CHAPTER ONE

1.1

INTRODUCTION
Pension systems are under increasing strain in a developing country like
Nigeria. Most employees neither have any meaningful retirement benefits
nor earn enough during their working life to cater for their retirement. The
extended family system and other traditional ways of supporting the old are
already weakened under the pressure of urbanization, industrialization and
increased mobility or westernization.
Prior to the enactment of the Pension Reform Act 2004, pension schemes in
Nigeria had been bedeviled by many problems. The public service operated
an unfounded defined benefits scheme and the payment of retirement
benefits were budgetary allocation for pension was offer one of the most
vulnerable items in budget implementation in the high of resource
constraints. In many cases, everywhere budgetary provisions were made,
inadequate and untimely release of funds resulted in delays and
accumulation of arrears of payment of pension right. It was obvious
therefore that, the defined benefits scheme could not be sustained (Pencom,
2007).

In the private sector on the other hand, many employees were not covered by
the pension scheme put in place their employers and many of these schemes
were not funded, the management of the pension fund was full of
malpractices and manipulation between the fund managers and the trustees
of the pension funds (Pencom, 2007).
This scenario necessitated a re-think of pension administration in Nigeria
accordingly, the pension reform was initiated in order to address and
eliminate the problems associated with pension schemes in the country. The
outcome of the reform was the enactment into law of the Pension Reform
Act 2004. (Pencom 2009).
The Pension Reform Act 2004 established the National Pension Commission
(PENCOM) as the body to regulate, supervise and ensure the effective
administration of pension matters in Nigeria. It licenses, regulates, and
supervises pension operations include Pension Fund Administration (PFAs)
Pension Fund Custodians, (PFCs), Closed Pension Fund Administrators,
existing schemes that are approved to continue by the Commissions.
(Economic Confidential, Dec. 2007)
National Pension Commission is also charged with the responsibility to
provide regulatory framework and guidelines for efficient management of
pension funds in Nigeria. (Pension, 2009).
2

This study give an insight to the new Pension Act 2004 and also look at the
Chilean-type pension reform adopted by the Nigerian policy makers to see
whether it would be suitable for the Nigerian economy. The study also looks
at the roles of the key players in the new pension reform and assesses their
contribution towards the development to the pension industry. Lastly, the
study will provide an alternative approach to the new pension system in
Nigeria.
The new pension reform is one numerous reform pushed through by the
Obasanjo administration to reduce government expenditure on the social
welfare of the populace. The philosophy here is to allow the government to
shelve a major social responsibility of catering for its workforce after
retirement in the form of gratuity and pension payments.
1.2

OBJECTIVES OF THE STUDY

The objectives of this study are to:
1.

Enumerate the impact of the new pension reform in Nigeria since

2004 to date (2010) on the pension fund administration. In this case, a
fragmented pension system was replaced by a mandatory private

2.

funded pension system.

Highlight the implementation efforts and challenges of the new
pension reform from the year 2004 to date (2010).

3.

Assess the new reformed pension system in terms of its contribution

4.

to the economic development of Nigeria.

Examine the reasons why reform was seen as essential, the way in
which it was carried through, and the manner of operation of the new

5.

system in terms of both coverage and entitlements and of regulation.

Develop and increase awareness of the importance of pension reform

6.

to the pension administration in national development.

Discuss the current or likely problems of pension administration and
suggest or proffer solution to the problems.

1.3

STATEMENT OF THE RESEARCH QUESTIONS

The researcher developed some questions for the purpose of a focused work
to serve as a guide to the source of this project work and it is expected this
project should proffer answers to these questions at the end of this work. The
questions are listed below:
1) What impact has the 2004 pension reform on the Nigerias public
service?
2) What is the nature of pension administration policy in Nigeria prior to the
2004 pension reform?
3) How was the problem affecting pension administration prior to the
pension reform in Nigeria?
4) What are the roles of the pension reform in promoting the social welfare
of the pensioners?

