An Overview of the Pension Reform Act 2004 by M.K. Ahmad National Pension Commission

1. An Overview of the Pension Reform Act 2004byM.K. AhmadNational Pension Commission Sensitisation Seminar for the University of Agriculture Makurdi

2. Agenda • Rationale & Objectives of Pension Reform • Coverage and Exemption • Nature of the Scheme • Pension Fund Administrator & Pension Assets Custodian • Transitional Arrangements • National Pension Commission • Safeguards for the Scheme • Benefits of the Scheme Sensitisation Seminar for the University of Agriculture Makurdi

3. Pre - Pension Reform Act: Public Sector Schemes • Unfunded and inadequate budget allocations • Budget far short of promised benefits • Late releases of funds • Unsustainable outstanding pension liabilities estimated at N2 trillion • Pension arrears to 216,000 pensioners in Military, Police, Civilian, & CIPPO was over N56 Billion • Proportion of pension to salaries increased between 1995 and 1999 from 16.7% to 30% Sensitisation Seminar for the University of Agriculture Makurdi

4. Pre - Pension Reform Act: Public Sector Schemes • Weak and inefficient administration • Protracted delays in processing and payment • Less transparent and cumbersome processes • Require about 14 documents to file pension claim • Demographic shifts and aging make defined benefit scheme unsustainable • No link between contribution and benefits • Support ratio continued to fall making old scheme unsustainable • Most of the over 300 parastatals schemes were bankrupt • Largely unfunded & weak and restrictive investment practices / • Mismanagement Sensitisation Seminar for the University of Agriculture Makurdi

5. Pre - Pension Reform Act: Private Sector Schemes • Most workers not covered by any form of retirement benefit arrangements • Pension Schemes had been largely unregulated with highly diversified arrangements • Most were “resignation” than retirement schemes • Weak and inefficient administration Sensitisation Seminar for the University of Agriculture Makurdi

6. Overall Philosophy of the Pension Reform • Ensure that every worker receives his retirement benefits as and when due • Assist workers to save in order to carter for their livelihood during old age so as to reduce old age poverty • Establish a system that is financially sustainable, simple & transparent, safeguards pension assets and promotes savings • Adopted major reform instead of cosmetic adjustments of the past Sensitisation Seminar for the University of Agriculture Makurdi

7. Nature of the Scheme • Contributory • Fully Funded • Individual Retirement Savings Accounts • Privately Managed & third party custody of pension assets • Strictly regulated and supervised Sensitisation Seminar for the University of Agriculture Makurdi

8. Objectives of the Pension Reform • Establish sustainable pension system • Empower the worker • Control over Retirement Savings Account • Promotes labour mobility • Minimises incentives for early retirement • Ensure transparent & efficient management of pension funds • Promote savings culture Sensitisation Seminar for the University of Agriculture Makurdi

9. Objectives of the Pension Reform • Secure compliance & promote wider coverage • Pension coverage in Nigeria is very low: 1990 to 1999 was 1.3% as against 17% and 60% for Cameroun and Mauritius respectively • Establish strong regulatory & supervisory framework • Provides for single regulator • Eliminates regulatory overlap and arbitrage Sensitisation Seminar for the University of Agriculture Makurdi

10. Coverage & Exemption • For Public Service of the Federation and all Employers of five employees and above in the private sector • Employees with 3 years or less to their retirement and those covered by Section 291 of the Nigerian Constitution are exempted • Existing pensioners are also exempted Sensitisation Seminar for the University of Agriculture Makurdi

11. Retirement Savings Account • Employee opens a Retirement Savings Account (RSA) with a Pension Fund Administrator (PFA) • Employer and employee to jointly contribute minimum of 15% employee’s basic salary, housing & transport allowances to RSA • 7.5% by employer and 7.5% by employee in govt. ministries and agencies • 12.5% by employer and 2.5% by employee in Military • In other cases, minimum of 7.5% each by the employer & employee • Employer may bear the full burden, i.e. not less than 15% • Contributions can only be reviewed upwards Sensitisation Seminar for the University of Agriculture Makurdi

12. Retirement Savings Account Cont’d • Employer to deduct and remit to Pension Assets Custodian (PAC) within 7 days of pay day • PAC to notify, within 24 hours, the PFA who would credits the employee’s RSA • Contribution by government shall be a first charge on the Consolidated Revenue Fund of the Federation • Contributions and retirement benefits are tax-exempt Sensitisation Seminar for the University of Agriculture Makurdi

13. Withdrawal from Retirement Savings Account • Account holder must be 50 years or upon retirement (terms of employment, medical advice or disability) • 50 years not related to 35 years of service or 60 years of age • Mode of withdrawal • Programmed monthly or quarterly withdrawals or • Annuity for life purchased from Life Insurance Company with monthly or quarterly payments Sensitisation Seminar for the University of Agriculture Makurdi

