Pension Schemes In Nigeria: Albatross of retirees (II), by Professor MK Othman


Deep Thoughts with Othman

As elucidated in the first part of this piece, the defined pension scheme in Nigeria failed to serve the basic objective of making retirees enjoy the fruit of their labour. The failure was attributed to poor pension fund administration, outright corruption; embezzlement of the pension fund; inadequate build-up of funds, and poor supervision.

Has the new scheme, the contributory pension scheme addressed the challenges of the old defined pension scheme? Is the contributory pension scheme not akin to pushing retirees to jump from frying pan to fire? These were the questions posed in the closing paragraph of this piece last week.

An additional challenge to the defined pension scheme was the sudden demographic change occasioned by a population explosion, which churned out more retirees monthly across all public establishments.

Devaluation of Naira on a continuous basis, the global economic recession, and over two decades of double-digit inflation compounded the problem and made the pension scheme inconsequential to the beneficiaries.

Consequently, the pension burden on governments at various levels grew exponentially making the payment promptly impossible and eventual collapse of the defined pension scheme. What is the contributory pension scheme?

Contributory Pension Scheme backed by Pension Reform Act 2004 is rather a systematic pension reform, a complete shift from the defined benefit scheme to the contributory one.

The scheme is supposed to be fully funded, managed by third parties with control, checks and balances. It has strong pillars of sustainability as an employee compulsorily contributes at least 7.5 per cent of his monthly salary with the employer contributing another 7.5 per cent of the employee’s salary to the scheme.

However, the employer may bear the contribution solely by paying a 15 per cent minimum without contribution from the employees. The Pension Reform Act 2004 provided responsibilities of management and administration of the scheme to three institutions; National Pension Commission, Pension Funds Custodians, and Pension Fund Administrators.

National Pension Commission (PenCom) was statutorily established as a regulatory body to supervise and ensure effective administration of all pension matters.

It has the power to formulate, direct and oversee the overall pension policy, investigate, seek information from any employer or pension fund administrator or custodian or any other person or institution on matters relating to retirement benefit or management of pension funds.

Pension Fund Custodians (PFCs) are responsible for keeping safe custody of pension assets on trust on behalf of contributors. The main functions of PFCs are to receive pension contributions on behalf of PFAs; settle transactions and undertake activities relating to the administration of pension fund investments on behalf of PFAs and notify the PFA within 24 hours of the receipt of pension contributions from employers.

Pension Fund Administrators (PFA) are to privately manage pension funds through opening Retirement Savings Account (RSA) for employees; invest and manage pension fund assets; payment of retirement benefits and accounting for all transactions relating to the pension funds under their management.

Theoretically, a contributory pension scheme appears to be a perfect system that can relieve the government from the financial stress of the old defined pension scheme, aka pension for life. Practically, the scheme is bedevilled with many challenges.

First, the corruption of the old scheme was also transferred to the new scheme due to the lack of transparency between the schemes.

A few years ago, the Economic and Financial Crime Commission investigated cases where N151 billion were stolen due to the grey schemes in pension funds (

Second, the scheme places a huge financial burden on the government to make a contribution for the individual employees in addition to payment of accrue right for transfer from the old scheme to the new one. Government/employers are required to set aside 5 per cent of their annual wages to offset the cost of employees’ migration. Similarly, employers are required to pay group life insurance to cover workers who die in active service. Employers of the public service are finding it difficult to pay their financial obligations.

Third, the contributory pension scheme is not a pension for life and thus, the retiree’s pension will be stopped ten to 15 years after retirement. This is because the pension is calculated based on an estimated lifespan of the retiree and if a retiree is fortunate to bypass his lifespan, he would have to survive without a pension.

With the current erosion of the extended family value system, an old retiree may have nobody to care for his well-being when the pension is stopped. Soon, we may be having old retirees dying out of hunger and common health challenges, as no one will bear the responsibility to cater to their needs.

Chile, where Nigeria adopted the scheme has old-age security cover such that as soon as one’s pension is stopped or exhausted, the retiree migrates to an old-age security scheme where upkeeps are guaranteed.

Fourth, the cumbersome nature of the scheme fraught with unawareness and unwieldiness causes a dreadful nightmare to a retiree. From the first day of retirement, a retiree takes a minimum of 15 months to begin to access his pension and the so-called lump sum.  This is caused by lengthy, ambiguous, and spatial documentation, which a retiree is subject to. What is the way forward?

The process needs to be simplified and transparent. Vigorous creation of awareness of the scheme among the stakeholders is highly desirable. The government, being the biggest employer of labour must be made to meet her financial obligation as at when due.

Corruption in the scheme must squarely stop. Jigawa State’s model of defined contributory pension scheme is perfectly working, why can’t the federal government and other states adopt it? This may stop the scheme from being an albatross to retirees.

Professor Othman writes from NAERLS, ABU Zaria, and can be reached via email:


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