension system in

Nigeria.

The new pension reform is one numerous “reform” pushed through by the

Obasanjo administration to reduce government expenditure on the social

welfare of the populace. The philosophy here is to allow the government to

shelve a major social responsibility of catering for its workforce after

retirement in the form of gratuity and pension payments.

1.2 OBJECTIVES OF THE STUDY

The objectives of this study are to:

1. Enumerate the impact of the new pension reform in Nigeria since

2004 to date (2010) on the pension fund administration. In this case, a

fragmented pension system was replaced by a mandatory private

funded pension system.

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2. Highlight the implementation efforts and challenges of the new

pension reform from the year 2004 to date (2010).

3. Assess the new reformed pension system in terms of its contribution

to the economic development of Nigeria.

4. Examine the reasons why reform was seen as essential, the way in

which it was carried through, and the manner of operation of the new

system in terms of both coverage and entitlements and of regulation.

5. Develop and increase awareness of the importance of pension reform

to the pension administration in national development.

6. Discuss the current or likely problems of pension administration and

suggest or proffer solution to the problems.

1.3 STATEMENT OF THE RESEARCH QUESTIONS

The researcher developed some questions for the purpose of a focused work

to serve as a guide to the source of this project work and it is expected this

project should proffer answers to these questions at the end of this work. The

questions are listed below:

1) What impact has the 2004 pension reform on the Nigeria’s public

service?

2) What is the nature of pension administration policy in Nigeria prior to the

2004 pension reform?

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3) How was the problem affecting pension administration prior to the

pension reform in Nigeria?

4) What are the roles of the pension reform in promoting the social welfare

of the pensioners?

5) What is the impact of the 2004 pension reform on pension administration

in Nigeria?

1.4 SIGNIFICANCE OF THE STUDY

The importance or benefits to be gained in respect to this research cannot be

overemphasized. The research would be relevant to the stakeholders in the

pension industry.

The research would also serve as reference point for future research to

managers, supervisors, students, and administrators. That might at one point

or the other confronted with pension related problems.

Pension reform is one of the major pillars of the ongoing reform in the

Nigerian economic landscape. The philosophy and objectives of the

economic reform that gave both to the new pension scheme are widely

acclaimed and accepted (Pencom, 2007). Study figured out that the Nigerian

policy makers were of the view that if a Chilean – type pension system could

be established in the in their country, Nigeria would enjoy the same benefits

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that in their eyes the 1981 reform has brought to Chile. (Issa, 2006). The

policy makers are extra – careful considering the fact that Nigeria is known

for its low scoring measures of sound administration. Even by 2005 there

were only five countries placed lower than Nigeria out of the 158 rated by

transparency international (www.tranparency.org). Whilst it was scarcely

above sixth percentile on the world institute

(www.worldbank.org/wbi/governance) rating of countries worth respect to

“control of corruption” and only in the sixteenth percentile with respect to

“regulatory quality”. The issue of Nigerian pension highlights the crucial

role regulatory capacity. So for, Nigeria is the only country on the African

continent to pursue the project suffers therefore from two difficulties at the

same time. First, the reform would demand a rapid expansion of the scope

and quality of Nigerian regulatory, which even if forth coming, would still

leave question marks behind the purpose of the reform. Second, Nigeria tries

to follow the Chilean example at a moment in time when the original

“model” is about to be substantially reformed by the current Chilean

government (Issa, 2006).

1.5 SCOPE OF THE STUDY

The scope of this study covers manly the pension matters as regard to the

new pension reform since 2004 to 2010 in Nigeria it tries to assess the

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impact of the reform on the administration and supervision of both the

pension fund contribution and the key players in the pension industry.

The study also provides on alternative approach as regards to the pension

scheme, should the new scheme failed.

1.6 PLAN OF THE STUDY

The main aim of this work is to make assessment on the impact of the

reformed pension scheme since 2004 to 2010.

Chapter one of the work is an introduction to the problem to research on.

Chapter two of the work describes the current reform and tries to provide an

alternative approach should the new reformed scheme failed. Chapter four of

the work shows the presentation and analysis of data collected and the

chapter give recommendations.

DEFINITION OF TERMS

Words are capable of having more than one meaning. Thus they can only be

explained from the context in which they are used. Therefore in this study

the under mentioned will be defined and channeled the context and purpose

by which they are meant for may be outside literal meaning.

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PENSION:- It is a form of deferred compensation of a workers , a

retirement plan to provide and secure income for old age. Or is the fixed

periodical sum of money paid in consideration of past services. That is to

one who retired from workforce. Udeze (2006).

REFORM:- Means to make something by correcting or making

improvements ( Oxford Advanced Leaner’s Dictionary, Sixth Edition ). A

reform is an improvement made upon a system or changes made or

improvement (Wowo, 2004).

PENSION REFORM ACT:- It is an act meant ensure that employees

whenever they retire from service have something ever they retire from

service have something to fall back on. It ensure that every employee

receives his or her retirement benefits as at when due. So the whole thing is

it ensures that when you and I retire, we don’t need rely on extended family

system or our employers (Pencom 2006).

PENCOM:- Pencom simply refers to national pension commission (NPC)

it is a new organization established as part of the pension reform of the

government, it is supposed to be a supervisory and regulatory agency for the

pension industry. (Ahmad, 2006). And it also approves licenses and

supervises PFA, PFC and other institutions relating to pension matters. In

other words, it supervises and regulates all pension matters in Nigeria.

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Pencom also maintain National Data Bank on pension matters as well as

receives and investigates complaints PFA, PFC and the employers

FULLY FUNDED:- Where funds and assets match pension liabilities at any

given time, a fully funded scheme is said to have been existed (Penman

Pension, 2006).

NEW PENSION SCHEME:- The new pension scheme is a contributory,

fully funded, privately managed scheme with third party custody of the

pension fund assets based on retirement savings account for every

contributor (Penman Pension, 2006).

PENSION FUND ADMINISTRATORS (PFA):- PFAs are limited

liability companies registered by the National Pension Commission (NPC),

set up purposely to manage pension contributions. Or it is a company

licensed by Pencom to keep pension funds and assets on the RSAs on trust

for the employees on behalf of the PFA (Penman Pension, 2006). They will

have a minimum paid up capital of N150 million. Each employee will

choose their PFA, and be allowed to effect a change of provider once a year.

Each PFA will appoint a custodian (PFC) i.e. pension fund custodian e.g.

Penman Pension, Sigma Pension, APT pension etc

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PENSION FIND CUSTODIAN (PFC)

Based on wrong and non-maximization of previous pension schemes, the

new pension reform separate the pension administration of pension fund and

assets. This it does by the establishment of Pension Fund Custodians (PFCs)

who must be licensed by the Pension Commission (Pencom). Custodians

will be licensed financial institution registered under the company Act. They

will have a minimum worth of N5billion.

RETIREMENT:- Retirement is a cessation of service after serving for a

period of not less than five (5) years from September 1991 or thereafter for a

period of not less than ten (10) years period respectively appointed as

qualifying an officer for gratuity and pension respectively.

CLOSED PENSION FUND ADMINISTRATORS (CPFA):- Any

employer managing its pension scheme existing before the enactment of the

Pension Reform Act 2004 May, subject to certain conditions, apply to

Pencom to be registered as a (CPFA). (Penman Pension, 2006).

PROGRAMMED WITHDRAWAL: Is a method by which the employee

collects his retirement benefits in periodic sum spread throughout an

estimated life span (Penman Pension, 2006).

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ANNUITY: - An annuity is an income purchased from approved life

insurance companies which provide monthly or quarterly income to the

retiree during his/her lifetime. (Penman Pension, 2006)

GRATUITY:- This is the money that is given to an employee one when

he/she retires or leaves his/her job. The rule is that any retiree from office is

entitled to at least one year of his/her last salary id he/she has served for at

least 5 or 10 years as the case may be.

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CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter looks into an overview of the pension industry: meaning of

pension and its nature, pension reform in Nigeria, reasons for the reform,

pension administration in Nigeria before and after the Pension Act, reform

methodology, objectives of the reform, regulation of the new system, the

impact of the Pension reform on capital market, implementation efforts and

challenges and problems and prospects of the new Pension Act.

2.2 MEANING AND NATURE OF PENSION

The subject of pension has increasingly become a very emotive issue all

over the world; the increased public interest in pension maters has been

stimulated not only by the forces of globalization but also by domestic

socio-economic factors. Increased worker education and the phenomenal

development in information and communication technology (ICT) have also

contributed to putting issues of retirement and quality of life after retirement

on the front burner. The poor condition of our pensioners has often propelled

most concerned Nigerians in to pensive mood and had been said about the

plights of pensioners (Udeze, 2006).

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Udeze (2006) “it is a form of deferred compensation of a worker, a

retirement plan to provide and secure income for old age”.

Holzmann (2005), a pension is a “stipend provided for an elderly or

disabled military veteran or to his widow or children, upon proof of military

service”.

Pension could also be defined as a regular payment which is to be given to

an employee by an employer which could be in the public or private sector,

this payment would be made the employee when he retires and becomes not

as productive as he used to be, till the day he dies. Pension provides people

with a source of income in their old age (Fashola, 1999).

Pension is a private or government fund (or payments there from), from

which intermittent and regular benefits or allowances are paid to a person

upon his or her retirement or disability.

Benefits are deferred to the retirement or disability of the employee and are

generally payable thereafter to the person’s death. In many public or private

employment based Pension plans, the employer regularly contributes a small

percentage of an employer’s earnings to an individual plan accounts that is

set up in the employees names. Employee contributions if any are also

credited to the pension account. Sometimes, pensions are only payable as of

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a certain age, such as 55, 60 or 65 or upon the attainment of a certain length

of service, such as 30 years of service.

The government (the state) often provides a gamut of Pensions, some to

supplement probate retirement pensions others to provide the disabled with

an allowance.

In Molleur VMNR (1965), Justice Domoulon of the Excheque court of

Canada wrote that: “Pension allowances or stipends presuppose the

retirement or cessation of the pensioner’s services, as no one draws from the

same employer both a salary and superannuation installments”.