14. Withdrawal from Retirement Savings Account • Lump sum withdrawal provided that the amount left after the withdrawal shall be sufficient to procure an annuity or fund programmed withdrawal that will produce an amount not less than 50% of employee’s annual remuneration as at the date of retirement • If under 50 years, lump sum withdrawal is 25% provided that no employment is secured within 6 months Sensitisation Seminar for the University of Agriculture Makurdi

15. Survivor and Disability Benefits • Employer shall maintain life insurance 3 times total emolument in farvour of each employee • Upon death & disability, the benefits under life insurance will be paid to the RSA • Benefits be paid thereafter to the designated beneficiary Sensitisation Seminar for the University of Agriculture Makurdi

16. Functions of Pension Fund Administrator • Opens and maintains Retirement Savings Account (RSA) for every employee • Invests & manages pension fund assets • Pays retirement benefits to employees • Provides customer support service including access to customer account balances and statements • Shall have Investment & Risk Mgt Committees for efficient operations of the PFA Sensitisation Seminar for the University of Agriculture Makurdi

17. Licensing Requirements for a PFA • Limited liability company whose object is to manage pension funds • Minimum paid up share capital of N150million • Professionally competent to manage pension funds and administer retirement benefits • Applicant company, its Subscribers, Directors or Officers are not linked to distressed or mismanaged fund • Shall not engage in any other business other than management of pension funds • Satisfies any other requirements set by the Commission Sensitisation Seminar for the University of Agriculture Makurdi

18. Functions of Pension Assets Custodian • Receives the total contributions remitted by employers • Notifies the PFA within 24 hours of the receipt of contributions from any employer • Holds pension fund assets in safe custody on trust for the employees and beneficiaries of the retirement benefits • Execute transactions and undertakes other related activities on behalf of PFA • Reports to the Commission on assets held for PFA Sensitisation Seminar for the University of Agriculture Makurdi

19. Licensing Requirements for a PAC • A licensed financial institution with a minimum net worth of N5billion or is wholly owned by a company with a minimum net worth of N5billion • Min total Balance Sheet of N125billion or is wholly owned by a licensed financial institution with a total balance sheet of at least N125billion • Possess professional and technical capacity to perform functions of a Custodian • To issue a guarantee to the full value of Assets held • Never involved in distressed or mismanaged fund • Undertakes to hold pension fund assets in safe custody on trust for the employees and beneficiaries of the retirement benefits • Satisfies any other requirements set by the Commission Sensitisation Seminar for the University of Agriculture Makurdi

20. Investment Of Pension Fund • Pension Funds shall be invested by PFA in safe and high yielding instruments subject to guidelines and regulations issued by the Commission • Investment portfolio may contain a mixture of: • Bonds, Debentures, & Preference Shares listed on the Stock or securities issued and guaranteed by FGN & CBN • Ordinary shares of listed public ltd companies with track record of dividend payment of over 5 years • Bank Deposits & Real Estate, etc. Sensitisation Seminar for the University of Agriculture Makurdi

21. Transitional Arrangements for Public Sector: Retirement Benefits Bond • Employees with over 3 years to retire will be issued with Bonds for the value of their accrued pension rights • Accrued pension rights ( gratuity & pension) are guaranteed & will be actuarially determined for each employee transiting to the new scheme at the cut-off date • The Commission supervises and manages the issuance and redemption of the Bond Sensitisation Seminar for the University of Agriculture Makurdi

22. Transitional Arrangements for Public Sector: Retirement Benefits Bond • CBN to establish, invest and manage Retirement Benefit Bond Redemption Fund (RBBRF) • Fed. Govt to pay 5% of monthly wage into the Fund until last retirement bond issued is redeemed • Bond redeemed from RBBRF upon employee’s retirement and added to RSA Sensitisation Seminar for the University of Agriculture Makurdi

23. Transitional Arrangements for Public Sector: Pension Departments • Pension Departments (6) to replace existing Pension Boards and Offices • Departments shall: • Carry out existing functions of relevant pension offices • Make budgetary estimates for existing pensioners • Receive allocations from the Government and make payments to pensioners as and when due • Ascertain existing deficit of category of officers exempted from the scheme • Carry out any other related functions as the Commission may direct Sensitisation Seminar for the University of Agriculture Makurdi

24. Transitional Arrangements for Private Sector : Existing Schemes • Pension Schemes in the private sector will continue to exist provided that they: • Are fully funded at all times • Undertake to make up any shortfall within 90 days • Demonstrate capacity for the management of pension fund assets • Must have managed pension fund assets for at least 5 years before commencement of Act Sensitisation Seminar for the University of Agriculture Makurdi

25. Transitional Arrangements for Private Sector : Existing Schemes • Pension Fund Assets to be: • Held by a Custodian • Segregated from assets of the company • Membership of existing schemes • Restricted to current members • Optional to current members • Operate under supervision of Commission • Actuarial valuation must be done every year in the case of Defined Benefit Scheme Sensitisation Seminar for the University of Agriculture Makurdi

