Until June 2004, Nigeria had operated primarily 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, as retirees would not be supported by their previous contributions but by annual budget provisions, hence the massive accumulation of pension debt, which was estimated to be more than a trillion 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 swindled private sector workers, 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 is of a contributory nature, obliging employers and workers (in the public sector and in the private sector of the organization with five or more workers) to contribute 7.5% of each of the emoluments of the worker 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 a debt 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 specified contributions on behalf of qualified participants. However, the employer does not guarantee a certain amount at retirement. The payment that will be made 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 they retire.
A taxpayer has the option of purchasing an annuity from an insurer or withdrawing 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 the sense that such payment could stop when the retiree dies.
On the other hand, you can have an arrangement of scheduled withdrawals from your Retirement Savings Account (RSA), which could guarantee payment for life and a lump sum payment to a taxpayer’s survivors in the event of death before they run out. funds. The scheme also allows bulk payments to enable a retiree to buy a home or start a business, as long as the balance in the taxpayer’s Retirement Savings Account (RSA) can finance a monthly payment for the rest of the taxpayer’s life that It is not less than half of the contributor’s last salary.
For example, if your total contribution to an RSA amounts to 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 are now retiring 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 someone who starts early to contribute the same amount over 40 years at the same rate of return, they would have accumulated N126 million in their RSA and would be entitled to a monthly payment of N1.1 million.
Since the defined contribution scheme promotes flexibility in the labor market, the worker is free to move with his account when he moves to another place of work or residence. Finally, it is believed that the direct contribution scheme has the potential to generate positive economic externalities, including the promotion of a deeper, more competitive and more liquid financial market.
PENSION FUND MANAGERS (AFP)
Pension fund managers and pension fund custodians must withhold and manage contributions until the time the taxpayer retires at age 50 or older. The regulation of the regime is provided by the pension commission to avoid abuses and safeguard the funds under management. However, care must be taken when choosing an AFP (Administrator of Pension Funds) to manage your Retirement Savings Account. Most of the 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 large fund management, transparency and integrity, as well as customer service issues should be considered. A little research into the background and track record of the parent institutions and their directors would help in making the right decisions. Remember that no employer can force any employee to use a particular Pension Fund Administrator, while the law allows a contributor to correct any election error by moving his account from one Pension Fund Administrator to another once a year without have to give reasons.