He further adopted these words to define a “pension”, “…..an annuity or

other periodical payment made, especially by a government, a company, or

an employer of labour, in consideration of past services or of the

relinquishment of rights, claims or emoluments…..” “Pensions are

universally construed as a reward for long continued service paid upon their

retirement”. “A pension is a stated allowance or stipend made in

consideration of past services or of surrender of rights or emoluments to one

retired from services, and is not wages as wages are defined as remuneration

of employment”. (Mueller V. Minister of National Revenue 1965 CTC 267).

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Wolson (1990), of the supreme court of Canada remarked, in Clarke V.

Clarke that “Pension is a colloquial term rather than a term of art”. But ten

years later, that same court in Boston V. Boston justice major for the court,

defined it as follows: “A pension right arises as an asset or a contingent

bundle of rights to a future income stream. After retirement, when the

pension produces an income, the pension asset is in a sense, being

liquidated” (Clarke V. Clarke 19902 Supreme court reports 795 and Boston

V. Boston 2001 SCC43).

The British Columbia pension benefits standard Act (1865), (using wording

very similar to the Alberta legislation), defines a pension as: “… a series of

payments that continue for the life of a former member, whether or not the

pension is afterward continued to another person”.

Udeze (2006), “it is a form of deferred compensation of a worker, a

retirement plan to provide and secure income for old age”. According to

James (2001), it means a society, fund, contract or scheme the assets of

which are held under irrevocable trust and any scheme established by a law

in Nigeria or elsewhere, the main objects of which are, in the opinion of the

board, the provision of non assignable and non commutable retirement

pensions or annuities for an individual or his death, or for any group or class

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of individuals and their dependents”. Generally, pensions are matrimonial

assets.

However, not everybody needs or has access to pension. Some may have the

foresight, investment skills and discipline necessary to provide adequately

for their own retirement. Others may have access to strong family and

community supports that ensure security in their old age while many may

never earn money to provide for their future. Pension saving has nonetheless

provided to be a useful social innovation. Societies with well functioning

pension systems enjoy some advantage over those without. Pension serves to

provide people with a secured source in old age. Without pension saving

savings, it could be more difficult to finance long-term projects. More

reliance on external debt might be necessary. It might also be difficult to

issue and sell stocks and bonds. Without watchful monitoring of pension-

fund managers, corporate management might be more extravagant (Leecher,

1996:2).

2.3 PENSION REFORM ACT IN NIGERIA (HISTORICAL

BACKGROUND)

The first pension administration started during the colonial period the

colonial officers provided employment for the people it became apparent

that they make provision for their after service or old age, care for the

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workers and their widows. Labour activist Michael Imoudu and other

officers in the 40’s contributed to its development and contributed

immensely to the decision of the British colonial officers to the extent the

payment of retirement benefits to indigenous staff who met the criteria

stipulated by the colonial administration.

The first pension legislation in Nigeria was the 1951 pensions ordinance

(Pension Act 1951), the ordinance provided for ‘ex-gratia’ payment of

pension whereby pensions or gratuities were awarded by the colonial

administration as its sole discretion as reward for long and faithful service.

When the laws of Nigeria were codified in 1958, the Act became known as

then Pension Act Cap 147 of the laws of Nigeria 1958. Other pension

Acts/Rules (1958-1974) include the following:

a. Non-government certified teachers’ superannuation scheme rubs (1968).

b. Standard discretions for the grant of retiring benefits to native authority

staff for local government servants in Northern Nigeria.

c. Uncertified teachers’ superannuation scheme rules (1973).

d. Circular No. 5/1973, Federal ministry of establishment for non-

pensionable public servants

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PRIVATE SECTOR

Most of the private sector plans were developed in the early 70s long after

the public services scheme, although some of them were successors to

former plans. They are three types of private sector plan in Nigeria which

are non insured private provident fund, insured provident fund and defined

contribution plans, but the contribution in this case are accumulated in

funds. The second type that is insured is very common and it is a defined

contribution plan where the contribution are used to purchase insurance

companies while the defined benefit plans operated by a small percentage of

private sector employees.

National Provident Act 1961

The National Provident Fund (NPF) is known as the National, social

insurance trust fund. It was established in 1961 by the act of parliament the

National Provident Act, 1961 by the act of parliament the National Provident

fund. Membership of the fund is compulsory for employers not covered by

the public service pension scheme. It is a compulsory scheme whereby the

employers and the employees contribute equally to the fund at the rate of 5%

of an employee’s salaries; it was later increased but was kicked against by

organized labour so it was reverted.

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The National Provident Act 1961 before its metamorphosis into NSITF has

undergone some revisions through the major provisions have not been

revised. The following legislation are relevant;

a. National Provident Fund (Gen.) Regulations, 1961

b. National Provident Fund (Seaman) Regulations 1962

c. National Provident Fund Act 1964

d. National Provident Fund (amendment) Decree 1967

e. National Provident Fund (amendment) Decree 1972

f. National Provident Fund (amendment) Decree 1976

g. National Provident Fund (amendment) Decree 1978

THE UDOJI PENSION REFORM

The public service review widely known as Udoji commission examined the

pension system of Nigeria through a comprehensive work made some

recommendations with respect to pension schemes in the public service

under the following principles:

a. Payment of pensions or gratuity shall be seen as deferred pay and the

vesting of pension rights in employee

b. Payment of pension and gratuity shall be charged on and paid out of the

money voted for the purpose by the government.

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c. All public sector schemes should be modified to promote mobility of

labour within the public service.

d. All persons who come within the umbrella of the pension Act circular

standard director and rules should be eligible for the “same retirement

benefits”.

e. The private sector companies should continue to run their individual

pension scheme.

f. The strengthening and recognition of the national provident fund as a

continuous body to carry out its responsibilities.

g. Whenever new salary scales are approved, there should be corresponding

change in retirement benefits.

h. Finally, he suggested a long term national plan are a goal towards which

the nation should move as resources and capabilities allow.

THE PENSION ACT NO 102 OF 1979

The acceptance and implementation by government of the recommendation

of Udoji commission constituted the first major reform of public service

pension schemes in Nigeria. Circular 6/1975 under the title “The New

Pension Scheme” and the comprehensive administration rules attached to it

gave effect to the reform measures. These rules became the drafting

instructions for the promulgation of the pensions act no 102 of 1979

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(Pension Act Cap. 346 of the laws of the federation of Nigeria. 1990) with a

commencement date of 1st April, 1974 as approved by government in the

white paper on the Udoji report. The Act consolidated all enactments and

circulars on pension in force prior to the promulgation of the law and

incorporated the gravity and pension scales devised by commission for

public officers.

POST-UDOJI REFORMS

After the Udoji reforms most of the original provisions in the Pensions Act

no 102 of 1979 were amended mainly through administrative circulars.

Between 1st September 1979 when the Act was signed into law by the then

Head of the Federal Ministry Government (General Olusegun Obasanjo) and

December 2003, the pension’s officer which has also undergone several

institutional changes issued 84 administrative circulars amending many

provisions in the Act in exercise of the power vested in the Executive, Head

of the office (currently the head of the civil service of the Federation). About

76 of these circulars deal with review of pension rates, computation of

benefits and related issues. Notwithstanding the many amendments which

have been effected through circulars, some major features of the Pension Act

1979 have remained unchanged like the defined benefit and non-

contributory pay-as-you-go-system: the eligibility provisions, the continuity

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of service and presentation of pension rights through the mechanism of

coordination of break in service and merger of service and finally the vesting

of pension rights in the employee.

On the other hand, through administrative circulars in the Act were amended

in response to changing socio-economic and political circumstances. Some

of them include the following:

a. Mandatory retirement at the age of 60 years of 35 years of service

whichever is earlier affected through the civil service. Decree No 43 of

1988

b. Minimum and maximum age for entry into service now stand at 16 and

50 years respectively (Public Service Rules 2000).

c. The decision of Government to reduce qualifying service for gratuity to

five (5) years and pension to 10 years (1002).

d. Circular No 13, 49951/3. 4/vi/337 of 21st August, 1985 decentralized the

payment of gratuities. Extra-ministerial department is expected to apply

to the establishments and pensions office for funds to settle the gratuities

of its retiring staff.

A technical committee on the review of the civil service pension scheme

with Ajibola Ogunshola as chairman was set up with members drawn from

private and public sector pension professionals. Nigeria Labour Congress

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(NLC) and the Nigeria Employers Consultative Association (NECA), they

enjoyed consultation and technical assistance from the international labour

organization and the British Government. The committee was required to

undertake a comprehensive review of the Civil Service Pension Scheme and

make appropriate recommendation.

THE NEW PENSION REFORM ACT 2004

The pension program in Nigeria started when the 1979 constitutional

privilege of being a first charge on the consolidated revenue of the

federation was reversed by the 1999 constitution; pension expenditure had to

compete with other expenditures charged on the consolidated revenue of the

federation. Since then pension office experienced under-funding leading to

mounting pension liabilities. When the situation was becoming precarious,

in 2007 pensions and records department office of the Head of Civil Service

of the Federation convened a stockholders’ workshop at the International

Conference Centre (ICC), Abuja.

At the end of the workshop, the following resolutions and recommendations

were made as follows (Alh. Wowo, 2004).

a. To narrow the gap of pension benefit between the public and private

sectors, government should direct the appropriate government body to

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work out a realistic and comparable loving wage that will stimulate

meaningful contribution to the pension scheme.

b. Adoption of the principle of contributory scheme for the entire public

service, contribution by civil servants should take their earnings into

consideration.

c. All existing laws on pension matters should be reviewed and harmonized.

d. There should be an established regulatory body for both private and

public service pension.

e. Others were also made and finally a follow-up committee should be set

up to prepare a draft blue print on the new pension policy.

The new system which replaces the old non-contributory pay as you go

system that solely depended on government budgetary allocations has the

specific objectives of ending the problems associated with the old system

such as failure pensioners their dues at all, paying them late or in bits that

could not provide minimum material comfort to the aged citizens who toiled

for Nigeria for decades. The main feature of the contributory pension

scheme includes the followings:

a. The Act provides uniform regulations for both the public and private

sectors.

b. The scheme is contributory.