5) What is the impact of the 2004 pension reform on pension administration

in Nigeria?
1.4

SIGNIFICANCE OF THE STUDY

The importance or benefits to be gained in respect to this research cannot be
overemphasized. The research would be relevant to the stakeholders in the
pension industry.
The research would also serve as reference point for future research to
managers, supervisors, students, and administrators. That might at one point
or the other confronted with pension related problems.
Pension reform is one of the major pillars of the ongoing reform in the
Nigerian economic landscape. The philosophy and objectives of the
economic reform that gave both to the new pension scheme are widely
acclaimed and accepted (Pencom, 2007). Study figured out that the Nigerian
policy makers were of the view that if a Chilean type pension system could
be established in the in their country, Nigeria would enjoy the same benefits
that in their eyes the 1981 reform has brought to Chile. (Issa, 2006). The
policy makers are extra careful considering the fact that Nigeria is known
for its low scoring measures of sound administration. Even by 2005 there
were only five countries placed lower than Nigeria out of the 158 rated by

transparency international (www.tranparency.org). Whilst it was scarcely

above

sixth

percentile

on

the

world

institute

(www.worldbank.org/wbi/governance) rating of countries worth respect to

control of corruption and only in the sixteenth percentile with respect to
regulatory quality. The issue of Nigerian pension highlights the crucial
role regulatory capacity. So for, Nigeria is the only country on the African
continent to pursue the project suffers therefore from two difficulties at the
same time. First, the reform would demand a rapid expansion of the scope
and quality of Nigerian regulatory, which even if forth coming, would still
leave question marks behind the purpose of the reform. Second, Nigeria tries
to follow the Chilean example at a moment in time when the original
model is about to be substantially reformed by the current Chilean
government (Issa, 2006).
1.5

SCOPE OF THE STUDY

The scope of this study covers manly the pension matters as regard to the
new pension reform since 2004 to 2010 in Nigeria it tries to assess the
impact of the reform on the administration and supervision of both the
pension fund contribution and the key players in the pension industry.
The study also provides on alternative approach as regards to the pension
scheme, should the new scheme failed.
6

1.6

PLAN OF THE STUDY

The main aim of this work is to make assessment on the impact of the
reformed pension scheme since 2004 to 2010.
Chapter one of the work is an introduction to the problem to research on.
Chapter two of the work describes the current reform and tries to provide an
alternative approach should the new reformed scheme failed. Chapter four of
the work shows the presentation and analysis of data collected and the
chapter give recommendations.
DEFINITION OF TERMS
Words are capable of having more than one meaning. Thus they can only be
explained from the context in which they are used. Therefore in this study
the under mentioned will be defined and channeled the context and purpose
by which they are meant for may be outside literal meaning.
PENSION:- It is a form of deferred compensation of a workers , a
retirement plan to provide and secure income for old age. Or is the fixed
periodical sum of money paid in consideration of past services. That is to
one who retired from workforce. Udeze (2006).
REFORM:-

Means

to make something by correcting or making

improvements ( Oxford Advanced Leaners Dictionary, Sixth Edition ). A

7

reform is an improvement made upon a system or changes made or

improvement (Wowo, 2004).
PENSION REFORM ACT:- It is an act meant ensure that employees
whenever they retire from service have something ever they retire from
service have something to fall back on. It ensure that every employee
receives his or her retirement benefits as at when due. So the whole thing is
it ensures that when you and I retire, we dont need rely on extended family
system or our employers (Pencom 2006).
PENCOM:- Pencom simply refers to national pension commission (NPC)
it is a new organization established as part of the pension reform of the
government, it is supposed to be a supervisory and regulatory agency for the
pension industry. (Ahmad, 2006). And it also approves licenses and
supervises PFA, PFC and other institutions relating to pension matters. In
other words, it supervises and regulates all pension matters in Nigeria.
Pencom also maintain National Data Bank on pension matters as well as
receives and investigates complaints PFA, PFC and the employers
FULLY FUNDED:- Where funds and assets match pension liabilities at any
given time, a fully funded scheme is said to have been existed (Penman
Pension, 2006).

