The pride of every economy is the active working population largely because of the potential demographic dividend as these set of people work and earn income from which the government earns its revenue via taxes, levies etc. However, the reality is that the present active working population becomes the future dependent population. Thirty-five years or so down the line, these individuals may potentially become dependent on the government for basic sustenance and essential needs – a concept known as security services. The method of providing these needs to the dependent population is called social security and welfare service. Given that there is usually a relationship between the cost incurred and service provided, the big question that needs to be answered is "how would the government finance social security services?"

Several answers have been proposed by different schools of thought. Some schools believe that the active population should directly contribute towards the ageing population, while others opined that the government should use the taxes paid to provide for the ageing population. Where social security is fully financed by the government through taxation, sustainability becomes questionable as the government will either increase the tax rates or ration the current tax between recurrent expenditures (social security services) and capital expenditures (basic amenities). This could invariably overburden the current taxpayers, and where it is impracticable to increase the tax burden, the quality of the social services may begin to fall.

Current State Of Collaborative Participation

Another school of thought is that both the active working population and the government can collaborate in the social security system. The school believes that the active population can contribute while the government provides the enabling legislation that guarantees social security benefits in the future. Nigeria is one of the countries that has adopted this approach. The country has enacted several legislations to cater for the dependent population through contributions of the active population. The legislations enacted were targeted at:

  1. creating an enabling environment for the administration of social security,
  2. forming the basis of funding for social security,
  3. granting of tax reliefs on contributions by the active population to pension, medical services, redundancy, retirement or any other activities that can cause employee disengagement.

This article seeks to review some of the social security legislation enacted in Nigeria and the scope of their coverage.

Disease or disability

One of the ways the Nigerian government cater for employee disengagement from the active population because of disease or disability is the Employees Compensation Act (ECA) enactment. Principally, the objective of the ECA is to provide for an open and fair system of guaranteed and adequate compensation for all employees1 or their dependants for any death, injury, disease or disability arising out of or in the course of employment; and also to provide rehabilitation to employees with work-related disabilities. Based on the ECA, an employer is mandated to contribute 1 per cent of its annual payroll cost to the ECA fund scheme. Contributing employers can also enjoy income-tax relief on the amounts contributed to the ECA scheme. With the ECA, employees are protected and catered for in the event of workplace disability given that they can access the pool of funds in the ECA scheme.

However, the Scheme has its limitations given that only accidents, diseases or disabilities that occur in the course of employment are covered. In fact, the ECA only cover any accident sustained while "on the way between the place of work and:

  1. the employee's principal or secondary residence;
  2. the place where the employee usually takes meals; or
  3. the place where he usually receives remuneration provided that the employer has prior notification of such place"2.

Therefore, any employee whose accidents condition occurred outside this scope or with disease or disability that are not work related may not be entitled to the benefit of the scheme.


As everyone in the current active population will one day belong to the ageing population, the remuneration of an individual post-employment is a major concern to any country. Based on the OEDC guidelines "the regulation of pension fund asset management should be based on the basic objective of a pension fund which is to serve as a secure source of retirement income"3. This is because these categories of individuals have contributed to the economy during their active years and, may not have enough savings to adequately cater for life after employment. To solve this problem, Nigeria operates a mandatory contributory pension scheme for its active employment population. The pension scheme ensures that improvident individuals save to cater for their livelihood during old age. Contributions and access to the funds of the pension scheme are regulated by Pension Reform Act (PRA)4.

The PRA mandates both employers and employees to contribute ten per cent and eight per cent respectively of the employees' monthly emoluments to a Retirement Savings Account (RSA) under the pension scheme funds. The PRA, however, allows the employer to bear full responsibility for the scheme. The benefit of this scheme is that the present active population can fund their post-employment income without imposing an additional burden on the government. Similar to the ECA, the contributing employer and employee are entitled to income tax relief on the amounts contributed to the pension scheme RSA.

End of service

An individual, though willing to work, might be disengaged as a result of the "end of a service". End of Service occurs after an employee has reached a mandatory contractual terminal period.

For most countries, gratuitous payments made as a result of the "end of service" enjoy tax-exempt status. Nigeria also adopted this method; however, this was initially fraught with controversies5 due to conflicting provisions of the 1996 Budget Pronouncement, the Personal Income Tax Act (PIT) 2004 and its subsequent amendment in 2011. Due to these conflicts, the tax authorities initially thought that gratuity earned by employees in the private sector should not enjoy a tax-exempt status where certain conditions 6 were not met. However, the Tax Appeal Tribunal successfully resolved this conflict7 and the Finance Act (FA) 2019 subsequently deleted the controversial basis from the PIT Act thus affirming that that gratuity paid at the "end of service" is completely tax-exempt. Tax-exempt gratuitous payment goes a long way in catering for the needs of disengaged employees as the lump sum could be used to finance post-employment life needs in addition to pension funds.