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c. Each participant has private savings accounts which is portable.

d. Pension assets are to be privately managed.

e. The administrators of the fund are different from its custodians.

f. The pension Act provides strict sanctions for violation of its regulation

by operators of the system.

g. The Act establishes the National Pension Commission (PENCOM) as the

overall supervisors of the scheme.

h. The Act repeats that of 1990 and establishes a mandatory pension scheme

for employees in both the public and private sectors in Nigeria and

employer and the employee shall contribute to fund retirement benefits

(Alh. Wowo, 2004).

The bill also provides for the establishment of the National Pension

Committee which is charged with the responsibility of ensuring that the

provisions of the National Pension Act achieve their objectives.

The reform further provided for a “defined contribution” arrangement unlike

the defined benefits system, which the NSITF has been operating. The

implication of the reform on the NSITF can be summarized thus: The NSITF

Act 1993 was amended to bring the fund fully under the audit of the new

law, the funds contributed to the NSITF by any person before the

commencement of this Act together with attributable thereof are not required

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for the purpose of administration minimum pension as determined by the

National Pension Commission (PENCOM) shall be computed and credited

to into the retirement savings account to be opened by the NSITF for each

contributor. However, any contributor or beneficiary under the NSITF Act

shall at least 5 after the commencement of the Act, select pension fund

administrator of his choice for the management of the pension fund standing

to his credit. Where any person who contributed under the NSITF Act has

retired before the commencement of this Act, the fund due to him shall be

paid to him shall be paid to him in accordance with the rules and regulations

of the pension commission or section 4 of this Act. The NSITF shifts from

“defined contribution”.

2.4 THE REASONS FOR THE REFORM

In Nigeria, there were many pension schemes (Pension subcommittee, 1997;

see also IMF, 2005a). It was not until after independence in 1960 that the

first national scheme was introduced in Nigeria. It was developed out of the

provident fund scheme that had operated for the colonial civil service and

like it, took the form of a severance payment scheme, paying a lump-sum on

retirement. It was not until 1994 that a scheme – the national social

insurance trust fund (NSITF) – that paid out an annuity was established.

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The NSITF catered only for private sector workers. It was complimented

and indeed overshadowed by the various schemes for federal public

servants, police and security services and for the military. At the same time,

each of the 36 federal states, plus the capital territory, had a pension system

for its public employees, as did each of the 774 local government authorities

operating beneath these. In addition, each of a multitude of publicly owned

federal or state enterprises (often referred to as “parastatals”) had its own

pension scheme.

Whilst the retirement age was normally 65, federal civil servants were able

to retire on a full pension if they had completed 35 years of service, as were

military personnel, if they had completed 10 years. Moreover, although, the

maximum pension under the NSITF scheme was fixed at 65 percent of last

salary, for federal civil servants it was fixed at 65 percent of last salary, for

federal civil servants it was fixed at 80 percent. Last pensions of federal civil

servants were supposedly adjusted in line with civil service salaries. By

contrast, there was no provision for indexing in the legislation covering the

NSITF scheme.

An even more important difference between the various Nigerian scheme

was their financing. He pension schemes for federal, state and local civil

servants were non-contributory and unfunded. The NSITF scheme operated

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effectively on a PAYGO basis, being financed by employee and employer

contributions. The pension schemes for parastatals were non-contributory

but they were at least normally funded.

Private sector firms could establish their own occupational benefit schemes

and these provided both pension and severance payments. These might or

might not be contributory and might or might not be funded. How

widespread these occupational schemes were is unclear. Many were small.

Those that were funded and thus eligible for tax privileges covered only a

few thousand employees (Pension Subcommittee, 1997).

In Nigeria, some 90 percent of those who work are reckoned to be in the

informal labour market, moreover, of private sector workers, only those in

establishments with at least five employees were obligatorily insured.

However, issue of compliance and disincentives to love or to supply labour

were not pointed to in Nigeria, largely because most of the schemes were

non-contributory. However, the privileges of civil servants were made

mentioned so that the reform was also intended to make the system

“equitable” (IMF, 2005; p66). On top of this, the various parts of the system

were seen as inefficient. The occupational pension schemes run by the

parastatals were largely unregulated and unsupervised (Milliman, 2002). The

NSITF had no proper information technology and many records were merely

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on paper (Pension Subcommittee, 1997; IUF, 2005a). Administrative costs

were high consuming over three quarters at the start of the century. There

were suggestions that the pension records of some parts of the civil service,

the military and the parastatals were “padded” with “ghost pensioners”, but

it was also recognized that pensions for former federal and state employees

often went unpaid (see many reports in www.globalafing.org). Estimates to

the extent of arrears to former federal employees (including those from the

military and from federal parastatals) have been put in the order of two to

three percent of GDP, whilst arrears for state and local government

pensioners cannot even be quantified (IMF, 2005a).

2.5 PENSION ADMINISTRATION IN NIGERIA BEFORE AND AFTER

THE NEW PENSION REFORM ACT

The research first discusses pension administration in Nigeria before the

coming of the new pension reform. The pension scheme then was based

upon the defined benefit structure plan by which the quantum of entitlement

payable to a retiree is a percentage of his length of service and terminal

income. The scheme was funded on the Pay-As-You-Go (PAYGO) basis; no

fund is set apart for meeting contingent liability for employees’ retirement

benefit; rather fund is taken from the consolidated revenue fund accounts as

the liabilities fall due. Retirees’ benefits are guaranteed by the constitutional

29

provision which grants that pension liability shall be the first charge to the

revenue. The scheme is non-contributory as employees do not contribute to

his funding: government, the employer bears full liability (Fashola 1999).

The federal government of Nigeria took interest in pension scheme and

enacted the pension ordinance of 1951, which had retrospective effect to

1946, later the decree No 102 of 1979, which gave the federal government

the sole responsibility for pension matter in the whole federation. The

federal government provides 100% of the fund to operate them: public

servants do not contribute towards the pensions. Annual budgetary

provisions were made to pay retirees as they disengage from work, the

assumption is that government will always have to meet retirement benefit

liabilities.

Before the coming of the new pension reform, government parastatals

usually used the pension insured scheme and self-administered scheme. The

board of trustees was recognized in law to be the most reliable body to

manage the pension scheme and its funds, the confidence reposed in the

board is not placed if one considers the fact that members of the board are

both the owners of the scheme and the beneficiaries and therefore better

placed to manage their assets. This fact was taken in to consideration in

constituting the membership of the board as approved by the “standard trust

deed”. That was why “political office holders” and other categories of public

30

office holders who do not hold permanent and pensionable appointment

were excluded. The implications of placing overall responsibilities for

managing the scheme on the board are that it has to approve all pension

matters.

Financial management and payment of pensions in the public service is

practical, the ministry of finance gives funds to ministries and extra-

ministerial departments for disbursement. The permanent secretary as the

accounting officer in each ministry is charged with the responsibility of

supervising the funds, though he can delegate the responsibility to whoever

he wishes (Adeleye, 1999).

PAYMENT OF GUARANTEED PENSION

Before the present reform of pension, government guarantee payment of

pension for five (5) years;’ this means that the pensioner will be paid his/her

pension for a period of five years without being physically present. After the

fifth anniversary of retirement, the pensioner is expected to be present

physically to show that he/she is still alive.

The pensioners are required to fill a life certificate form. Where an officer

dies within the officer dies within five years of retirement, the survivor/legal

31

representative shall be paid the balance of the five years pension on the

submission of a death certificate.

VERIFICATION OF PENSIONS

In order to ensure that only genuine pensioners are paid pensions, it is

desirable to conduct verification exercises of pensioners at interval to ensure

that they are the rightful owners of pensions received by them. The exercise

allows the fund manager to determine those pensioners who have died but

the relations have not reported their death and those who have fake

documents and received pension processes for the payment of retirement

benefits.

In the civil service, (federal, state and local government) the payment of

gratuities precede the payment of pensions. The documents and records

submitted or payments are usually the same. However, in parastatals and

quasi-government departments where there were pension schemes

established for the payment of retirement benefit, the payments of pension

and gratuities used to be done simultaneously depending on the availability

of funds. This allows for quicker processing and possibly accurate payment.

Whereas the slow and cumbersome process in the civil service, the process

of an officer’s retirement benefit starts when the officer gives notice of his

intention to retire from the service.

32

PAYMENT OF GRATUITIES

The office of the head of service of the federation was charged with the

payment of gratuities. This was decentralized to federal ministries in 1986 to

ensure early and fast processing of documents for the payment of gratuities

of their officers before payment of pensions by the officer of head of service

of the federation. Ministries were requested to apply for the release of A.I.E

and support such request with a properly designed performance containing

the names of the retiring officers and certain information about their records

while in service. Each ministry is recognized to forward a request letter in

which it will seek for the release of funds to enable it pay the gratuities of its

retiring officers. A profoma is attached to each request which contains the

following information; Name of referee, date of birth, date of first

appointment, salary grade level, length of service, estimated gratuity

payable, terminal salary etc.

The funds officer examines the data provided in respect of each retiring

officer, calculations, recalculations and corrections are made, at the end the

correct amount due to each retiree is confirmed. To qualify for the payment

of gratuity, the retiree must be alive, and must have his/her appointment

regularized or formalized. He/she must not be less than 15 years old or more

than 45 years old on entry into the service.

33

PAYMENT OF GRATUITIES IN THE STATE

In the states, the process and procedures for the payment of gratuities differs

from that of the federal government. When officers apply for retirement,

their applications are sent to the Bureau of establishment and pensions or the

pension board for computation of their benefits. The files and documents are

then sent to the office of the Auditor-General for the state audition.

The audited documents are returned to the Bureau of establishments for

recommendation to the Accountant General of the state, in which he

determines the pay point and raises voucher to the sub-treasure in charge of

the pay point.

PAYEMENT OF GRATUITIES IN THE LOCAL GOVERNMENT

The local government pension board was responsible for the payment of

retirement i.e. gratuities and pensions of local government retirees. On

receipt of the application for retirement from an officer, the board computes

the benefit due to each officer and sends it to the office of the Auditor

General for the local government auditing. The audited documents are

returned to the local government pensions before their payments are sent to

the local governments selected by the retirees for the receipt of their monthly

pensions.