NEW PENSION SCHEME:- The new pension scheme is a contributory,

fully funded, privately managed scheme with third party custody of the
pension fund assets based on retirement savings account for every
contributor (Penman Pension, 2006).
PENSION FUND ADMINISTRATORS (PFA):- PFAs are limited liability
companies registered by the National Pension Commission (NPC), set up
purposely to manage pension contributions. Or it is a company licensed by
Pencom to keep pension funds and assets on the RSAs on trust for the
employees on behalf of the PFA (Penman Pension, 2006). They will have a
minimum paid up capital of N150 million. Each employee will choose their
PFA, and be allowed to effect a change of provider once a year. Each PFA
will appoint a custodian (PFC) i.e. pension fund custodian e.g. Penman
Pension, Sigma Pension, APT pension etc

PENSION FIND CUSTODIAN (PFC)

Based on wrong and non-maximization of previous pension schemes, the
new pension reform separate the pension administration of pension fund and
assets. This it does by the establishment of Pension Fund Custodians (PFCs)
who must be licensed by the Pension Commission (Pencom). Custodians

will be licensed financial institution registered under the company Act. They
will have a minimum worth of N5billion.
RETIREMENT:- Retirement is a cessation of service after serving for a
period of not less than five (5) years from September 1991 or thereafter for a
period of not less than ten (10) years period respectively appointed as
qualifying an officer for gratuity and pension respectively.
CLOSED PENSION FUND ADMINISTRATORS (CPFA):- Any
employer managing its pension scheme existing before the enactment of the
Pension Reform Act 2004 May, subject to certain conditions, apply to
Pencom to be registered as a (CPFA). (Penman Pension, 2006).
PROGRAMMED WITHDRAWAL: Is a method by which the employee
collects his retirement benefits in periodic sum spread throughout an
estimated life span (Penman Pension, 2006).
ANNUITY: - An annuity is an income purchased from approved life
insurance companies which provide monthly or quarterly income to the
retiree during his/her lifetime. (Penman Pension, 2006)
GRATUITY:- This is the money that is given to an employee one when
he/she retires or leaves his/her job. The rule is that any retiree from office is

10

entitled to at least one year of his/her last salary id he/she has served for at
least 5 or 10 years as the case may be.

11

CHAPTER TWO
LITERATURE REVIEW
2.1

INTRODUCTION
This chapter looks into an overview of the pension industry: meaning of
pension and its nature, pension reform in Nigeria, reasons for the reform,
pension administration in Nigeria before and after the Pension Act, reform
methodology, objectives of the reform, regulation of the new system, the
impact of the Pension reform on capital market, implementation efforts and
challenges and problems and prospects of the new Pension Act.

2.2

MEANING AND NATURE OF PENSION

The subject of pension has increasingly become a very emotive issue all
over the world; the increased public interest in pension maters has been
stimulated not only by the forces of globalization but also by domestic
socio-economic factors. Increased worker education and the phenomenal
development in information and communication technology (ICT) have also
contributed to putting issues of retirement and quality of life after retirement
on the front burner. The poor condition of our pensioners has often propelled
most concerned Nigerians in to pensive mood and had been said about the
plights of pensioners (Udeze, 2006).
12

Udeze (2006) it is a form of deferred compensation of a worker, a

retirement plan to provide and secure income for old age.
Holzmann (2005), a pension is a stipend provided for an elderly or
disabled military veteran or to his widow or children, upon proof of military
service.
Pension could also be defined as a regular payment which is to be given to
an employee by an employer which could be in the public or private sector,
this payment would be made the employee when he retires and becomes not
as productive as he used to be, till the day he dies. Pension provides people
with a source of income in their old age (Fashola, 1999).
Pension is a private or government fund (or payments there from), from
which intermittent and regular benefits or allowances are paid to a person
upon his or her retirement or disability.
Benefits are deferred to the retirement or disability of the employee and are
generally payable thereafter to the persons death. In many public or private
employment based Pension plans, the employer regularly contributes a small
percentage of an employers earnings to an individual plan accounts that is
set up in the employees names. Employee contributions if any are also
credited to the pension account. Sometimes, pensions are only payable as of

13

a certain age, such as 55, 60 or 65 or upon the attainment of a certain length

of service, such as 30 years of service.
The government (the state) often provides a gamut of Pensions, some to
supplement probate retirement pensions others to provide the disabled with
an allowance.
In Molleur VMNR (1965), Justice Domoulon of the Excheque court of
Canada wrote that: Pension allowances or stipends presuppose the
retirement or cessation of the pensioners services, as no one draws from the
same employer both a salary and superannuation installments.
He further adopted these words to define a pension, ..an annuity or
other periodical payment made, especially by a government, a company, or
an employer of labour, in consideration of past services or of the
relinquishment of rights, claims or emoluments.. Pensions are
universally construed as a reward for long continued service paid upon their
retirement. A pension is a stated allowance or stipend made in
consideration of past services or of surrender of rights or emoluments to one
retired from services, and is not wages as wages are defined as remuneration
of employment. (Mueller V. Minister of National Revenue 1965 CTC 267).

