Until June 2004, Nigeria had operated, particularly in the public sector, a defined benefit pension plan, which was largely unfunded and non-contributory. The system was characterized as a pay-as-you-go (PAYG) scheme, since retirees were not to be supported by their previous contributions but by annual budget provisions, thus the massive accumulation of pension debt, which was estimated at more than one billion naira.
Following the apparent collapse of the public sector pension scheme, as evidenced by the thousands, if not millions, of poor and embittered retirees produced over the years and an equally large number of private sector workers cheated, the Nigerian government acted wisely to reform the system with the Pension Law in 2004.
The entry into force of the Pension Reform Law in 2004 has been hailed as a highly feasible solution to the pension issue, which for most employees today remains the likely source of income in their retirement years. .
The new pension scheme came to replace the previous defined benefit scheme. The new regime is defined contribution, which has a contributory nature, forcing employers and workers (in the public sector and in the private sector of the organization with five or more employees) to contribute 7.5% of each of the employee’s emoluments to a Retirement. Savings Account (RSA). However, for the military, the contribution rate is 2.5% and the government contributes 12.5%.
Under the old defined benefit scheme, no contributions were made and the employer was required to make projections of each employee’s pension rights, determining those projections by the employee’s years of service and earnings. Thus, the obligations are effectively an indebtedness obligation of the employer, who assumes the risk of not having sufficient funds to satisfy the contractual payments that must be made to retired workers.
However, under the defined contribution scheme, the employer is responsible only for making specific contributions on behalf of qualified participants. However, the employer does not guarantee a certain amount in retirement. Payment to qualified participants at retirement will depend on the growth of plan assets. The main objective of the scheme is to accumulate enough funds to guarantee regular monthly payments to the taxpayer after he retires.
A taxpayer has the option to purchase an annuity from an insurer or withdraw direct payment of their Retirement Savings Account (RSA) balance to an insurer in exchange for a guaranteed monthly or quarterly payment for an agreed period; this could be risky in that such payment could stop when the retiree dies.
On the other hand, you can have a scheduled withdrawal arrangement from your Retirement Savings Account (RSA), which could guarantee payment for life and a one-time payment to survivors of a taxpayer in the event of death before they run out. funds. The scheme also provides a lump-sum payment allowance to enable a retiree to buy a home or start a business, provided the balance in the taxpayer’s Retirement Savings Account (RSA) can fund a monthly payment for the remainder of the retirement. life of the taxpayer that is not less than half of the last salary of the contributor.
For example, if your total contribution to an RSA is N20,000 per month over a 20 year period with an average annual return of 10% and life after retirement is expected to be 25 years. You would have accumulated around N15,000,000 and this entitles you to a monthly payment of around N138,000 for that period.
Suppose you now retire with a final monthly salary of N150,000 and you want a lump sum payment, which means you will need to provide a monthly retirement benefit of N75,000, therefore you can take a lump sum of N12. 9 million or withdrawal based on accumulated funds.
However, for an individual who starts early contributing the same amount over 40 years at the same rate of return, they would have accumulated N126 million in their RSA and be entitled to a monthly payment of N1.1 million.
Since the defined contribution scheme encourages labor market flexibility, the worker is free to move around with his account when he moves to another place of work or residence. Finally, the direct contribution scheme is believed to have the potential to generate positive economic externalities, including the promotion of a deeper, more competitive and more liquid financial market.
PENSION FUND ADMINISTRATORS (AFP)
Pension fund administrators and pension fund custodians must withhold and manage contributions until such time as the contributor retires at age 50 or older. Regulation of the scheme is provided by the pension commission to prevent abuse and safeguard the funds under management. However, care should be taken when choosing an AFP (Pension Fund Administrator) to manage your Retirement Savings Account. Most Pension Fund Administrators are basically start-ups, although they are all linked to one group of financial institutions or another, such as banks and insurance companies.
Attributes such as proven knowledge of managing large funds, transparency and integrity, as well as customer service issues should be considered. A little research on the background and achievement record of the owning institutions and their directors would help in making the right decisions. Remember that no employer can force any worker to use a particular Pension Fund Administrator, while the law allows a contributor to correct any choice error by moving his account from one Pension Fund Administrator to another once a year without have to give reasons.
