THE IMPACT OF
CONTRIBUTORY PENSION SCHEME ON THE NIGERIAN PUBLIC
TABLE OF CONTENTS
Title page – – – – – – – – i
Declaration – – – – – – – – ii
Certification- – – – – – – – – iii
Dedication – – – – – – – – – iv
Acknowledgement
– – – – – – – v
Abstract – – – – – – – – – vi
Table of
contents – – – – – – – vii
CHAPTER ONE
1.1 Background of the study – – – – – 1
1.2 Statement of problems – – – – – – 3
1.3 Objectives of the study – – – – – 6
1.4 Research Hypothesis – – – – – – 7
1.5 Statement of hypotheses – – – – – 8
1.6 Significance of the Study – – – – – 8
1.7 Scope of the study – – – – – – 9
1.8 Limitation of the study – – – – – 9
1.9 Definition of Terms – – – – – 9
1.10 Plan of the study – – – – – – – 11
CHAPTER TWO
Literature Review
2.1 Introduction – – – – – – – 12
2.2 Problems associated with the payment of
Pension
(Retirement benefit) – – – – – – 16
2.3 Pension Reform Act 2004 – – – – – 16
2.4 Contribution as Tax deductible Expenses – – 18
2.5 Investment of Pension Funds – – – – 19
2.6 Retirement savings account and remittance – – 22
2.7 Minimum Pension Guarantee – – – – 23
2.8 Transfer of entitlement from defined benefit
scheme 24
2.9 Offences, penalty and enforcement power – – 26
2.10 National Pension Commission – – – – 28
2.11 Composition of the commission – – – – 29
2.12 Functions of the commission – – – – 30
2.13 Power of the commission – – – – – 32
2.14 Books of account – – – – – – 33
2.15 Pension Fund Administrators – – – – 34
2.16 Pension Cause custodian – – – – – 35
2.17 Functions of Pension Funds Custodians – – 35
2.18 General Obligations of Pension fund
Administrator – 36
2.19 Chilean Pension System – – – – – 37
CHAPTER THREE
Research Methodology
3.1 Introduction – – – – – – – 42
3.2 Research Design – – – – – – – 42
3.3 Population of the study and Sample Size – – 43
3.6 Method of Data Collection – – – – – 44
CHAPTER FOUR
Data Interpretation and Analysis
4.1 Introduction – – – – – – – 45
4.2 Data Presentation and analysis- – – – – 45
4.3 Testing Hypothesis – – – – – – 55
4.5 Research findings – – – – – – 59
CHAPTER FIVE
Summary, Conclusion and Recommendations
5.1 Summary – – – – – – – – 62
5.2 Conclusion – – – – – – – – 64
5.3 Recommendations – – – – – – 64
Bibliography – – – – – – – 66
Appendices – – – – – – – 70
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Prior to the enactment of the Pension
Reform Act (2004), Pension Schemes in Nigeria had been bedeviled by many
problems. The public service operated and unfounded defined benefits scheme and
the payment of retirement benefits were budgeted annually. The annual budgetary
allocation for pensions was often one of the most vulnerable items in budget
implementation in the light of resources constraints. In many cases, even where
budgetary provisions were made, inadequate and untimely release of founds
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
(Pension, 2007).
In the private sector on the other
hand, many employees were not covered by the pension schemes put in place by
their employers and many of these schemes were not founded. Besides, where the
schemes were funded, the management of the pension funds were full of
malpractices 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 was initiated in
order to address and eliminate the problems associated with pension schemes in
the country. The out come of the reform was the enactment into law of the
Pension Reform Act. 2004. (Pen com, 2007).
The pension reform programme is
governed by the key principles of sustainability, safety and security of
benefits, transparency, accountability, equality, flexibility, inclusively,
uniformity and
practicability (Pencom, 2007).
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 operation of Ppension Fund
Administrators (PF A), Pension Fund Custodians (PFCs), Closed Ppension Fund
Administrators (CPFAs), existing schemes that are approved to
continue by the commission and any
other pension related institutions (Economic Confidential, Dec., 2007).