34

PAYMENT OF GRATUITIES IN THE PARASTATALS

The pension scheme in the parastatals are funded and therefore the mode and

procedures of payment differ from the civil service even though payments

are made in accordance with the provisions of the Trust Deeds and rules,

which in most cases are replica of pensions, Decree 102 of 1997. On receipt

of an officers’ application for retirement from the service, the personnel

department processes the officer’s document for retirement and forwards it

to the secretary of the Board of Trustees of the institution. The secretary

thereafter prepares a schedule of all benefits and presents it to the Board of

Trustees at the next board meeting for consideration. After consideration, the

documents are sent to the insurer in charge of pension scheme who would

verify the data and send a cheque covering the payments to the Board of

Trustees for disbursement to the retirees.

COMPUTATION OF RETIREMENT BENEFITS

Computation of retirement benefits of a retiring officer is worked out based

on the length of pensionable service, basic salary and all allowances

enumerated in circular ref. B. 63216/S.I/x/168 of 13th, September 1991 and

the subsequent amendment. In computing an officers benefits, it must be

determined from the records available in the retirees files that he prima-facie

35

qualified for gratuity and pension. The following are the circumstances

under which a retiree qualifies for retirement benefits:-

1. On voluntary retirement after a qualifying service year of 10 years.

2. On compulsory retirement for the purpose of facilitating improvement

in the organization of an officer’s department or ministry so that

greater efficiency or economy can be effected.

3. On compulsory retirement in accordance with Section A of the

Pension Decree 102 of 1979.

4. On the advice of a properly constituted medical board certifying that

the officer is no longer mentally or physically capable of carrying out

the functions of his office.

5. On total or permanent disablement while in service.

6. On abolition of his office under Section 7 of the decree.

7. If the civil service commission of the federation requires him to retire

on grounds that his retirement is in public interest.

8. To take up appointment in a local government or as a member or head

therefore with the prior consent of the ministry of the establishment.

Payment of pensions shall not commence until the officer attains the age of

45 years; however, for officers who are compulsorily retired or whose

appointment are terminated or whose offices are abolished, the pension shall

36

be paid at their exit from service. Computation of retirement/terminal

benefits is very vital both to the officer and the government in that it is the

point which the officer’s benefits are measured in monetary terms.

The pension administration division provides data on the retiring officer’s

names, service, total emoluments, salary procession, indebtedness and

gratuity, if already paid. The data are provided in a profoma; retirees

establishment files are sent to the computation officer to determine in terms

of naira and kobo how much the retiring/deceased/terminated/missing

officer entitle to receive as gratuities and pensions.

PAYEMENT OF RETIREMENT BENEFIT TO DECEASED

OFFICER

Pension can also be paid to the next-of-kin, dependant/legal representatives

of any person named as survivor of a deceased officer under the following

circumstances:-

Where officer dies in service after completing the minimum qualifying

service, pension are gratuity are paid to his as if he has retired on the date of

his death. He shall be paid 5 years pensions and gratuity.

However, where an officer dies in the actual performance of his duties and

without his fault, his next-of-kin shall be paid additional pension. Apart

37

from the benefit at the first circumstance above, the pensions are paid to his

widow(s) for life as long as she remains unmarried and of good faith.

Pension payable to his widow is one-third of the deceased officer’s accrued

pension as at the date of his death shall be paid to a minimum of six (6)

children.

The pension shall be paid to the children until each of them attains the age of

18years or in case of female children the time of marriage or attaining the

age of 18. Where a deceased officer does not qualify for pension by virtue of

the length of service, the dependent shall be entitled to pro-rata pension

calculated at the rate of 2% per annum of the pensionable service based on

the deceased officer’s total emolument. In the case of a missing officer that

is not found within a year and it is reasonable to presume that the officer has

died, his benefit are paid to his next-of-kin or survivors. The benefits are

paid as if the officer retired on the date he was declared missing.

PAYEMENT OF PENSION: NOTIFICATION OF THE DEATH OF A

PENSIONER

As soon as a report is received of the demise of an officer, steps should be

taken to stop further payments of salaries and allowances to the deceased

officer, this will reduce the indebtedness to the government. The family of

the deceased officer should be requested to submit a stamped death

38

certificate at a convenient time for processing of his benefits. Where a death

certificate was not issued at the time of death, affidavit sworn by a legal

recorded next-of-kin or a declaration by a very senior civil servant, legal

practitioner, clergyman or imam to the effect that he saw the corpse and

witnessed the burial will serve as an alternative.

The failure of this particular scheme to make the desired impact may be due

to a combination of two (2) factors. Inadequate funding and poor

management (Ebegbuna, 1999), for instance, without adequate funding,

there will be no surplus invested also the limited fund may not be enough to

pay all pensioners. One noticeable problem in the management of this

pension scheme was poor record keeping which did not only raise the

expected funding level to alarming proportions but also slowed down or

make payments of retirement benefits impossible. Up-to-date most states

have not paid gratuities to their retirees since 1992. This scheme was a

failure because it was not able to provide employment with a means of

securing on retirement standard of living which is responsibly constant with

what they enjoyed while in service. Other factors that led to the failure of

this scheme includes: corruption, irregular payment to pensioners, bad

leadership, the problems of ghost workers and mass retirement of employees

who became entitled to pension administration, diversion of allocation for

39

pension and the burden of payment rested solely on government (C. Nnamdi,

1997).

PRIVATE SECTOR

In the case of the private sector, the NSITF, served as a provider of social

security to employees in the private sector. It was formally known as the

NPF (National Provident Funds) which was established in 1952 and on June

1994 it was changed to the Nigeria Social Insurance Trust Fund (NSITF).

During the era of NPF it registered 20,410 employees and when it was

changed to NSITF, members increased to 2,839,163 increased by 1,430,385.

The end product of any pension scheme is payment of benefits to members

and the fund has fared well in discharging its responsibilities. Unlike the

NPF scheme which was merely savings scheme that provided for lump sum

payment of what we contributed plus fixed interest as benefits, the

management considers payment of benefit as top priority. The NSITF was

very successful.

PENSION ADMINISTRATION IN NIGERIA AFTER THE PENSION

REFORM ACT

The debate on the pension reform attracted wide comments and also

generated a list of controversy among the stakeholders in the pension

40

industry. The pension Reform Act 2004 repeats that of 1990 and established

a mandatory pension scheme for employees in both the private and public

sectors in Nigeria which requires production from both of them. Verification

exercise was carried out on the pensioners that were owed by the

government in order to identify cases of personification and forgery. The

authentic and genuine loss of pensioners arrears were paid into their bank

account worldwide.

The Federal Government has been committed to the pension reform scheme

since its inception in July, as an employer of labour it has never defaulted in

its contribution. This contribution from both the employer and employees

has been kept in the Central Bank of Nigeria and invested in treasury bills,

some of the recognized and licensed pension fund custodian includes: First

Custodian, U.B.A Custodian and Zenith Custodian as their name denotes

they are all financial institutions that are well managed and they keep the

contributed fund.

They are also the licensed pension fund administrators (PFA) and the

premium pension limited. The working of the new system is that while every

employee that is contributing to the fund is expected to direct all such

contributions to be deposited with their choice of pension fund custodian

(PFC) and manage such deposits. Every employee who registers with a PFC

41

would be given a pin number or code which remains for the person alone.

Contributors cannot redraw from their account until they retire or are

unemployed by way of lost of job and unable to find another job for up to 6

(six) months. However, all contributors are supposed to know their balance

at certain intervals and at any time the contributor is not satisfied with any

PFA, he/she has the option to change to another PGA. With the new pension

scheme, every pensioner is expected to be paid or allowed to withdraw a

lump of money from his accounts to enable the retiree receive an account

that will not be less than 50% of the last salary on a regular basis. This

depends on the agreement reached which could be monthly or quarterly on a

basis the balance which is managed by the PFA is invested in the purchased

of annuity.

On the part of the private sector, the NSITF was amended to bring the new

fund fully under the ambit of the pension law. The funds contributed to the

NSITF by any person before the commencement of the new pension act

together with any attributable income thereof not required for the purpose of

administering minimum pension as required by the administering minimum

pension as required by the National Pension Commission shall be computed

and credited into the retirement savings account to be opened by the NSITF

for each contributor. However, any contributor or beneficiary under NSITF

shall have at least 5 years after the commencement of this Act select Pension

42

Fund Administrators of his choice for the management of the pension fund

standing to his credit. Where any person who contributed under the NSITF

Act retired before commencement of this Act, the funds due or in lump sum

in accordance with the rules and regulations of the National Pension

Commission.

The NSITF are now catering for both the public and private sector, they are

also required to shift from the “defined benefits” to “Defined contributions”.

In the required benefits arrangements, members’ benefits bear no direct

relationship with their contributions. The benefits they receive are likely to

be much higher than the contribution made. NSITF pools resources and

serves as a form of income redistributions. In the case of the defined

contributions, whatever pension benefits an employee will draw depends on

how much he contributed to the scheme. It links contributions directly to

benefits and has created individual poverty right to accumulate savings. It

shall also make more money for investment,

The most interesting aspect of the scheme is that the queues of pensioners

will no longer be there but the question is how efficient the Pension Fund

Administrators (PFAs) and pension fund Custodians (PFCs) could be to

avoid a relapse.

43

THE NSITF AND THE PENSION ACT

The NSITF, in to which the National Provident Fund transmitted, was set for

another significant transformation with the enactment of the pension reform

Act 2004. The section 42 of the Act provides that;

a. The Nigeria Social Insurance Trust Fund (NSITF) shall establish a

company to undertake a business of fund administrator in accordance

with this Act.

b. The funds contributed to the NSITF by any person before the

commencement of this Act together with any attributable income

thereof not required for the purpose of administering minimum

pension as determined by the commission shall be computed and

credited into the respective savings accounts to be opened by the

NSITF for each contributor or beneficiary of the contributions made

under the NSITF Acts 1993.

c. Any contributor or beneficiary under the NSITF Act shall at least 5

years after the commencement of this Act, select the pension fund

administrator of his choice for the management of the pension fund

standing to its credit

d. Where any person who contributed under the NSITF Act has retired

before the commencement of this Act, the funds due him shall be paid

44

to him in accordance with section 4 of this act or in lump sum in

accordance with the rules and regulations of the commission.