Loss of employment (redundancy)

Market factors, technological advancement, and more recently pandemic situations can culminate into redundancy. As these cases cannot be avoided, the employees are usually entitled to a benefit. In Nigeria, individuals that lose their jobs as a result of redundancy8 are entitled to compensation. Similar to gratuity, the compensation from a redundancy payment is tax-free up to a limit of ? 10million. Any amounts over the limit is treated as a capital sum and is liable to capital gains tax at 10%. In addition, where the redundancy persists and the individual is unable to secure another employment after four months of his redundancy, the person can withdraw up to 25 per cent of the total amount credited to his retirement savings account under the pension scheme9. Such withdrawals are tax-exempt.


In extreme cases, an employee may die in the course of employment. In the case of death, the dependants of the deceased employee will be entitled to some compensation. Given that the ECA only covers death arising in the course of employment, there are other provisions of the law the covers death in general. One of such provisions is in the PRA which stipulates that, every employer shall maintain a Group Life Insurance Policy in favour of each employee for a minimum of three times the annual total emolument of the employee10. Thus, where an employee dies his entitlements under the Policy will be paid to the named beneficiary. Therefore, based on the ECA and PRA provisions, we can safely assume that the dependants of an employee will be adequately covered under social security in the event of death. 

Concluding Thoughts

It could be said that the collaborative approach adopted by Nigeria is favourable, as it protects the active working population from incidences that would make them join the dependent population without a sufficient social security plan. This position however has its demerits, as the costs are passed from the government to either the employer or employee. Though the government has created an enabling environment and incentivised contribution to social security, these incentives may not be sufficient in the long run due to the rise in the cost of doing business in Nigeria for employers. In order to mitigate this increase in cost, the government may need to review the current coverage of these Acts and repeal provisions that do not encourage ease of doing business in Nigeria. For instance, under the ECS act, the government should consider including a definition for monthly payroll and not leave it to the determination of the Board. 11

A critical look at the legislative provisions may reveal that the enactments are largely skewed towards the formal sector. Based on publicly available statistics, the informal sector in Nigeria has the highest working population12, and these categories of individuals are not mandated to contribute to social security. Although the ECA, The PRA and "Guidelines from the National Pension Commission on Micro Pension Plan try to include them in the scope of coverage, the rate of participation has been relatively low. Some of the factors attributable to the low participation may include apathy towards government institutions and fund managers13 based on records of mismanagement, inadequate awareness of the provisions of these legislations, inadequate sensitization of the benefits of contributing to social security and illiteracy The government should sensitize these categories of individuals on the benefits of contributing to the social security scheme and the best way is improve access to the social security coverage. This is because the testimonial of a customer travels faster and convinces more than any form of advertisement.

The constant amendments in legislations via the Finance Acts to cater for changes in the business space is a welcome development, and it is hoped that more changes will be introduced via the Finance Act that would create a better social security system. With this in mind, it is believed that the social security space will continue to see tremendous changes in times to come.


1. The provisions of the ECA applies to all employers and employees in the public and private sectors excluding members of the armed forces (other than persons employed in civilian capacities).

2. Section 7(2) ECA

3OECD Guidelines on Pension Fund Asset Management.

4. The provisions of the PRA apply to employees of the public and private sectors excluding members of the Armed Forces, the intelligence and secret services of the Nigeria

5. The controversies were before the Finance Act 2019.

6. :The conditions were:

  1. the period of services does not amount to ten years.
  2. the total gratuity payable exceeds the amount of ?100,000, the amount of any excess will be taxable.
  3. the period of service (or where service is not continuous, the aggregate period of service in any sixty-three consecutive months) does not amount to five years, then, if the total gratuities exceed a sum calculated at the rate of one thousand Naira per annum for such period or aggregate period the amount of any excess will be taxable.

7. In the case between the Nigerian Breweries Plc and Abia State Board of Internal Revenue, the Tribunal held that gratuities are wholly tax-exempt under the Personal Income Tax Act 2004 and its amendments.

8. Section 20 (1c & 2) of the Labour Act in the event of redundancy, the employer shall use his best endeavours to negotiate redundancy payments to any discharged workers who are not protected by regulations made .by the Minister. The Minister may make regulations providing, generally or in particular cases, for the compulsory payment of redundancy allowances on the termination of a worker's employment because of his redundancy.

9. Section 7(2) of the PRA 2014.

10. Where an employer fails, refuses or omits to make payment as and when due, the employer shall be liable to pay the full claims arising from the death of any staff in its employment during the period.

11. Remuneration is defined as "basic wages, salaries or earnings designated or calculated, capable of being expressed in terms of money and fixed by mutual agreement or by law which are payable by an employer to an employee for work done or to be done or services rendered or to be rendered: and allowances which include rental, transport, meals and utility or other allowances as may be determined by the Board, from time to time; ECA 2010

12. Based on the ILO report of 2018, the informal sector accounts about 80% of Nigeria working population - wcms_626831.pdf (

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