This study will give an insight to the
new Pension Reform Act 2004, evaluate the effect of the contributory Pension
Scheme on the Nigerian Public. The study will also look at the roles of 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.
1.2 STATEMENT OF THE PROBLEM
In line with the same policies adopted
every where, the Nigerian government has introduced a new pension scheme, which
amounts to privatization of pensions. Workers will no longer pay into a State
Pension Fund. Now they will depend on
private funds that supposedly will make the money grow by investing it in
stocks, shares and other speculative activities. What is worse is that if any
of these funds collapse, the government provides no guarantee.
The new pension reform seems to be
another anti-worker policy of the government, where the future of the workers
is now openly tied to the whims and caprices of a series of emergency
investors. These so – called Pension Fund Administrators and custodians have
been licensed by the government to collect compulsorily a substantial percentage
of workers’ salary every month which can be spent or invested in other ventures
as the administrators so desire.
The new Pension Reform Act of 2004 is
one of the numerous ‘reforms’ pushed through in 2004 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.
Before now, the positions of things in
the workplaces were in two forms, depending on which establishment the workers
belong, that is, either the private or public sector. The situation in the
public sector of the pre existing pension scheme is that a civil servant or
worker working for the government will collect a certain amount of money worked
out as gratuity depending on the number of years put into service. The gratuity
is expected to be paid immediately the worker stops working. Pensions are also
paid immediately on a monthly basis if the worker is of the
“pensionable” age.
The situation in the private sector is
different to what is obtained in the public sector. Here, what the worker
collects at the end of his/her working life with the company is of a
contributory format. The worker contributes a pre-defined percentage of the
monthly basic salary to the pension fund and the employer also contributes as
related percentage of the worker’s basic salary to the pension fund.
The worker will then collect the total
contribution at the end of the work life with the company. The Act now makes it
mandatory for all workers to pay 7.5% of their salary to the pension funds, the
employer is also expected to contribute another 7.5% equivalent of the worker’s
basic salary to the monthly contribution.
The reality is that for the workers in the
private sector, it immediately translates into the workers getting less pay
than what they are getting previously. The previous contribution used to be 4%
but now it has almost doubled to 7.5%. in the salary of the workers.
Whereas, the new situation is almost
anti-worker in the public sector. Here the employer, which is government at all
levels, is being relieved of a major social responsibility of caring for its
workers after retirement. Now the government workers must cough up 7.5% of
their salary every month as a contribution to the pension fund.
To the workers in the public sector,
the new situation as per pension contribution is a double blow. This is
because, lifelong pension and gratuity is the only thing each worker probably
still looks to as a mild compensation for the very poor salary package they are
presently receiving as wages. To now say that they have to contribute for their
pension, which will also not last till they die, from their present meager
salary is most uncaring and callous.
Another fact is that the present
contributory pension scheme is not guaranteed by the government. In the final
analysis, it is not different from any other savings in the bank. In order
word, if the pension fund administrator and pension fund custodians should
collapse, the pension fund under their care also collapse. That is the real
situation and this is why the government is saying that if this should happen,
it is the workers liability because it is the worker’s free will to choose
his/her own Pension Fund Administrator (PF A).
This study will explain the operation
of the new reform and also urge the public to be extra careful with the
operation of the new reform. The study will also proffer an alterative approach
to the reform should the current reform failed.
1.3 OBJECTIVES OF THE STUDY
The research is set to evaluate the
performance of the Pension Reform Act 2004 while the specific objectives are
to:
i.
Examine the effect of the
new pension reform in Nigeria since 2004 to 2008 on the pension fund administration.
In this case, a fragmented PA YGO Pension system was replaced by a mandatory
private funded pension system.
ii.
To 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, entitlement
and regulation.
iii.
To assesses the new
reformed pension system in terms of its contributions to the economic
development of Nigeria.
iv.
To highlights the
implementation efforts and the challenges of the new pension reform
v.
To discuss governance
problems and suggest or proffer solutions to the problems.
