The problem with pensions in Nigeria
Nigerian workers need to prepare for retirement.
Going by the latest available data (Q2, 2022) from the National Pension Commission (PenCom), Nigeria’s pension industry’s regulator, about 10 million people have pension accounts. This figure is about 15-17% of the labour force, a far cry from PenCom’s agenda set in 2007, to cover at least 30% of the working population with pension plans by 2024. In the United States, more than half of the working age population have some form of retirement plan.That number is over 70% in the United Kingdom.
Pension scheme in Nigeria: how does it work?
A pension plan is a retirement account where employers and employees make monthly contributions. In Nigeria, employers contribute 10% of the salary, and the employee contributes 8%—this is known as a defined contribution scheme and is governed by the Pensions Reforms Act. The employee receives the money when they retire.
Previously, Nigeria operated a defined benefits system where employers or the government, in the case of the civil service, solely topped up the pension account. Although this meant that retirement benefits were part of the annual government budget, it was too expensive for employers to maintain. Hence the shift to a co-funded system.
Challenges of pension scheme in Nigeria
People have tried to explain why Nigerians do not seem to be planning for retirement. Perhaps they don't know they can get pension plans or do not want the money deducted from their salaries. Also, small businesses often believe they don't have to provide their employees with pension plans, but the law makes it mandatory if you have over 15 employees. Often, employers prefer not to accumulate the extra cost of putting a plan in place.
There have been reports of private employers failing to remit their contributions to employee pension accounts, and the backlog makes it harder for them to pay. Most are confident they will not be penalised, even though the law stipulates a 2% penalty on unremitted funds.
In recent times, PenCom has tried to penalise companies. In April 2018, reports suggested that employers were forced to pay ₦7 billion in penalties for deducting funds from employees' salaries and not remitting them to their retirement accounts. This is a good start, but there are still a lot of organisations that are yet to remit their employees’ funds.
The fact that 15% of the working population as of 2020 had pension plans may leave the other 85% reliant on future generations—or the government—to take care of them when they are older.
Moreover, most pension account holders are between 30 and 49 years. In a country where over half the population is below 30, you would expect that age group to account for more than just 9% of pension accounts. Then again, we should not be surprised; Nigeria's youth unemployment rate is 25%, compared to the national average of 19%.
State of the pension industry in Nigeria
The elephant in the room when it comes to Nigeria's pension industry is the returns on investment. Looking at the information in the chart below, we can see that returns have barely covered a high inflation rate over the years, meaning that people's savings are effectively losing their value.
Why is this? Well, pension fund administrators (PFA) have traditionally invested in safe but low-yielding government securities. As of April 2018, 70% of PFA funds were put in government securities. The hope is that new pension legislation (including the multi-fund structure) would encourage PFAs to diversify their investments in order to get higher returns.
One way of doing this would be by funding Nigeria's infrastructure. The country's infrastructure deficit has been discussed at length, and it makes sense to dedicate a portion of pension funds—patient, sizable capital—to plug this gap. The kinds of investments that could be made in which the funds are retained for years. Government revenue is inadequate, and foreign investors are usually unwilling to invest long-term funds in Nigeria's businesses because the country is perceived as too volatile and risky. Still, the country needs these investments in the private sector to boost productivity and employment.
This isn’t to state that investments should be made solely for improving the economy as it may not be profitable for them. But these investments should be made based on their merits, and PFAs have the technical expertise to research these investments and make the best decisions.
Frequently Asked Questions
What percentage of one’s salary goes to pension?
Per the provisions of the Pension Reform Act 2014, a minimum of 8% of your monthly salary should be set aside for pension. On the other hand, your employer must contribute 10% of your monthly salary. For example, if your salary is ₦200,000, ₦16,000 will be deducted from your salary. Your employer will contribute ₦20,000.
How long does pension last in Nigeria?
Pension lasts throughout the lifetime of an individual after their retirement.
Does the Pension Reform Act specify what age I can access my pension in Nigeria?
The Pension Reform Act doesn’t state a specific age as a criterion for accessing pension. Your ability to access your pension depends on the terms and conditions of your employment contract. Usually, this means you can access your pension contributions after retirement.
However, the Pension Reform Act 2014 permits the payment of 25% of your pension contribution if you are under the age of 50 and have been sacked (disengaged) from work and unable to secure another job within four months.