14

Wolson (1990), of the supreme court of Canada remarked, in Clarke V.

Clarke that Pension is a colloquial term rather than a term of art. But ten
years later, that same court in Boston V. Boston justice major for the court,
defined it as follows: A pension right arises as an asset or a contingent
bundle of rights to a future income stream. After retirement, when the
pension produces an income, the pension asset is in a sense, being
liquidated (Clarke V. Clarke 19902 Supreme court reports 795 and Boston
V. Boston 2001 SCC43).
The British Columbia pension benefits standard Act (1865), (using wording
very similar to the Alberta legislation), defines a pension as: a series of
payments that continue for the life of a former member, whether or not the
pension is afterward continued to another person.
Udeze (2006), it is a form of deferred compensation of a worker, a
retirement plan to provide and secure income for old age. According to
James (2001), it means a society, fund, contract or scheme the assets of
which are held under irrevocable trust and any scheme established by a law
in Nigeria or elsewhere, the main objects of which are, in the opinion of the
board, the provision of non assignable and non commutable retirement
pensions or annuities for an individual or his death, or for any group or class

15

of individuals and their dependents. Generally, pensions are matrimonial

assets.
However, not everybody needs or has access to pension. Some may have the
foresight, investment skills and discipline necessary to provide adequately
for their own retirement. Others may have access to strong family and
community supports that ensure security in their old age while many may
never earn money to provide for their future. Pension saving has nonetheless
provided to be a useful social innovation. Societies with well functioning
pension systems enjoy some advantage over those without. Pension serves to
provide people with a secured source in old age. Without pension saving
savings, it could be more difficult to finance long-term projects. More
reliance on external debt might be necessary. It might also be difficult to
issue and sell stocks and bonds. Without watchful monitoring of pensionfund managers, corporate management might be more extravagant (Leecher,
1996:2).
2.3

PENSION

REFORM

ACT

IN

NIGERIA

(HISTORICAL

BACKGROUND)
The first pension administration started during the colonial period the
colonial officers provided employment for the people it became apparent
that they make provision for their after service or old age, care for the
16

workers and their widows. Labour activist Michael Imoudu and other
officers in the 40s contributed to its development and contributed
immensely to the decision of the British colonial officers to the extent the
payment of retirement benefits to indigenous staff who met the criteria
stipulated by the colonial administration.
The first pension legislation in Nigeria was the 1951 pensions ordinance
(Pension Act 1951), the ordinance provided for ex-gratia payment of
pension whereby pensions or gratuities were awarded by the colonial
administration as its sole discretion as reward for long and faithful service.
When the laws of Nigeria were codified in 1958, the Act became known as
then Pension Act Cap 147 of the laws of Nigeria 1958. Other pension
Acts/Rules (1958-1974) include the following:
a. Non-government certified teachers superannuation scheme rubs (1968).
b. Standard discretions for the grant of retiring benefits to native authority
staff for local government servants in Northern Nigeria.
c. Uncertified teachers superannuation scheme rules (1973).
d. Circular No. 5/1973, Federal ministry of establishment for nonpensionable public servants

PRIVATE SECTOR

17

Most of the private sector plans were developed in the early 70s long after
the public services scheme, although some of them were successors to
former plans. They are three types of private sector plan in Nigeria which
are non insured private provident fund, insured provident fund and defined
contribution plans, but the contribution in this case are accumulated in
funds. The second type that is insured is very common and it is a defined
contribution plan where the contribution are used to purchase insurance
companies while the defined benefit plans operated by a small percentage of
private sector employees.
National Provident Act 1961
The National Provident Fund (NPF) is known as the National, social
insurance trust fund. It was established in 1961 by the act of parliament the
National Provident Act, 1961 by the act of parliament the National Provident
fund. Membership of the fund is compulsory for employers not covered by
the public service pension scheme. It is a compulsory scheme whereby the
employers and the employees contribute equally to the fund at the rate of 5%
of an employees salaries; it was later increased but was kicked against by
organized labour so it was reverted.