1.4 RESEARCH QUESTIONS
The Pension Reform Act 2004 came into
being to solve the administrative, technical and other lapses in the former
defined pension procedure. It is in light of this that the researcher wishes to
scientifically answer the following research questions.
i.
What is the impact of
Pension Reform Act 2004 on the Nigerian Public?
ii.
Is the pension commission
up to the task of meeting the set objectives of the reform?
iii.
Are the beneficiaries of
the reform fully aware of its provisions?
iv.
What are the effects of
7.5% deduction from the monthly payment?
v.
Are the techniques used by
the pension administrators adequate in ensuring that payment is not just enough
but is paid on time?
vi.
Are fund custodians
reliable institutions for the safekeeping of contributions?
vii.
Are the contributed funds helping the economic
development of
viii.
What are the possible
obstacles of the reform?
1.5 STATEMENT OF THE HYPOTHESES
To effectively carry out this research,
the following hypothesis is being proposed.
Ho:
Pension Reform Act 2004 will impact natively on the lives of retirees and
economic growth in Nigeria.
H1:
Pension Reform Act, 2004 will impact
positively on the lives of retirees and economic growth in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
This research is aimed at evaluating
the impact of contributory pension scheme on the public and its significance to
the government. The study will also assist in assessing the effects of the
contribution made by the employers of labour and employees in their well being
and existence, so that fiscal planning will be geared towards correcting any
lapses.
The study will help the general public
to know the various legislation on person and thus assist them to take
advantage of the provision. This research will also contribute to knowledge as
it is aimed at the critical evaluation of the silent effects of contributory
pension scheme operation in Nigeria.
1.7 SCOPE OF THE STUDY
This research focuses its attention on
the financial, administration, managerial and technical implication of the
Pension Reform Act 2004 covering year 2005 – 2008 only.
1.8 LIMITATION OF THE STUDY
Contributory pension, not being a
popular research area In the past, creates the problem of inadequate relevant
texts and publications for this study.
Also management of organizations are
not very kin on disclosing their financial records. Another limitation of this
research is that, the researcher does not intend to visit all the states of the
federation.
1.9 DEFINITION OF OPERATIONAL TERMS
PENSION:
Udeze (2006), it is a form of deferred compensation of a workers, a retirement
plan to provide and secure income for old age.
REFORM:
Means to make something better by correcting or making improvements (Oxford
Advanced Leamer’s Dictionary). A reform is an improvement made upon a system or
changes made or improvement (Wowo, 2004).
PENCOM:
This is a new organization established as part of the reforms of the government
(Ahmad, 2006). This organization approve, license and supervise PF A, PFC and
other institutions relating to pension matters.
PENSION
REFORM ACT: It is an act meant to ensure that
employees whenever they retire from service, have something to fall back on. It
ensures that every employee received his or her retirement benefits as at when
due (Pencom, 2006).
FULLY
FUNDED: A fully funded pension scheme exists where
pension funds and assets match pension liabilities at any given time (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 each contributor (Penman Pension, 2006).
CPFA:
Means closed Pension Fund (Administrator. Any employer managing its pension
scheme existing before the enactment of the Pension Reform Act 2004, may be
subjected to certain conditions, apply to Pencom to be licensed as a CPF A
(Penman Pension, 2006).
PROGRAMMED
WITHDRAWAL: Is a method by which the employee
collects his retirement benefits in periodic sums spread throughout an
estimated life span (Penman Pension, 2006).
ANNUITY:
An annuity is an income from approved life insurance company which provides
monthly or quarterly income to the retiree during his/her life time (Penman
Pension 2006).
1.10 PLAN OF THE STUDY
This research plans to achieve the
objectives of this study through five chapters as follows:
Chapter one, as seen above has
introduced the topic and systematically explained the nature of the problems.
Chapter two will try to reveal available information, text and publication on
relevant laws, theories, method and history of pension and contributory
pension. Chapter three will deal with research methodology. The method and
techniques of data collection and analysis to be used by the researcher will
discussed. Chapter four will analyses the research findings and test all the
relevant hypotheses. Chapter five will summarize the entire research work and
draw conclusion based on the findings and this will be followed by the
necessary recommendations.