SECTION 3 of the Pension Reform Act 2014 established a Contributory Pension Scheme (CPS) for the payment of retirement benefits for employees in the public service of the federation, the Federal Capital Territory, states, local governments and private sector. In case of the private sector, the scheme shall apply to employees who are in the employment of an organisation in which there are 3 or more employees.

In a proactive action to expand the coverage of the CPS, the National Pension Commission (PenCom) has introduced the Micro Pension Plan. The Micro Pension Plan refers to an arrangement under the CPS that allows the self-employed and persons working in organisations with less than three (3) employees to make financial contributions towards the provision of pension at their retirement or incapacitation.

Those exempted from CPS

The CPS is mandatory for all employees in the public service. However, certain public officers are exempted from it.  These officers are judges of the Supreme Court and Court of Appeal. These judicial officers are through the provisions of Section 291 of the the 1999 (as amended) entitled to pension for life at a rate equivalent to their last annual salary and their allowances in addition to any other retirement benefits to which they may be entitled. Others exempted include members of the armed forces, the intelligence and secrete services of the federation; any employee who is entitled to retirement benefits under any pension scheme existing before the 25th day of June 2004 but as at that date had 3 or less years to retire.

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Rates of contribution

The CPS is a fully funded scheme. Money is contributed into individual employee’s Retirement Savings Account (RSA) by the employee and his/her employer, to pay his/her pension.

The Act, in Sub-section 4(1), provides for minimum rates of contribution to the scheme. The employer is expected to contribute a minimum of ten per cent and the employee eight per cent of the employee monthly emolument. The rates of contribution may, upon agreement between the employer and employee, be reviewed upward from time to time and the Commission notified accordingly.

Voluntary contribution by the employee and additional contribution by the employer

Sub-section 4(3) gives an employee, who is already a member of the scheme a window to make voluntary contributions. Sub-section 4(4)(a) provides that an employer may agree to pay an additional benefits to the employee on retirement; sub-section 4(4)(b) further provides that an employer may elect to bear the full responsibility of the scheme provided in such case his contribution shall not be less than 20 per cent of the monthly emoluments of the employee.

Group life insurance policy

 Sub-section 4(5) makes it mandatory for every employer to maintain a Group Life Insurance Policy for her employees. The sub-section provides that in addition to the minimum rates of contributions specified, sub-section (1) of this section, 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 employee and premium shall be paid not later than the date of commencement of the cover.

In view of insurance policy of no-premium, no-cover, the Act provides in sub-section 6 of the section, that where the employer failed, refused or omitted to make payment as and when due, the employer shall make arrangement to effect the payment of claim arising from the death of any staff in its employment during such period.

“Sub-section 6 of the section provides that an employer who fails to deduct or remit the contribution within the time stipulated, shall in addition to making the remittance already due, be liable to a penalty to be stipulated by PenCom. Sub-section 7 provides that the penalty shall not be less than 2 per cent of the total contribution that remains unpaid for each month or part of each month the default continues and the amount of the penalty shall be recovered as a debt owed to the employee’s RSA, as the case may be. In order to enforce compliance with this provision, PenCom has appointed agents who are operating as recovery agents.”

Payment of contributions into retirement savings account of employee

Section 11 provides that every employee to whom the Act applies shall maintain a Retirement Savings Account (RSA) in his name with a Pension Fund Administrator of his choice and shall notify his employer of the PFA chosen and the identity of the RSA opened.

Sub-section 3 of the section, mandates an employer to deduct at source the monthly contribution of an employee; and not later than 7 working days from the day the employee is paid his salary, remit an amount comprising the employee’s contribution and the employer’s contribution to the Pension Fund Custodian (PFC) specified by  the PFA of the employee.

There are sanctions for non-compliance with this section by the employer. Sub-section 6 of the section provides that an employer who fails to deduct or remit the contribution within the time stipulated, shall in addition to making the remittance already due, be liable to a penalty to be stipulated by PenCom. Sub-section 7 provides that the penalty shall not be less than 2 per cent of the total contribution that remains unpaid for each month or part of each month the default continues and the amount of the penalty shall be recovered as a debt owed to the employee’s RSA, as the case may be. In order to enforce compliance with this provision, PenCom has appointed agents who are operating as recovery agents.

Contribution evasion

Contribution evasion, or non-compliance, is a critical issue in the operation of defined contribution schemes. It influences the adequacy of benefits payment to participants as well as both the financial status and political legitimacy of the entire program. Contribution evasion occurs when employers, employees and self-employed do not pay required contribution. It is seriously undermining the CPS in the country, with revenue falling short of what is required to pay benefits. This shortfall has resulted in the scheme failing to pay benefits as and when due to public sector retirees.

Contribution evasion is one of the reasons why the scheme was made mandatory: some workers will not voluntarily save enough on their own to fund their retirement. The problem is compounded because employers act as collecting agents for the scheme and they have less interest in making their contribution, in collecting employees contributions than some workers have in making them. Contribution evasion can only occur if three conditions coincide: (a) employers wish to evade, or place a low priority on, making pension contributions relative to other expenses, (b) employees prefer non-payment of contribution, are reluctant to report non-payment to PenCom, the regulator or are unaware of the non-payment, and (c) government enforcement tolerates evasion or is inadequate to prevent it.

Contribution evasion is one of the main problems facing the CPS in the country. Both employers and employees are evading contribution especially in the public sector. Employees who are beneficiaries of the scheme would have evaded contribution but for the fact that it is mandatory and deductions for the contribution made at source, that is before salaries are paid.

Most State governments have not keyed into the Scheme, some of those that have laws passed are implementing the scheme in default of their own laws. Sixteen years after the coming into force of the CPS; the repeal of the Pension Act 1990, which was of universal application for the public services of the federation, states and local governments and the National Council of States decision for states to adopt the CPS, some states are still without any pension law for workers of such states and local governments. Mention must be made here of Lagos, Kaduna and Jigawa states, who are a shining example to other states with regard to the payment of pension. Lagos State is the face of CPS in Nigeria. Even the federal government has a thing or two to learn from Lagos State in this regard.

Some reasons for contribution evasion by workers

There are several reasons why workers who are beneficiaries of the CPS may evade contribution. They include but not limited to the following: poverty or temporary financial hardship. Poor workers may feel that they cannot save because their immediate needs are so pressing. Because the contributions are mandatory savings, they may seek to avoid contributing. High income tax rates and contribution rates for other social programs such as the National Housing Fund, low rates of return compared to alternative uses of fund. Workers are likely to evade contributions when they feel that the system is unfair or that it lacks legitimacy. Workers view the CPS as a way for the government to raise revenue for other purposes, thus viewing mandatory contributions as tax. Workers may rightly mistrust government and businesses to handle their money properly and in their favour.

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