18

The National Provident Act 1961 before its metamorphosis into NSITF has
undergone some revisions through the major provisions have not been
revised. The following legislation are relevant;
a.
b.
c.
d.
e.
f.
g.

National Provident Fund (Gen.) Regulations, 1961

National Provident Fund (Seaman) Regulations 1962
National Provident Fund Act 1964
National Provident Fund (amendment) Decree 1967
National Provident Fund (amendment) Decree 1972
National Provident Fund (amendment) Decree 1976
National Provident Fund (amendment) Decree 1978

THE UDOJI PENSION REFORM

The public service review widely known as Udoji commission examined the
pension system of Nigeria through a comprehensive work made some
recommendations with respect to pension schemes in the public service
under the following principles:
a. Payment of pensions or gratuity shall be seen as deferred pay and the
vesting of pension rights in employee
b. Payment of pension and gratuity shall be charged on and paid out of the
money voted for the purpose by the government.
c. All public sector schemes should be modified to promote mobility of
labour within the public service.
d. All persons who come within the umbrella of the pension Act circular
standard director and rules should be eligible for the same retirement
benefits.

19

e. The private sector companies should continue to run their individual

pension scheme.
f. The strengthening and recognition of the national provident fund as a
continuous body to carry out its responsibilities.
g. Whenever new salary scales are approved, there should be corresponding
change in retirement benefits.
h. Finally, he suggested a long term national plan are a goal towards which
the nation should move as resources and capabilities allow.
THE PENSION ACT NO 102 OF 1979
The acceptance and implementation by government of the recommendation
of Udoji commission constituted the first major reform of public service
pension schemes in Nigeria. Circular 6/1975 under the title The New
Pension Scheme and the comprehensive administration rules attached to it
gave effect to the reform measures. These rules became the drafting
instructions for the promulgation of the pensions act no 102 of 1979
(Pension Act Cap. 346 of the laws of the federation of Nigeria. 1990) with a
commencement date of 1st April, 1974 as approved by government in the
white paper on the Udoji report. The Act consolidated all enactments and
circulars on pension in force prior to the promulgation of the law and
incorporated the gravity and pension scales devised by commission for
public officers.

20

POST-UDOJI REFORMS
After the Udoji reforms most of the original provisions in the Pensions Act
no 102 of 1979 were amended mainly through administrative circulars.
Between 1st September 1979 when the Act was signed into law by the then
Head of the Federal Ministry Government (General Olusegun Obasanjo) and
December 2003, the pensions officer which has also undergone several
institutional changes issued 84 administrative circulars amending many
provisions in the Act in exercise of the power vested in the Executive, Head
of the office (currently the head of the civil service of the Federation). About
76 of these circulars deal with review of pension rates, computation of
benefits and related issues. Notwithstanding the many amendments which
have been effected through circulars, some major features of the Pension Act
1979 have remained unchanged like the defined benefit and noncontributory pay-as-you-go-system: the eligibility provisions, the continuity
of service and presentation of pension rights through the mechanism of
coordination of break in service and merger of service and finally the vesting
of pension rights in the employee.
On the other hand, through administrative circulars in the Act were amended
in response to changing socio-economic and political circumstances. Some
of them include the following:

21

a. Mandatory retirement at the age of 60 years of 35 years of service

whichever is earlier affected through the civil service. Decree No 43 of
1988
b. Minimum and maximum age for entry into service now stand at 16 and
50 years respectively (Public Service Rules 2000).
c. The decision of Government to reduce qualifying service for gratuity to
five (5) years and pension to 10 years (1002).
d. Circular No 13, 49951/3. 4/vi/337 of 21st August, 1985 decentralized the
payment of gratuities. Extra-ministerial department is expected to apply
to the establishments and pensions office for funds to settle the gratuities
of its retiring staff.
A technical committee on the review of the civil service pension scheme
with Ajibola Ogunshola as chairman was set up with members drawn from
private and public sector pension professionals. Nigeria Labour Congress
(NLC) and the Nigeria Employers Consultative Association (NECA), they
enjoyed consultation and technical assistance from the international labour
organization and the British Government. The committee was required to
undertake a comprehensive review of the Civil Service Pension Scheme and
make appropriate recommendation.
THE NEW PENSION REFORM ACT 2004

