By AKINTOLA OMIGBODUN

At Nigeria’s independence in 1960, government corporations such as the Nigerian Ports Authority, NPA, Electricity Corporation of Nigeria, ECN, that were established by specific laws set aside funds each month for the pension benefits of their employees.

Other government agencies such as the federal universities that were subsequently established by specific laws also had pension funds for their employees. However, during the 1970s, the Federal Government of Nigeria, FGN, introduced a unified salary structure and conditions of service for all government ministries, agencies and corporations following on the recommendations of a panel headed by Chief Jerome Udoji.

One effect of the unified salary structure and conditions of service was that funds were no longer being set aside for the pension benefits of employees. Payments of pension benefits were then made from the current income of government.

By the year 2000, the FGN had come to the conclusion that it was not feasible to continue making payments of pension benefits from its current income. The FGN therefore brought up a new scheme for pension benefits which scheme was eventually passed into law as the Pension Reform Act 2004.

A contributory pension scheme was specified in the Pension Reform Act 2004. The first objective of the scheme is to ensure that each person who worked in either the public service or private sector receives his or her retirement benefits as and when due. The second objective is to assist persons who have not planned for their future by ensuring that they save in order to cater for their livelihood during old age.

The third objective is to establish rules, regulations and standards for the administration and payments of retirement benefits for the public service and the private sector.

Each employee should have a retirement savings account with a pension fund administrator. Contributions to the employee’s retirement savings account shall be made by the employer and the employee with each party, contributing a minimum of 7½% of the employee’s monthly emoluments.

On retirement, an employee has three alternative methods for making withdrawals from a retirement savings account. The employee could make programmed monthly or quarterly withdrawals calculated on the basis of an expected life span.

The employee could also obtain monthly or quarterly payments from an annuity for life purchased from a life insurance company. In the third method, the employee could take a lump sum plus an annuity or a programmed withdrawal. The significant thing is that whatever approach is adopted the employee is expected to receive an annual retirement benefit of at least 50% of his/her final annual remuneration.

The National Pension Commission, PenCom, has stipulated that funds held by a pension fund administrator could be invested in government securities, quoted equities, the money market and other fixed income.

The contributory pension scheme had only been in operation for a few years at the time the capital market crash occurred in 2008. Up to 25% of pension funds could be invested in quoted equities and the 2008 market crash has significantly affected the pension funds.

For a number of years, the portfolio value of a retirement savings account had only a little difference from the total net contributions received into the account. More recently, between early November 2013 and April 2014, there have been drops of about 25% in the market prices of shares of the major companies that have consistently paid dividends following the 2008 market crash.

PenCom should therefore consider reducing the permissible investment in quoted equities to 5% of the amount available in a pension fund. It has been suggested that the correction in prices of quoted equities between November 2013 and April 2014 is due to the withdrawal of foreign investors.

One wonders if the price drop would not have been higher if there were no pension funds to purchase the shares from the foreign investors. PenCom should begin to look at how pension funds could be invested in non-speculative housing projects for the benefit of holders of retirement savings accounts.