The Act also mentions the death of an NSITF member at the commencement

of this Act, all pensions and assets shall be transferred to a custodian, this

shall be supervised by the pension commission.

The NSITF Act 1993 shall be deemed amended in all particulars to bring it

in full compliance with this Act.

From the foregoing, the operations of the Act will have far reaching

consequences for the NSITF whose major business was provision of social

security for workers in the private sector which it did mostly by providing

pension services for the contributors to the scheme. The Act also provides

that the NSITF shall continue to provide social insurance services other than

pension. The Act also requires that that the NSITF establish a company to

carry on the business of a PFA to which the pension funds in its custody will

be transferred shows that NSITF will continue to be active and relevant in

pension matters, as the influence it will retain its PFA and in its advantage, it

already has in terms of its track record in the field of pension over the years.

This should stand the NSITF and its PFA in good stead when it comes to

contributors choosing a PFA. The experience and nationwide proximity and

provision of excellent services by its PFA to its existing contributors who

45

are spread across the length and breadth of the federation. Another

advantage of the NSITF pension fund administrators is the early growth and

accumulation of the fund of its PFA as most workers in the private who

already contribute to the NSITF scheme will find it more convenient or even

profitable to remain with its PFA (Mbanugo, 2006).

2.6 REFORM METHODOLOGY

In 2003, a task force was set up to work out the details of a pension reform.

Membership of that task force remains unclear reference is made only to the

name of its chairman. In practice the pension reform committee becomes

synonymous with that person and thus was frequently referred to as the

“Adeola Committee”. The committee did not start its work from the scratch.

It based most of its consideration on the work already undertaken by the

“Vision 2010 committee”. The head of the pension reform committee had

been a member of that committee, although not a member of its pension

subcommittee and the Adeola committee drew very closely from its findings

and recommendations.

Accordingly, the committee considered not so much basic principles but

rather the details associated with establishing a Chilean style system with

drawing up the appropriate legislation. Drafts of the law were circulated for

discussion with interested and affected parties, in particular representatives

46

of business – the Nigerian Consultative Organization (NECA) – and labour –

the Nigerian Labour Congress (NLC. The Trade Union Congress (TUC) and

Confederation of Free Trade Unions (CFTU). This did not prevent the

NECA from complaining that it was often excluded from critical

discussions.

Initially, both organizations argued that pension reform should focus on

addressing existing pension arrears in the public sector. Both were

concerned about the future of tri-par-title NSITF in the administration of

which they enjoyed on entrenched position. The NSITF, had collected

contributions from all employers and employees in the formal private sector

and had built up a reserve, and there were fears that one purpose of the

reform might be t acquire these assets and use it to solve the pension crisis in

the public sector (Oshinowo, 2003).

The demand of business and labour were in par satisfied by allowing the

NSITF to establish Pension Fund Administration (PFA), an option they had

infact featured in the 1997 report of the “Vision 2010 Committee”. that PFA

– which took the name “Trust fund” – is co-owned by the NSITF, the NLC,

the TUC, the NECA and three financial service companies and it has a

governing board on which there is equal representation of organized

business and labour. This did not prevent the NECA from continuing

47

criticism of the reform, although arm position became more muted. The

pension reform Act also required there to be one representative of labour and

one of business, and even one of the Nigerian Union of Pensioners among

the twelve ordinary board members of the pension committee (PENCOM),

the body the was to regulate the new system, although the majority of the

board members represent federal government interests.

Officially, both business and organized labour stand behind the new system

and through their participation in Trust fund, actively promote it. The

Pension Reform Act 2004 concerns only federal level schemes. The remote

of the federal government with respect to pension policy doesn’t cover 36

federal states, the local government authorities below them or the parastatals

that these states might have established. The most the government could do

was to exhort this level government to emulate the reform and replace their

unfunded schemes with ones based upon private accounts. Pencom duly

drafted a law that each state could apply. It took a further two years until

august 2006, before they all agreed to enact the necessary legislation

(Komolafe, 2006).

2.7 OBJECTIVES OF THE REFORM

The primary objectives of the scheme are to ensure that every person who

worked in either the public or private sector receives his retirement benefit

48

as at when due. The scheme would assist workers to save in order to cater

for their livelihood during old age. The scheme was also concerned with

establishing a system that would ensure that workers receive benefits

generated by their own savings and not dependent on government

subsidiaries or future generations. The reform would stem the growth of

outstanding pension liability, thereby releasing resources to support growth

and development of the country (Pencom, 2006).

Fully funded scheme will reduce the vulnerability of the pension system to

demographic trends and political interference, which had adversely affected

the old schemes. Furthermore, the worker has direct control over his/her

retirement savings accounts and determines which pension fund

administrator manages his account. The arrangement will address the

problems of the failure of sponsors of defined benefit scheme to deliver on

promised benefits scheme to deliver on promised benefits and promote

confidence in the system.

The reform seeks to establish uniform rules, regulations and standards for

administration of pension matters as well as strong regulatory and

supervisory framework.

49

SECONDARY OBJECTIVES

Consistent with the key elements of the federal governments medium term

and development agenda, the National Economic Empowerment and

Development Strategy (NEEDS), the reform was also intended to reduce

physical cost of pension to the government, achieve fiscal reform through

measure designed to raise domestic savings and increase private

investments, mobilize long term savings to finance the real sector sustain

high and broad based GDP growth and promote the development of an

efficient capital market.

With the portability of the retirement savings account, labour mobility is

expected to improve because employees do not need to worry about

implications of changing jobs on their pensions. The incentive for workers to

withdraw from the labour market, which early retirement schemes tend to

encourage under the old scheme, will be minimized. The new scheme which

mandates savings, will encourage under the old scheme, will generate long-

term investible funds that will deepen and strengthen the financial market as

well as facilitate the lowering of cost of capital. Consequently, higher

economic growth will be promoted (Pencom, 2006).

50

2.8 REGULATION OF THE NEW SYSTEM

The importance of institutional capacity and effective regulation to the

success of a pension system based upon individual accounts is widely

acknowledged. The necessary infrastructures include effective banks and life

assurance that can operate as providers and custodians and a transparent and

well-functioning equities and securities market in which pension assets can

be invested. A dedicated regulator usually oversees the activities of the

pension system itself, but separately regulators oversee financial services

and financial information is enhanced by the application of accounting

standards and reliable measures of credit worthiness.

By the time of the Nigerian pension reform, there was considerable number

of the necessary elements in existence buy not all of them were functioning

satisfactorily. Thus, the World Bank economic governance project finance

improvements to the technical and professional capacity of the Economic

and Financial Crimes Commission (EFCC) and the Securities and Exchange

Commission (SEC) and sought to assist in the greater use of international

accounting standards and to strengthen the Nigerian accounting board. The

size of appropriations for these objectives (USD 6.6,) was almost equal to

that made specifically to assist the pension reform (World Bank, 2004).

51

Pencom is responsible for setting rules governing investment portfolios, both

in terms of mix and the acceptable risk of assets. In Nigeria, an indigenous

rating agency had existed since 1992, but a second one has come into

existence only recently and its funding appears not unrelated to the

requirement that, any security in which pension assets are invested must

have been rated by at least two agencies.

At present, the investment rule laid down for the Nigerian system requires

that all investment be domestic. There is a tight limited on the extent to

which equity investment is permitted. On the other hand, investment in

federal government securities is encouraged, at least in so far as these are

committed to being of investment grades even if they have not been rated

investment rules shown in the table below;

INVESTMENT RULES RESTRICTION

Investment Rules Restriction

Asset type Details Maximum within portfolio

Minimum rating

Federally issued instruments No limit 100% None (But currently rated BB by SEP and BB by fitch)

Instruments issued by a federal state

Max 2% of assets one states and not more than 2% of any one issue

20% None (none currently rated)

Corporate bonds REITS, Mortgage-and-asset-backed) securities and debt

Max 2.5% of all issue of that corporate entity and not more than 2.5% of any one issue

30% BBB

52

instruments

Certificate of deposit and bankers acceptances (money market instrument)

Max 1% with respect to any bank,

25% A

Ordinary shares Max 1% in any one company and not more than 1% of the company’s value

25% BBB but AAA if IPD

Open and closed funds Max 0.5% in any fund and not more than 0.5% of that company’s value

5% A

Foreign Investments Guidelines still to be issued

Source: Pencom, 2005

Prime factor, the 2004 pension reform act and the subsequent guidelines

issued by Pencom established as strict regulatory system. Then demand a

high level of professional misconduct. They set strict asset allocation rules

and mandatory investment targets, and they follow many of the recently

issued OECD “Guidelines on pension fund Asset Management”, (206). On

the other hand, the guidelines ignore the OECD recommendation that a PFA

provide obligatory strategies and this means potential members of PFAs

have no opportunity to evaluate differences in providers’ investment

strategies when making their choice of provider.

2.9 THE IMPACT OF PENSION REFORM ON CAPITAL MARKET

It is frequently suggested that establishment of a founded scheme can

contribute to the development of capital markets and the accumulation of

53

savings that follow will promote economic growth. The Nigerian

government certainly repeatedly stressed this. Thus, under the description of

the strategic implications of the reform; reference was made to “the new

scheme potential to promote the national savings and the implication,

economic growth, to how funded pension scheme hence the capacity to

promote capital market development” and to how “DC schemes are believed

to the potential to generate positive economic externalities, including the

promotion of deeper, more competitive and more liquid financial markets”

(Pencom, 2004).

Others have been more skeptical. This, it is argued that pension reform by

itself will not lead to improved capital markets since successful reforms also

require regulatory changes, market liberalization and the privatization of

state-owned industries (Uthoff, quoted in Matijascoc and Key, 2006).