22

The pension program in Nigeria started when the 1979 constitutional

privilege of being a first charge on the consolidated revenue of the
federation was reversed by the 1999 constitution; pension expenditure had to
compete with other expenditures charged on the consolidated revenue of the
federation. Since then pension office experienced under-funding leading to
mounting pension liabilities. When the situation was becoming precarious,
in 2007 pensions and records department office of the Head of Civil Service
of the Federation convened a stockholders workshop at the International
Conference Centre (ICC), Abuja.
At the end of the workshop, the following resolutions and recommendations
were made as follows (Alh. Wowo, 2004).
a. To narrow the gap of pension benefit between the public and private
sectors, government should direct the appropriate government body to
work out a realistic and comparable loving wage that will stimulate
meaningful contribution to the pension scheme.
b. Adoption of the principle of contributory scheme for the entire public
service, contribution by civil servants should take their earnings into
consideration.
c. All existing laws on pension matters should be reviewed and harmonized.
d. There should be an established regulatory body for both private and
public service pension.

23

e. Others were also made and finally a follow-up committee should be set
up to prepare a draft blue print on the new pension policy.
The new system which replaces the old non-contributory pay as you go
system that solely depended on government budgetary allocations has the
specific objectives of ending the problems associated with the old system
such as failure pensioners their dues at all, paying them late or in bits that
could not provide minimum material comfort to the aged citizens who toiled
for Nigeria for decades. The main feature of the contributory pension
scheme includes the followings:
a. The Act provides uniform regulations for both the public and private
b.
c.
d.
e.
f.

sectors.
The scheme is contributory.
Each participant has private savings accounts which is portable.
Pension assets are to be privately managed.
The administrators of the fund are different from its custodians.
The pension Act provides strict sanctions for violation of its regulation by

operators of the system.

g. The Act establishes the National Pension Commission (PENCOM) as the
overall supervisors of the scheme.
h. The Act repeats that of 1990 and establishes a mandatory pension scheme
for employees in both the public and private sectors in Nigeria and
employer and the employee shall contribute to fund retirement benefits
(Alh. Wowo, 2004).

24

The bill also provides for the establishment of the National Pension
Committee which is charged with the responsibility of ensuring that the
provisions of the National Pension Act achieve their objectives.
The reform further provided for a defined contribution arrangement unlike
the defined benefits system, which the NSITF has been operating. The
implication of the reform on the NSITF can be summarized thus: The NSITF
Act 1993 was amended to bring the fund fully under the audit of the new
law, the funds contributed to the NSITF by any person before the
commencement of this Act together with attributable thereof are not required
for the purpose of administration minimum pension as determined by the
National Pension Commission (PENCOM) shall be computed and credited
to into the retirement savings account to be opened by the NSITF for each
contributor. However, any contributor or beneficiary under the NSITF Act
shall at least 5 after the commencement of the Act, select pension fund
administrator of his choice for the management of the pension fund standing
to his credit. Where any person who contributed under the NSITF Act has
retired before the commencement of this Act, the fund due to him shall be
paid to him shall be paid to him in accordance with the rules and regulations
of the pension commission or section 4 of this Act. The NSITF shifts from
defined contribution.

25

2.4

THE REASONS FOR THE REFORM

In Nigeria, there were many pension schemes (Pension subcommittee, 1997;
see also IMF, 2005a). It was not until after independence in 1960 that the
first national scheme was introduced in Nigeria. It was developed out of the
provident fund scheme that had operated for the colonial civil service and
like it, took the form of a severance payment scheme, paying a lump-sum on
retirement. It was not until 1994 that a scheme the national social
insurance trust fund (NSITF) that paid out an annuity was established.
The NSITF catered only for private sector workers. It was complimented
and indeed overshadowed by the various schemes for federal public
servants, police and security services and for the military. At the same time,
each of the 36 federal states, plus the capital territory, had a pension system
for its public employees, as did each of the 774 local government authorities
operating beneath these. In addition, each of a multitude of publicly owned
federal or state enterprises (often referred to as parastatals) had its own
pension scheme.
Whilst the retirement age was normally 65, federal civil servants were able
to retire on a full pension if they had completed 35 years of service, as were
military personnel, if they had completed 10 years. Moreover, although, the
maximum pension under the NSITF scheme was fixed at 65 percent of last
26

