The Emergence of the Pension Reform Act 2014 Back

The Pension system anywhere in the world has a major purpose and that is provision of a means of livelihood for an employee upon retirement. The focus of pension is therefore, employee based, as without an employee, there would be no reason whatsoever for pensions. Put in another parlance, the essence of pension is to provide a system of post-retirement benefits for employees.


Generally, any legislation is made or amended with a view to curing a problem or mischief, which has been identified in the society. As societies continue to develop, certain regulations become archaic and the need for amendments/ alterations to align such statutes with contemporary challenges become inevitable. Hence, the consequent amendment of the Pension Reform Act of 2004 (PRA 2004).


Prior to the enactment of the PRA 2004, Nigeria had operated a system known as the Defined Benefit pension scheme, which was predominantly operational in the public sector with minimal compliance from the private sector, mainly due to a poor legislative framework and regulatory institutions. The scheme was amongst other deficiencies, poorly funded, non-contributory and mainly dependent on budgetary allocations; which meant that the government was faced with a situation of massive pension debts which had accumulated overtime and only a few individuals were able to access the pension funds albeit after years of wait, sometimes even after death.


The obvious defects of this primordial pension system led to the setting up of a National Taskforce Team on Pension Reforms by the then President Olusegun Obasanjo with Mr. Tajudeen Fola Adeola, a co-founding Managing Director of Guaranty Trust Bank as the Chairman who would eventually turn out to be the pioneer chairman of the National Pension Commission (PenCom). This led to the emergence of the PRA 2004, which repealed the Pensions Act of 1990 and introduced a uniform scheme known as the “Contributory Pension Scheme” (“the Scheme”) under Section 1 of the repealed Act. By this scheme, it became mandatory for employees in the public sector as well as that of the private sector (with 5 employees or more) to contribute a minimum of 7.5 percent of its monthly earnings into a special account known as the Retirement Savings Account (RSA). The employers as well were to contribute the same minimum percentage of the employee’s monthly emoluments into the RSA. In addition, where the employer was to bear the burden alone, it had to be a minimum of 15 percent of monthly earnings of the employee. See section 9 (1) and (2) of the PFA 2004.


Although the emergence of the PRA 2004 brought far-reaching reforms to the status quo ante operative then, it was however not devoid of its own shortcomings. For instance, the rate of embezzlement of pension funds skyrocketed to an unprecedented high, as there was more money available due to the new contributory scheme introduced by the PRA 2004 unlike under the previous regime when the government bore the burden of pension alone.


There were many high profile cases of pension fraud, prominent of which was the case involving a former Assistant Director in the Police Pensions Office who was sentenced to only two years imprisonment with an option of a fine of N750, 000 (seven hundred and fifty thousand Naira) only, when in fact, he had stolen over 20,000,000,000 (twenty billion pension funds). Equally, pensioners had to continue in long queues and went through different horrendous clearance and verification processes all in a bid to get clearance for payment as was prominent in the old regime amongst other challenges.


Similarly, the private sector has not helped matters much, as a good number of employees are currently not covered by the scheme due to the poor regulatory framework of the pension administration in the country, rendering employees at the mercy of their employers.


Whilst we are continuously confronted with these challenges, the National Assembly of the Federal Republic of Nigeria has seen the need to effect some changes in the PRA 2004 thus, the consequent repeal of the PRA 2004 by the PRA 2014. President Jonathan signed the PRA 2014 on 1st July 2014. Although the PRA 2014 largely embodies the provisions of the PRA 2004, there are however, some changes as they relate to the relationship between employers and their employees.



Highlights of the PRA 2014


As stated above, the aim of any amendment is to cure some defects in or modify an existing legislation to suit prevailing demands of the society. The PRA 2014 represents one of such amendments and some of the notable innovations under the PRA 2014 include:


Tenor/Application of the PRA 2014 – By virtue of Section 1(a) and 2(1) of PRA 2014, the application of its provisions extends from the Public Service of the Federation, Federal Capital Territory, the States and Local Government Councils as well as the Private Sector. It also defines an employee to include these tiers and expanded the coverage in the private sector from employers of 5 persons or more to 3 persons or more This represents a little departure from the PRA 2004 which expressly covered both the Federal Government of Nigeria and any organisation whose employed personnel ranged from 5 persons or more without inclusion of the States and Local Government Councils.