The impact of funded pension systems on savings rate is even less clear. The

academic literature is at best agnostic. It is recognized that saving can take

many forms, one of which might substitute for another, and that increased

savings by one party might merely finance increased indebtedness by

another (Orzag and Stigliz, 2001, but also Holzmann and Hinz, 2005).

As important as the level of saving is the form that they take. Funded

pension schemes are argued to contribute to the development of longer term

54

savings and so to the availability of long-term finance for investors. If

productive projects are less liquid, an increase in the availability of long-

term capital should on average, increase the return that can be made in

investing in such projects (Holzmann and Hinz, 2005). Even is pension

scheme invest solely in government bonds, they can be argued to have a

positive impact insofar as they stimulate the debt market. “They can create a

demand for long-term rather than short-term public debt, and this eventually

helps to build the yield curve (Ibid, pp. 133-114).

An assessment of whether the Nigerian pension reform is likely to contribute

to economic development requires as a first, an approval of the country’s

financial infrastructure. It has to be noted that inflation in Nigeria, although

lower than it has been for much of the 1990s, was running at 15% or more in

the early years of the new decade and that total (federal, state and local)

government expenditure was exceeding total government revenue by some

five percent of GDP.

The IMF – albeit not in relation to the pension reform has concluded that

“overall, (infrastructure) has not fostered stability or supported investment

and economic development”. It deemed the financial environment of Nigeria

to be one of “high risk”, and an important reason for this was the “unstable

55

macroeconomic environment”. As a consequence, banks were reluctant to

supply loans to the real economy (IMF, 2006).

The implications of a stock market structure have pointed out clearly with

respect to Latin America (Matijascot and Kay, 2006 p.11). “First, shares

tend to be highly concentrated in a limited array of government issued

paper”. In the case of a certain Latin American country, some of these

government bonds had been issued specifically to pay the transaction cost

associated with the new system. How important such issuances will be in

Nigeria is unclear, but the government is supposed to credit the accounts of

the members of NSITF with the value of their accrued rights. It is also

suppose to make transfers into a special recognition fund to cover its

obligations to the federal civil servants, the police and the military who are

transferring to the new scheme. Moreover, there is no requirement for this

government paper to meet an investment grade and there is no limit on the

extent to which pension funds can invest in paper issued by the federal

government.

Second, “insofar as pension funds are over-reliant on investments in state-

issued bonds, investment risk is higher than it would be with a (more)

diversified portfolio”. Third, “Pension funds tend to concentrate investments

in shares in a few large firms and mutual funds, leading to a rapid rise in the

56

value of those shares. This can lead to speculative bubbles that burst with

long-term consequences for these markets”. Exchanges in emerging markets

tend in any case to be much more volatile than those of developed countries.

2.1.1 IMPLEMENTATION EFFORTS AND CHALLENGES

A number of measures have been taken to implement the pension reform

since the enactment of the act in June 2004. The highlight of the

implementation efforts are summarized in the following paragraphs:

establishment of supervisory and regulatory framework.

Against the backdrop of a less sophisticated employees who do not have

expertise in investment and funds management as well as the need to

promote and sustain public philosophy that makes the employee as its main

focal point and primarily ensures the safety of their pension assets.

Consistent with the key objectives of the scheme the commission will ensure

that everyone who worked receives her/his retirement benefits as and when

due by protecting the employees’ interest and safeguarding the stability of

the system.

In carrying out its supervisory responsibility, the commission adopts a

surveillance model that involves prudential assessments compliance

57

monitoring and promotion of transparency and good corporate governance

(Pencom, 2006).

In this regard, various regulations and guidelines have been issued by the

commission to guide the operations of the industry. These regulations and

guidelines were issued after due consultation with industry stakeholders

which has greatly enhanced their robustness and acceptability.

REGISTRATION OF CONTRIBUTORS

The PFAs have also, commenced the registration of contributors with the

commission providing necessary support and facilities such as the personal

identification numbers (PIN) through the National Data Bank. Over 1.2

million employees have been registered by the PFAs within the past five

months since the exercise started (Pencom, 2006).

PUBLIC SECTOR EMPLOYEES’ ACCRUED PENSION RIGHTS

The Pension Reform Act 2004 requires that the accrued pension rights of

employees who are to join the new scheme shall be recognized for the period

they had worked for the government before the commencement of the Act.

As a result, actuarial valuation and accrued pension rights for the FGN

employees was concluded and retirement benefit bond would be issued.

58

Meanwhile the retirement benefit bond redemption fund at CBN is being

funded by the government (Pencom, 2006).

PUBLIC EDUCATION AND ENLIGHTENMENT

As part of the strategies for implementing the pension reform, the

commission embarked on intensive public education and enlightenment

programmes. Moreover, copies of frequently asked questions (FAQ) on the

pension reform have been compiled and printed in English, Hausa, Yoruba,

Igbo and Pidgin languages. The commission also developed, distributed and

published fliers on rights of employees, registration of contributors etc

(Pencom, 2006).

INCREASING COVERAGE AND BUY-IN OF THE SCHEME

In order to further expand the coverage of the scheme, the commission has

held discussion with many state governments on the possibility of

implementing the reform at state and local government levels. These tiers of

governments were not covered by the Act. To facilitate the process of

adoption of the scheme, the commission has also drafted a model state

pension law foe adoption by states (Pencom, 2006).

IMPLEMENTATION CHALLENGES

59

There are quite a number of challenges in the implementation of the reform.

As laudable as the new reform is, the change process to a new contributory

scheme has been greeted by a share of general misconception and

apprehension in the system, especially in the public sector. There are

concerns as to whether the reform can be effectively implemented given the

past experience of policy inconsistencies even when the process has just

commenced (Pencom, 2006).

A stable macro-economic environment is a prerequisite for the success of the

scheme. There is a growing concern about the death of investment outlets for

pension funds that will yield appreciable rates of returns on investment to

keep pace with inflation. There is also the challenge as to whether capital

market can optimally absorb the available and expected pension funds

without causing a gut and over valuation of the few securities in the market.

A review of the current high primary and secondary market transactions

costs is also desirable as part of other measures, to make the capital market

more investor-friendly so as to encourage more companies to seek quotation

on the Nigerian stock exchange, thus increasing available investment outlets

(Pencom, 2006).

There is the challenge of building necessary capacity needed for an effective

and efficient pension industry both for the operators and the regulator. While

60

the investment management aspect poses no significant threats due to the

existence related experience, the skills and expertise critical to successful

pension administration and custody would have to be developed over time

through training and education to expose staff to international best practices

in pension matters, so as to build the necessary expertise (Pencom, 2006).

The informal sector constitutes a major part of the Nigerian Economy, where

a sizeable proportion of working population are engaged in agriculture, petty

trading, domestic, artisan and other related fields. There is a challenge of

how to identify these set of people and secure their buy-in into the new

pension arrangement. Furthermore, there is the problem of determining the

rate and mode of contribution for these workers who have no fixed income

(Pencom, 2006).

Many provisions of the Act bothering on issues such as insurance cover,

annuities and risk rating of investments instruments that relate to other

industries and fall within preview of other regulatory authorities such as the

securities and exchange commission (SEC), National Insurance Commission

and Nigerian stock exchange. The co-operation of other regulatory agencies

is therefore critical to the successful implementation of the pension reform

(Pencom, 2006).

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2.1.2 THE PROBLEMS AND PROSPECTS OF THE NEW PENSION

REFORM

PROBLEMS OF THE NEW PENSION REFORM ACT

This project would first like to examine the problems of this pension reform.

Section 1(2) defines the beneficiaries of the scheme to include all employees

in the private service of the federation, federal capital territory and the

private sector. The implication here is that person’s employment comes

within the contemplation of the Act can benefit from the fund. Thus, for an

employee in Nigeria to enjoy the benefits of the Act, he comes within the

contemplation of the Act as stipulated in the above section. In the case of the

private sector, the scheme shall only apply to organizations having 5 or more

persons. The question then arises about those who are employed in the

private organizations with less than 5 persons. It is obvious from the

provisions of the Act that such employees are not covered by the scheme.

The observation of the Guardian Newspaper in one of its editorials on this

discriminatory provision states thus:

“The provision of the pension reform act excluding private sector

organization with less than 5 employees from the new pension scheme may

also require re-examination. Since many Nigerians are either self-employed

or are employed in an organization with less than 5 employees, the objective

62

of the scheme is to “ensure that every person who works is either the public

service or the private sector receives his benefits as and when due”, and to

assist improvident individuals by ensuring that they save in order to cater for

their needs and livelihood during old age” will be substantially defeated if

the large swathe of self-employed individuals and those employed in very

small organization are excluded from participation in the scheme. Rather

than their exclusions, Pencom and PFAs ought to have means and incentives

to encourage self-employed individuals and those working in organization

with less than 5 employees to participation in pension schemes under the Act

or otherwise” is very instructive (The Guardian, 2006).

Investment of pension fund assets outside the shores of Nigeria is

permissible, under section 74 of the Acts states “subject to the subsisting

Central Bank of Nigeria foreign exchange rules, the commission may

recommend to the president for approval of the investment of pension fund

asset outside the territory of the federal republic of Nigeria. It is quite clear

how this process will be instead, whether the commission will at its own

instance or at the instance of PFAs obtains blanket approval for specific time

of offshore investment by any PFA. One wonders the exact purpose of this

provision because it discourages diversification of business investment

outside the shore of Nigeria since it suggests that pension asset cannot be

invested abroad unless with the approval of the presidency. The Nigerian

63

Economy is big enough to accommodate other foreign investments that will

help guarantee the security and growth of the pension funds without wasting

of time and unnecessary safeguards for overseas investments therefore, there

should be no restrictions.

An important but contentious of the Act is Section 70(i) providing for

charges and fees of the service providers. It states that all income earned

from the investments of pension funds under this Act shall be placed to the

credit of the individual retirement savings account holders save for clearly

defined and reasonable fees, charges, costs and expenses of transactions

made by the pension funds administrators. Allowing the service providers

leverage to determine whatever is reasonable as fees and charges much to be

desired.

It means that the PFAs and the PFCs can come up with any outrageous

charges as long as they deem it reasonable and beneficiary will have no

choice but to watch his account debited accordingly however outrageous the

fees maybe (Mbanugo, 2006).

