The enactment of the Pension Reform Act 2004 ("the Act") changed the landscape for retirement benefit planning in Nigeria. The system that previously existed was marred with various challenges in both the public and private sectors. The public sector operated an unfunded defined benefit scheme with annual budgets to fund payment of retirement benefits. The challenges associated with the budgeting process, including securing approval for adequate funds, timely release of funds and actual settlement of beneficiaries made the defined benefit scheme unsustainable.
The private sector suffered similar fate. The various schemes put in place by employers were largely unfunded and many employees were not covered. For the few funded schemes that existed, different stories were heard of how the fund managers and trustees managed the process.
The Pension Reform Act 2004 introduced a compulsory contributory scheme covering all employees in both private and public sectors and established a uniform set of rules for the administration and payments of retirement benefits. The Act established the National Pension Commission (PenCom) as the regulatory authority to supervise and ensure effective administration of the scheme.
The objective of the Act among other things is to encourage employers and employees to contribute towards the retirement of the employees and provides the regulatory framework for the administration and payment of retirement benefits to employees in the public and private sector on retirement from service. The reform has created awareness that employees need to consciously plan for their retirement while in active employment, to avoid being impoverished at the end of their employment.
The Act requires employers and employees in the private and public sector to contribute a minimum of 7.5% of the employees' emolument to the employees' retirement savings accounts while 12.5% minimum contribution is required by employers and 2.5% by the employees in the case of military personnel. The employer can also elect to bear the full burden of the contribution, provided the total contribution for the employee will not be lower than 15% of the employee's emolument.
Any contribution made by the employer and employees under the scheme qualify for tax deductibility under the relevant income tax law. In addition, retirement benefits paid under this scheme enjoy tax exemption.
The Act also allow employees to make voluntary contributions to their retirement saving account in addition to the mandatory contributions. Withdrawals from the retirement savings account in respect of voluntary contributions are equally tax exempt, provided that the withdrawal is made after 5 years from the date the voluntary contribution was made. This provides additional window of tax planning opportunity for individuals, especially higher income earners, to enjoy tax free income by way of voluntary pension contribution.
Where an employee's earning capacity could accommodate long time investment planning of a minimum of 5 years, the pension scheme provides an opportunity of growing investment income by making voluntary contribution to his/her retirement savings account. The contribution made will enjoy tax deductibility with no tax payable at the point of withdrawal. In order to protect the investments of contributors while guaranteeing fair returns on investment, the pension fund administrators are expected to operate under strict regulatory guidelines when making investment decisions and in the application of the proceeds of pension fund assets.
Despite the improvement in the pension scheme in nearly10 years of operations of the Pension Reform Act 2004, there are still more to be desired. In terms of administration of the fund, there have been issues of unethical practices and diversion of pension fund while some Nigerian workers in Local Governments, States and even private sectors remain uncovered. Contributors are also particularly worried about the security of their savings. It was on this background that President Goodluck Ebele Jonathan forwarded a bill to the National Assembly in April 2013. The Pension Reform Bill 2013, seeks to close the gaps identified in the Pension Reform Act 2004.
The objectives of the Bill are to:
(a) establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the Public Service of the Federation, the Public Service of the Federal Capital Territory, the Public Service of the State Governments, the public service of the local government councils and the Private Sector
(b) make provision for the smooth operations of the Contributory Pension Scheme ensure that every person who worked in either the Public Service of the Federation, Federal Capital Territory, States and Local Governments or the Private Sector receives his retirement benefits as and when due; and
(c) assist improvident individuals by ensuring that they save in order to cater or their livelihood during old age.
It is important to note that the bill retained the provisions for additional voluntary pension contribution and the five years' timeline for withdrawal to qualify for tax exemption. This is geared towards enhancing the savings and investment culture of Nigerian workers.
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