Increase in the Percentage of Contribution – The PRA 2004 provided for a minimum of 7.5 percent contribution of the monthly emoluments of the employee and employer and where the employer undertakes full responsibility for the contributions, it shall be liable to contribute not less than 15 percent. However, under Section 4(1) of the PRA 2014, the proportion of contribution has been reviewed upwards as an employer is under obligation to contribute a minimum of 10 percent while the employee is entitled to contribute at least 8 percent of his monthly emolument. Where however, the employer wishes to bear full responsibility of the Scheme, it shall contribute not less than 20 percent of the monthly emoluments of the employee.


Incorporation of the Pension Reform (Amendment) Act 2011 Under Section 5(1) of the PRA 2014, the categories of persons under Section 291 of the 1999 Constitution (as amended) as well as members of the Armed Forces, the intelligence and secret services of the Federation are exempted from the Pension Contributory Scheme. Those mentioned under Section 291 of the Constitution are judicial officers. Under the PRA 2004, only judicial officers were exempted from the Pension Contribution Scheme. However, this was amended by the Pension Reform (Amendment) Act 2011 that included members of the Armed Forces, the intelligence and secret services of the Federation under Section 217 of the Constitution as the expanded category of persons exempted from the Scheme. These have now been incorporated into the PRA 2014 and the administration of their retirement benefits shall be subject to the supervision and regulation of PenCom.


Incorporation of the Universities (Miscellaneous) Provisions Act 2012 – This Act was passed to amend the Universities (Miscellaneous) Provisions Act 1993 by increasing the retirement age of Professors and non-academic staff of Universities, which had formed one of the cardinal demands of the Academic Staff Union of Universities in the protracted conflict between the Federal Government and the Union. Under this Act the retirement age of Professors and non-academic staff were reviewed upwards from 65 to 70 years and 60 to 65 years respectively. This amendment has been incorporated into the PRA 2014 by virtue of Sections 6(2) and 7(1) (d) of the PRA 2014. It also empowered PenCom to issue guidelines to regulate the administration of the retirement benefits of Professors covered by the Universities (Miscellaneous) Provisions Act 2012 as well as political appointees.


Incorporation of the Third Alteration Act to the 1999 Constitution of the Federal Republic of Nigeria – Under the interpretation Section to the PRA 2004, a competent court was defined as ‘the Federal High Court’. However, under the PRA 2014, the scope of the meaning of a “competent court” has been expanded to include the Federal High Court, High Court of the Federal Capital Territory and that of a State as well as the National Industrial Court, thereby given effect to the Third Alteration Act to the Constitution. However, one wonders why the PRA 2014 included the Federal High Court, the High Court of the Federal Capital Territory as well as that of the States when the Third Alteration Act to the Constitution vests exclusive jurisdiction in civil and criminal matters arising from pensions in the National Industrial Court on the basis of Section 254C (1) (k) and (5). This is clearly in violation of the Constitution and should be amended to reflect the exclusive jurisdiction of the National Industrial Court in such matters as it cannot stand in the face of this manifest inconsistency. Note further however, that only the National Industrial Court is mentioned under Section 107 (1) and (2) of the PRA 2014 on arbitration under the Act.


Obligation on employer to open a Retirement Savings Account for an Employee – Under Section 11(5) of the PRA 2014, an employer is under a duty and subject to guidelines issued by PenCom, to request a Pension Fund Administrator to open a nominal Retirement Savings Account where an employee fails to open one within a period of six months after assumption of duty. This was not provided under the PRA 2004. There is however, no sanction under the Act on employers who fail to comply with this provision and so little compliance should be expected.