In this new pension scheme there are individual risks for the employee such

as the earning capacity of an employee. An employee who earns very little

will find it difficult to feed his family and then saving for his pension will

even be more difficult, there is also the problem of unemployment skill

64

obsolete, in a situation where a person does not have a job at all, he won’t

even have a way for feeding for himself before he even thinks of saving

pension. The same thing goes to those whose skills are going out of date, the

jobs they specialized in are now carried out by machines such groups of

people are not considered in the new pension Act.

There is also the problem of pension of the promised that are not being

backed up by a well diversified assets pool segregated from employers’

assets. This was also the problem with the 1990 Act, where the employer is

willing to pay, there may be a situation where promise to pay pension

collapses, the money contributed by both the employer and employee are

expected to be invested by the pension funds in the hopes of earning a

positive rate of return, in an event where the investment does not work out

well, all those who invested will lose out, this is one of the major problem of

this Act. This pension scheme also attempt to run from governance yet there

is a considerable concentration on government securities, the other securities

that are expected areas of investment are without restrictions. The

investment managers may want to restrict themselves to government

securities which have a low return on investment, another thing is that the

government was unable to pay pension that resulted in this reform, again

they could refuse to return the investment with interest. The current reform

also does not provide insulation against economic and other shock affecting

65

the economy as a whole, there is also the problem of the value of the naira

and strikes. Once efforts of are not made to ensure that inflation remain

minimized and almost nonexistent. The value given to the retired workers as

pension may not address the economic problems and the worst if such

investment does not yield any return as a result of stoke action in the

country. Finally what is the guarantee that successive administrators will

enliven the vision and not jettison it like the national housing fund of the

Babangida administration?

THE PROSPECTS OF THE NEW PENSION REFORM

This refers to the chances this pension reform act has to e successful just like

there are many setbacks to this reform, it also has its positive aspects which

we shall examine.

Like previous reforms in the past, the present reform is meant to ensure that

employees when they retire have something to fall back to. This new

pension Act ensures that when an employee retires, his retirement benefit is

ready as and when due, the pensioner does not need to rely on his extended

family system, they don’t need to rely on their employers, each pensioner

would have saved to cater for their needs when they retire. The Act hopes to

establish a sustainable, simple and transparent pension system to empower

workers. The scheme also reduces political risks by moving pension plans

66

outside the direct control of government, it permits individual to have

enough in their accounts and decide when they retire. It is worthy to mention

that this arrangement shall make more money available for investment,

create employment opportunities and reduce social vices. Competition

among pension fund administrators shall provide some incentives for

investments performance and the economy shall undoubtedly receive a

boost. The Act also has some legal implication of the which are certainly

central to the smooth implementation of the law, the national assembly has

no powers to legislate on pensions for the entire public service i.e. states and

local government. It also has no constitutional powers to legislate on pension

generally that are not paid out of the Consolidated Revenue Fund (CRF) of

the federation.

Fraud and misappropriation of funds and corruption will be reduced

generally as this as this arrangement will ensure that the service providers

act as checks and balances between them, such as in section 59 of the Act

which requires both the PGA and PFC to report to the commission as soon

as reasonably practicable, any unusual occurrence. The phrase “any unusual

occurrence” could as well be the ill-conduct or misconduct of either the PFA

or PFC. The license of a PFA and PFC can also be resolved according to

section 54(2) of the Pension Act, therefore, if any of these bodies

mismanage a pension fund, their license shall be revoked. The commission

67

shall cause the retirement savings account being managed by the PFAs

whose license has been revoked to be transferred to another PFA, the same

applies to a PFC. To ensure that their license are not being revoked, both

bodies will want to manage the savings kept in their care well, the PFA and

PFC also have the duty to submit annual return to the commission on the

pension fund being managed by them and including the audited account to

the report (Mbanugo, 2006).

The new pension Act provides exemption from tax of retirement benefits,

additional voluntary contribution if so desired by employees, transferability

of pension accounts and benefit, creation of individual retirement savings

accounts, establishment of pension fund administrators, selection of pension

fund administrators by employees and the introduction of the private

managed pension fund that is strictly regulated. It has also made government

to be serious with the issue of pension and managers are made more

accountable. This new pension Act will also improve the living standards of

elderly, secure financial autonomy and independence of retirees, the

pensioner will no longer be at the mercy of employer as he is assured of

regular payment of retirement benefits. It also improves the labour market

by reducing incentives for early retirement and also increases the supply of

labour. It reduces unemployment due to GDP growth as well as promoting

labour mobility as retirement savings accounts is made portable.

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2.1.3 SUMMARY OF THE REFORM INITIATIVE

The reform initiative culminated into enactment of the pension reform act

2004. The Act seeks to establish for the public and private sector a scheme

that is contributory, fully funded based on the individual accounts that ate

privately managed by pension fund administrators with the pension fund

custodians as well as a strongly regulated and supervised (Pencom, 2006).

69

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION

Research methodology refers to the collection and analysis of data which

enabled the researcher to provide information to solve the research problem.

According to Cohen and Mabion (1980: 260), method refers to the range of

approaches used as a basis for interpretations, explanations and predictions.

It also analyses these methods, throwing light of their limitations and

resources whole clarifying their pre- suppositions and consequences. Isaac

(1969) defines methodology as simply referring to the basic principles and

assumptions of enquiring which must cover data analysis, sampling,

populations and techniques of data analysis.

The research is undertaken in order examines the impact of the pension

reform act 2004 on pension administration in Nigeria.

3.2 RESEARCH DESIGN

Research design in the specification of method and procedures for acquiring

the information needed to structure or solve the problem under

consideration; it is therefore, the overall operational pattern or framework of

the project. It stimulates the information to be collected from which source

70

and by what procedures. In this research, the historical research design was

used to this is generally seen as the best design applicable to the

administrative and this approach is chosen due to its administrative

appropriateness to deal with complex relationship that exist in this research.

Hence, it is purely a description of the impact of the pension reform act

2004 in pension administration in Nigeria.

3.3 POPULATION OF THE STUDY AND RESEARCH SAMPLING

The research examined the pension industry as a whole and used it as the

research population. The pension industry consist of the some key operators

such as pension commission, pension funds administration, pension funds

custodians etc. These operators run the activities of the industry. Some of the

key operators of the industry were used for the research sampling (i.e.

pension commission, Penman pension Ltd) and which were eventually used

to generalize the study of the population or industry.

3.4 SOURCES OF DATA

The data used in this research work is mainly secondary data, this

constituted of those collected from available materials in the library such as

textbooks, journal and also interpret materials.

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3.5 TECHNIQUES OF DATA ANALYSIS

The data gathered as revealed by the relevant materials were grouped to

ease the analysis. The presentation of data is in tabular form and further

analyze with the aid of percentage (%) apportionment. The researcher has

analyzed the data collected in the order in which they appeared in the

materials. The statistical technique used for analyzing the data is percentage

(%) apportionment.

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CHAPTER FOUR

4.1 DATA PRESENTATION AND ANALYSIS

Analysis of data is a process of inspecting, cleaning, transforming and

modeling data with the goal of highlighting useful information, suggesting

conclusion and supporting decision making. (Queisser, M 1998).

According to Adaeze (2006), he said, “before data can be used for any

analysis, it must be extracted and organized in presentable and readily

comprehensive form”.

This chapter deals with presentation and analysis of data collected in the

course of the research work by the researcher. The date from the materials

were presented in table and further analyzed with the aid of percentage (%)

apportionment. The researcher has analyzed the data collected in order

which they appeared in the materials.

4.2 DATA PRESENTATION

The data gathered in order to carry out this research work were presented in

a tabular form

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Table 4.2.1 Nigerian Stock Exchange all Share Index

Before 2004

2003- 2004

After 2004

2008-2010

Change

Year 45% Increase High 65% decrease -20%

Sources: O. Ogunyemi, Investment Analyst, available at http://www.docstoc.com/docs 6764814/Technical-Review-of-the-Nigerian-Stock-Exchange-(All-Share-Index)-as-at-June-2-2010.

From table 4.2.1 above, the share index of the Nigerian Stock Exchange

increases by 45% from the year 2003-2994 (Pre-Pension reform). But there

is significant decrease in the share index from the year 2008-2010 (Post-

Pension reform) this shows that the safety of pension funds invested by the

Pension Fund Administrators (PFA) would be questioned while the Nigerian

Stock Exchange has already fallen by more than two-thirds in comparison to

its peak in 2008/

4.2.2 Pension facts Before and After 2004

Before 2004 After 2004 Change

Number of Pension Administrators 0.41% 0.59% 0.8%

Social Security Funds 45% 55% 8%

Management Charges 0% 3% 3%

Pension Coverage Rate 8% (2004 9% (2010) 1%

Payments to retirees 68% 75% 7%

Growth of RAS Funds 0% Decrease by 2.5% -2.8%

Accrued Pension Liability 43% (2004) 75% (2010) 32%

Inflation Rate (Average) 7.2% (2004) 11.8% (2010) 4.6%

74Sources: Pencom, 2010 and Okpaise, 2009.

From the table 2.2.2 above, 26 Pension fund Administrators had been

licensed and 18 existing schemes was also approved to continue. But the

new scheme introduces management charges to be charged on the pension

funds. 3% management charges is to be charged. Inflation is also another

factor that affects the pension funds negatively.

The social fund before the pension reform is 45% while that of the post-

pension reform is 55%. This shows no significant increase of the social

security funds. Inflation rate increases faster than the rate at which the social

security funds increases. The funded accounts, administered by the pension

fund administrators (PFAs), have so far produced negative real returns for

pension savers. The charge is just 10%.

There were no management charges in the old pension scheme (Pre-2004

pension reform). The 2004 pension reform introduces the deduction of

management charges before the 2004 pension reform was 0% while that of

the pos 2004 reform is currently 3%. The 3% management charges are being

splitted among the Pencom, PFC and PFA. This management charges

obviously have negative effect on growth of RSA fund as well as the safety

of the invested pension funds. The table also shows 3% increase.

