By ROSEMARY ONUOHA

Are you a worker in the private or public sector of the Nigerian economy? Is there a pension plan in place for you? If you are a contributor to the Contributory Pension Scheme, CPS, then you are moving in the right direction, but if not, what are you still waiting for?

If you are employed by any of the state governments and there is no pension scheme in place for your state, exercise a little patience, as many of the state governments are still putting modalities in place to enact their own pension Act, as stipulated by the Pension Reform Act, 2004.

However, if you are employed in a private establishment with more than four employees and there is no pension scheme in place, then, there is need for you to learn about the importance of saving for your retirement.

The CPS

The Contributory Pension Scheme, CPS, replaced the old ‘Pay As You Go Defined Benefit Scheme’ that was burdened with a lot of problems and increasingly became unsustainable. Against the backdrop of a huge deficit, arbitral increases in salaries and pensions as well as poor administrative structures, the need for pension reform became glaring.

*Protesting pensioners

Accordingly, the CPS, powered by the Pension Reform Act, 2004 was created.  Therefore, the key objectives of the new scheme are to ensure that every person who has worked in either the public or private sector receives his retirement benefits as and when due; assist improvident individuals by ensuring that they save to cater for their livelihood during old age; establish a uniform set of rules and regulations for the administration and payment of retirement benefits in both the public and private sectors; and stem the growth of outstanding pension liabilities.

The new pension scheme is contributory, fully funded, based on individual accounts that are privately managed by Pension Fund Administrators with the pension funds assets held by Pension Fund Custodians and is under strict regulation by the National Pension Commission, PenCom.

Contributory System

Under this system, the employees contribute a minimum of 7.5 per cent of their basic salary, housing and transport allowances. Employers shall contribute 7.5 per cent in the case of the public sector. Employers and employees in the private sector will contribute a minimum of 7.5 per cent each. An employer may elect to contribute on behalf of the employees such that the total contribution shall not be less than 15 per cent of the basic salary, housing and transport allowances of the employees.

A basic point to note is that an employer is obliged to deduct and remit contributions to a custodian within seven days from the day the employee is paid his salary while the custodian shall notify the PFA within 24 hours of the receipt of contribution.

Contribution and retirement benefits are tax exempt and fully funded. The contributions are deducted immediately from the salary of the employee and transferred to the relevant retirement savings account. By so doing, the pension funds exist from the onset and payments will be made when due.

Individual Accounts

The employee opens an account to be known as a Retirement Savings Account, RSA, in his name with a Pension Fund Administrator of his choice. This individual account belongs to the employee and will remain with him through life. He may change employers or pension fund administrators but the account remains the same.

The employee may only withdraw from this account at the age of 50 or upon retirement thereafter. This withdrawal may take the form of a programmed monthly or quarterly withdrawal; a purchase of annuity for life through a licensed life insurance company with monthly or quarterly payments; and a lump sum from the balance standing to the credit of his retirement savings account: provided that the amount remaining after the lump sum withdrawal shall be sufficient to procure an annuity or fund programmed withdrawals that will produce an amount not less than 50 per cent of his monthly remuneration as at date of his retirement.

With any of the above options, there is an assurance that the pensioner has sufficient funds available to him for his old age. Although many have contended that at the end of the working period, they should be allowed to collect their savings in one lump sum, experience has shown that very few individuals have the discipline to manage funds effectively over a long period of time. The above was considered a better process than to allow the individual withdraw his accumulated savings at once, spend it all and then have no income when he is no longer in a position to work.