Reduction of waiting period to access benefits in the event of voluntary retirement or disengagement – Generally, an employee is prohibited from making any withdrawals from his RSA before the attainment of 50 years under Sections 7(1) and 16(1) of the PRA 2014. However, an employee who voluntarily retires or is disengaged from work by reason of total or permanent disability either of the mind or body before attaining 50 years, may with the approval of PenCom make a withdrawal not exceeding 25 percent of the total amount credited to his RSA under Section 7(2). Under the PRA 2004, the waiting period for accessing such funds was not less than 6 months. However, under the PRA 2014, it has been reduced to 4 months of such retirement or cessation of employment and the employee is unable to secure another employment.


The above highlights are certainly not exhaustive of the innovations of the PRA 2014 but reflect some of the changes brought about by its emergence particularly as they affect the employer-employee relationship in Nigeria.



The Impact of the PRA 2014 on Employer / Emplotee Relationship


The PRA 2014 has brought about provisions that if properly implemented would positively affect the retirement fortunes of employees. For instance, the PRA 2014 mandates an employer to open a Retirement Savings Account for an employee where such an employee fails to open one within 6 months of resumption of work.


One question that might pose a challenge is how to ensure that employers of labour especially in the private sector comply with these reforms. In reality, can an employee actually challenge his/her employer for failure to give effect to the provisions of the PRA 2014 especially in this part of the world where an employer wields so much power and having regard to the common law position that presupposes a master-servant relationship? Would such an employee not be scared of the likely consequences of losing his job as he who hires reserves the right to fire and having to litigate over it for several years as is common with the litigation process?


On the part of the employer, is the increase in the percentage of the monthly contribution by the employer not asking too much from an employer? Shouldn’t there be a categorisation of companies? Is it realistic for all companies to contribute the same minimum of 10 percent of the monthly emoluments of the employee especially having regard to the harsh economic environment prevalent in the society? Could this lead to a possible lay-off of some workers by employers of labour in order to meet up with the minimum requirements of the PRA 2014? These pressing questions may not be adequately answered on paper but will likely unfold as time progresses.


However, the consequent impact will be mostly reversed to the employee, as employers are now devising means of cushioning the effects that this legislation may have on their business. For instance, some employers will likely resort to a reduction in the emoluments in the contracts of service of the employee. Meaning that an unsuspecting employee may be subjected to paying the 18 percent of the contribution which ought to be shared between himself and his employer. How will the law deal with this kind of scenario?



The Expected Impact of the PRA 2014 on the Economy



The emergence of the PRA 2014 will no doubt have remarkable impacts on the economy of Nigeria much more than the PRA 2004 which is regarded as the catalyst of the reforms in the pension industry. This expectation is hinged on different factors. One of such will be the increase in the amount of pension funds available since the minimum contributions from the employer and employee have been increased to at least 10 percent and 8 percent respectively.


Only recently, during the World Pension Summit for Africa, the President of Nigeria announced that the pension funds has been strengthened from about 2 trillion Naira deficit as at 2004 to about 4.21 trillion Naira in March 2014. This underscores the reversal of pension debts into assets over a period of about 10 years since the PRA 2004 came into effect.


With better management by the pension managers, higher level of compliance on the part of the private sector in implementing the contributory scheme, fewer cases of misappropriation by those in position of trust as well as better policy management and implementation by those at the hem of affairs, these funds will form a veritable mechanism for national development. As the PRA 2014 provides a leeway for pension funds to be utilised for investments that will fast track national development.


As sad as it may sound, as at July 24, 2014, the number of companies issued with Certificate of Compliance with the PRA 2004 by PenCom stands at just 1,103 employers with the vast majority of these employers having an employee base of 10 and below. Assuming this negative trend is reversed by the participation of more companies in the pension scheme, one can imagine the amount of funds that can be garnered from the pension sector and utilised for other areas of development. Equally, there would be more assurance of benefits upon retirement.





As stated previously in this piece, pensions revolve around the retirement benefits of an employee. The PRA 2014 no doubt makes many concessions for employees as they form the basis of pension.  However, the main issue that the PenCom and other regulatory bodies will need to focus on is the effective and efficient enforcement of the reforms. This is because the PRA 2014 will be a colossal waste of legislative and precious time if its provisions cannot be effectively implemented especially in the private sector.






by David Okorogba



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