The coverage rate of the old pension scheme was 8% while that of the post-

2004 reform is 9%. The coverage rate difference is just 1%. Closely related

75

to the limited coverage of the Nigerian Pension system was the way in

which the vast majority of covered workers were public sector workers. The

2004 pension reform hasn’t yet addressed the problem of coverage of the old

pension scheme.

During the pre-2004 era, the old pension scheme has been able to be paying

68% of the pension due. And the new pension scheme pays 75% of the

pension due. But the new reform ignores workers outside the formal sector.

The 7% increase of payment to retirees will be of no significance since it has

failed to include those (worker) in the informed sector.

Before 2004, there is no Retirement saving account, therefore no growth will

be expected. The growth is 0%. In the post-2004, there is 2.8% decrease of

RSA fund. The funded accounts administered by pension fund

administrators have so far produced negative real returns for pension savers

(negative change of 2.8%).

During the post-2004 era, accrued pension liability was 43%. During the

post-2004 era was 75%. The new pension reform hasn’t yet addressed the

deadly problem defined benefit scheme, but rather worsened the situation.

There is 32% increase in the accrued pension liability.

76

Inflation rate before the pension reform (2004) is 7.2% and that of the post-

pension reform (2010) is 11.8%. And there is 4.6% increase in the inflation

rate. The increment in the inflation rate negatively affects the growth of RSA

funds as well as the social security fund. Management charges tend to

increase because of the increase in the inflation rate.

4.3 DISCUSSION OF FINDINGS

From the above analysis, the reform has failed to contribute to basic social

security in an old age for the majority of the Nigerians employed in the

informal sector. The scheme does not only fail to provide social security to

workers in the informal sector but also the poor. As it now stands, the

funded pension is isolated from larger social security concerns. It only caters

to the needs of workers in the formal employment sector. How Pencom is

going to address these managerial and structural issues is everybody’s guess.

Furthermore, none of the originally stated goals of Nigerian pension reform

have been achieved so far. The federal state continue to carry significant

pension arrears from the earlier unfunded defined benefit system (old

scheme) and it is obvious that unpaid pension have reached new record high.

The table above shows 32% increase of pension arrears.

77

Moreover, the funded accounts administered by pension fund administration

(PFAs) have so far produced negative real returns for pension savers.

Factors such as; unsound capital market, management charges, inflation rate

and poor administration are some of the factors behind the poor performance

of the funded accounts.

However it is doubtful whether the introduction of a funded pension system

is able to address the issue of workers outside of the formal sector of

employment in order to address the current shortcomings, a new direction of

Nigerian policy-making regarding pension would be necessary. This could

combine with a broader concern for expanding basic social security. Such a

new course would have immediate benefits and would address the issue of

economic development from the grassroots and improve on promises of a

“great leap” that is likely to remain a mirage.

Although clear regulations are a necessary condition for good governance,

they are not a sufficient one. An appropriate implementation structure and

enforcement culture is required. It is here that question needs to be asked.

Nigeria is known for its’ low scoring on measures on sound administration.

Even by 2005, there were only five countries placed lower than Nigeria out

of the 158 rated by transparency international (www.transparency.org).

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CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 SUMMARY

The study is concerned with the impacts of pension reform act 2004 on

pension administration in Nigeria with particular references to pension

commission and it is an almost exhaustive research work that deeply

analyzed the operations of pension fund administrators and the custodians in

the pension industry.

The reform initiative culminated into enactment of the pension reform act

2004. The act seeks to establish for the public and private sectors a scheme

that is contributory fully funded, based on individual accounts that are

privately managed by pension fund administrators with the pension funds

assets help by pension fund custodians as well as strictly regulated and

supervised.

However, the research work gives an overview of the study follow by on in-

depth of the literature review of the study. The research also gives an

indepth of the methodology adopted in carrying out this research and also

how data were systematically presented and analyzed.

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5.2 CONCLUSION

The pension reform has created a platform for the realization of all other

reform programmes of the federal government. Long-term pension funds are

being generated to facilitate the infrastructural development, leading to

reduced interest rate and promote the growth of the real sector, leading to

overall growth of GDP. The PFAs as instructional investors will facilitate

increased market integrity, transparency and corporate governance and

overall growth of the capital market. Workers are guaranteed peaceful

retirement and reduced poverty in retirement. A secured future for workers

will ensure job satisfaction and increased productivity.

The issue of the Nigerian pension reform highlights the crucial role of local

regulatory capacity. So far, Nigeria is alone on the African continent that

purses the project of individual funded pensions. The project suffers

therefore form two difficulties at the same time. First, the reform would

demand a rapid expansion of the scope and quality of Nigeria regulation,

which even if forthcoming would still leave question marks behind the

purpose of the reform. Second Nigeria tries the Chilean example at a

moment in time when the original “model” is about to be substantially

reformed by the Chilean government.

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5.3 RECOMMENDATION

If neither the pre- 2004 nor the new pension system is appropriate, policy –

matters might be encouraged to look at whether there are other ways to

provide for older people in countries such as Nigeria. One of these other

ways might be the social pension – a “pure cash transfer to old people in

which eligibility is not base on history of the recipients earmarked

contributions” (Pacious and Slichynsy, 2006). The contribution of social

pensions to the objective of poverty relief in developing countries has been

long advanced by the international labour organization. More recently, it has

been recognized by the World Bank as well (Holzmann and Hinz, 2008).

Social pension have been credited with positive developments in those

countries that have intruded them.

Significantly, the Chilean government is about to introduce social pensions

or is dependent of social assistance termed “basic solidarity pension

(Gobierode Chile, 2008). Currently, some 60% of the elderly population is

receiving either a very low pension or is dependent on social assistance. The

basic solidarity pension will be paid on grounds not of a contribution record

is an acknowledgement that after 25 years, the system of funded pensions

has failed to address the pension needs of the majority of Chilean citizens.

81

The cost of setting up social pensions have to be judged on their relative

merits in targeting resources at the poor as compared to other social policies

such as support for primary education or basic healthcare. Some studies have

suggested that social Pensions have contributed to improving women’s

health, supporting the rural poor, heightening the status of older people in

the family and increasing school enrolment (Johnson and Williamson,

2006). However, social pension also have some disadvantages. In the

Nigerian case, these go beyond the more general, although by no means

empirically funded objection that they might weaken traditional system of

informal family care for the elderly. The social pension would be reliant

upon the same revenge base as the old, unfunded pension. It would merely

involve an alternative way of distributing government revenue scheme,

channeling it away from elites to broader swathes of the population. The

instability of the revenue source would remain and thus, the likelihood that

the payments would fall into arrears might not be removed.

Moreover, for a social pension to fulfill its objectives, effective delivery

mechanism would have to be in place. Determining eligibility almost by

definition has to be undertaken at a local rather than a national level. This

place considerable powers in the hands of local administrative structures

informal ones. The administrative capacity of state and local government in

Nigeria has been frequently questioned - a recent survey of state

82

government by the National Planning Agency fund that on a fiscal

management, service delivery and transparency, only 13 out of 36 states

score a minimum of 25 percent (White, 2008).

On the other hand, it might also be argued that a social pension was well

suited to address the “catch 22” of a state such as Nigeria that needs to

maintain a strong federal centres based on centralized recourse endowment

but that is lacking legitimacy. Social pension would distribute some of the

revenue of the country’s oil wealth in an equal manager between richer and

poorer states. The states and the federal government would gain additional

legitimacy through a social system. In addition it is unlikely that current low

coverage rates in the country’s pension system could be increased in any

other manner in the near future.

To sum up, Nigeria might have tried learning from Chile, but it learnt from

the wrong book. Moreover, not only was that book wrong, but it was also

becoming outdated. Tackling the problem of social security in oil age

demands a new approach. Nigeria could learn lesson from abroad but it

should also learn lessons from abroad, but it should learn the latest not the

outdated lesson from Chile.

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CBN (2001). A Study of Nigerians Informal Sector Vol. II In –Depth Study of Nigerians Informal Manufacturing Sector, Lagos, Nigeria

Government of Nigeria (2004). Meeting Everyone’s Need National Economic Empowerment and Development Strategy Abuja.

Holzmann, R and Hinz, R (2009) Old Age Income Support in the Twenty – First Century. An International Perspective on Pension Systems and Reform Washington DC, World Bank.

Ilo (2008) Nigeria Report to the Government Actuarial Assessment of NSITF Accrued Liabilities Under the New Pension Scheme.

IMF (2006) Pension Reform in Nigeria Selected Issues and Statistical Appendix. Washington DC

IMF (2006) Nigeria First Review Under the Policy Support Instrument Washington.

Johnson, J and Williamson, J. (2006). Do Universal Non- Contributory Old Age Pension Make Sense for Rural Areas in low – Income Countries “In International Several Security Review.

Komalafe , F. (2006). “States, LGs Adopt New Pension Scheme” in Vanguard (Lagos), August 9, 2006.

Mainoma, M. A (2004) . An Appraisal foe the Pension Act 2004 Challenges and Prospects in the Public Sector. Nigerian Journal of Administrative Studies Vol. 3 (1).

Matijascic, M & Kay, S (2006). “Social Security at the Cross Road towards Effective Pension Reform in Latin America” In International Social security Review.

NLG (2004). “The New Pension Act 2004, Text of a Press Conference” 20 th

July, Nigeria Labour Congress.

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Okafor, A.o (2004). Paper Presented by Okafor on Historical Background on Pension Administration and Pension Reform In Nigeria at a Workshop for the North East Zone.

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Pencom (2006). “Pension Reform in Nigeria. “Paper Presented At the BPSR/CAPAM, Abuja. Nigeria.

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APPENDIX

Department of Accounting,

University of Abuja,

Abuja, Nigeria.

26th February, 2012

Dear Sir/Madam,

I am a student of the above named University, carrying out a research report work

on the Impacts of Pension Reform Act 2004 on Pension Administration in Nigeria:

A Case study of National Pension Commission, Abuja.

I will be pleased , if you can assist me with necessary materials and information

needed to will assist me in carrying out my research work.

All information and materials given will be used purely for academic work and

will be treated confidentially.

Thanks for your understanding.

Yours sincerely,

Isma’il Abubakar

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