26. Transitional Arrangements for Private Sector : Closed PFA • An employer may apply directly or through a wholly owned subsidiary for a closed PFA licence if; • Pension fund assets are N500 million and above • It has capacity to manage pension funds • Satisfies other requirements of Commission • Transfer assets to a PFA if pension fund assets are less than N500 million • Maintain existing investments subject to regulations by Commission Sensitisation Seminar for the University of Agriculture Makurdi

27. Transitional Arrangements for Private Sector : NSITF • The NSITF shall establish a company to undertake the business of a PFA in accordance with the Act • Funds contributed so far shall be computed & paid into respective Retirement Savings Accounts of contributors • Contributors to choose PFA to manage pension funds standing to their credit but only after 5 years of commencement of the Act • Pension Funds & Assets to be held by a Custodian • The Commission to supervise the NSITF • NSITF Act is amended for full compliance with the Pension Reform Act 2004 Sensitisation Seminar for the University of Agriculture Makurdi

28. National Pension Commission • Apex body to regulate and supervise pension schemes • Formulate, direct and oversee the overall policy on pension matters in Nigeria • Approve, licence and supervise PFA, PAC and other institutions relating to pension matters • Maintain National Data Bank on pension matters • Receive and investigate complaints against PAC, PFA and Employer • Membership include NLC, NECA & National Union of Pensioners, SEC, CBN, MOF & HOSF Sensitisation Seminar for the University of Agriculture Makurdi

29. National Pension Commission: Supervision and Examination • Commission conducts inspection & examination of PFA, PAC and Pension Departments once a year • Commission investigates the affairs of various operators in the pensions industry • Commission publishes list of PFAs & PCAs on yearly basis • External Auditors of PFAs & PACs under obligation to report specific problems to the Commission Sensitisation Seminar for the University of Agriculture Makurdi

30. National Pension Commission: Sanctions for Non-Compliance • Sanctions for operators range from N250,000 to N5 million and up to 10 years imprisonment • Directors or officers of PFAs and PACs or other persons can be sanctioned up to N10 million or 3 years imprisonment • Commission to revoke licence for persistent contravention • Commission to penalize employer that violates Pension Reform Act 2004 • Dispute resolution framework provided to minimise litigations Sensitisation Seminar for the University of Agriculture Makurdi

31. Implementation Update • Collection of contributions in the public service of the federation commenced in July 2004 • Contributions lodged in CBN pending licensing of PFAs & PACs • Compilation of employees profile in progress • Draft guidelines being prepared • Data compilation on retirement benefits schemes started • Public Education & Enlightenment for various stakeholders • Some state governments commenced arrangements for implementation Sensitisation Seminar for the University of Agriculture Makurdi

32. Safeguards for the Scheme • Separation of functions of PFA and PAC • Pension Assets Custodian Guarantee • Risk Rating of Investment Instruments • Compliance Officers • Pension assets held by a Custodian shall not be used to meet the claim of any Custodian’s creditors in event of liquidation of the Custodian • Pension assets held by a Custodian shall not be seized or subject to execution of judgment debt or stopped from transfer to another Custodian • Sale of pension assets, grant of loan or use as collateral is prohibited Sensitisation Seminar for the University of Agriculture Makurdi

33. Safeguards for the Scheme • Appointment of top management or Directors of PFA, PAC or other institutions must be approved by the Commission • Reporting requirements by PFAs, PACs & Pension Departments & adequate sanctions • Statutory Reserve Fund by PFA & Minimum Pension Guarantee • Public Disclosure of Information by operators in the industry • Government contribution shall be a first charge on Consolidated Revenue Fund of the Federation Sensitisation Seminar for the University of Agriculture Makurdi

34. Benefits of the Scheme • Pensioner no longer at the mercy of employer and is assured of regular payment of retirement benefits • Employee has up to date information on his Retirement Savings Account • Contributor has the freedom to choose who administers his retirement benefits account • Retirement Savings Accounts are portable • Stems further growth of pension obligations and provides a platform for addressing this liability Sensitisation Seminar for the University of Agriculture Makurdi

35. Benefits of the Scheme: Cont’d • Imposes fiscal discipline on the nation and is a solid foundation for economic development • Creates a huge pool of long term funds and enhanced accountability • Introduces clear legal/administrative sanctions • Separation of investment, administration and custody of assets • Enhances transparency in pension administration Sensitisation Seminar for the University of Agriculture Makurdi

36. Consequential Amendments & Repeal / Savings of Acts • Armed Forces Pensions Act 1990 consequentially amended • Save as provided, Pension Act 1990, Police and Other Agencies Offices Act 1993 & Police Pension Rights of IGP Act 1993 are repealed • Pension Reform Act 2004 shall prevail in case of inconsistency with other laws relating to pension matters Sensitisation Seminar for the University of Agriculture Makurdi

37. Pension Reform Act 2004 Frequently Asked Questions Sensitisation Seminar for the University of Agriculture Makurdi