salary, for federal civil servants it was fixed at 65 percent of last salary, for
federal civil servants it was fixed at 80 percent. Last pensions of federal civil
servants were supposedly adjusted in line with civil service salaries. By
contrast, there was no provision for indexing in the legislation covering the
NSITF scheme.
An even more important difference between the various Nigerian scheme
was their financing. He pension schemes for federal, state and local civil
servants were non-contributory and unfunded. The NSITF scheme operated
effectively on a PAYGO basis, being financed by employee and employer
contributions. The pension schemes for parastatals were non-contributory
but they were at least normally funded.
Private sector firms could establish their own occupational benefit schemes
and these provided both pension and severance payments. These might or
might not be contributory and might or might not be funded. How
widespread these occupational schemes were is unclear. Many were small.
Those that were funded and thus eligible for tax privileges covered only a
few thousand employees (Pension Subcommittee, 1997).
In Nigeria, some 90 percent of those who work are reckoned to be in the
informal labour market, moreover, of private sector workers, only those in
establishments with at least five employees were obligatorily insured.
27

However, issue of compliance and disincentives to love or to supply labour

were not pointed to in Nigeria, largely because most of the schemes were
non-contributory. However, the privileges of civil servants were made
mentioned so that the reform was also intended to make the system
equitable (IMF, 2005; p66). On top of this, the various parts of the system
were seen as inefficient. The occupational pension schemes run by the
parastatals were largely unregulated and unsupervised (Milliman, 2002). The
NSITF had no proper information technology and many records were merely
on paper (Pension Subcommittee, 1997; IUF, 2005a). Administrative costs
were high consuming over three quarters at the start of the century. There
were suggestions that the pension records of some parts of the civil service,
the military and the parastatals were padded with ghost pensioners, but
it was also recognized that pensions for former federal and state employees
often went unpaid (see many reports in www.globalafing.org). Estimates to
the extent of arrears to former federal employees (including those from the
military and from federal parastatals) have been put in the order of two to
three percent of GDP, whilst arrears for state and local government
pensioners cannot even be quantified (IMF, 2005a).
2.5

PENSION ADMINISTRATION IN NIGERIA BEFORE AND AFTER

THE NEW PENSION REFORM ACT

28

The research first discusses pension administration in Nigeria before the

coming of the new pension reform. The pension scheme then was based
upon the defined benefit structure plan by which the quantum of entitlement
payable to a retiree is a percentage of his length of service and terminal
income. The scheme was funded on the Pay-As-You-Go (PAYGO) basis; no
fund is set apart for meeting contingent liability for employees retirement
benefit; rather fund is taken from the consolidated revenue fund accounts as
the liabilities fall due. Retirees benefits are guaranteed by the constitutional
provision which grants that pension liability shall be the first charge to the
revenue. The scheme is non-contributory as employees do not contribute to
his funding: government, the employer bears full liability (Fashola 1999).
The federal government of Nigeria took interest in pension scheme and
enacted the pension ordinance of 1951, which had retrospective effect to
1946, later the decree No 102 of 1979, which gave the federal government
the sole responsibility for pension matter in the whole federation. The
federal government provides 100% of the fund to operate them: public
servants do not contribute towards the pensions. Annual budgetary
provisions were made to pay retirees as they disengage from work, the
assumption is that government will always have to meet retirement benefit
liabilities.

29

Before the coming of the new pension reform, government parastatals

usually used the pension insured scheme and self-administered scheme. The
board of trustees was recognized in law to be the most reliable body to
manage the pension scheme and its funds, the confidence reposed in the
board is not placed if one considers the fact that members of the board are
both the owners of the scheme and the beneficiaries and therefore better
placed to manage their assets. This fact was taken in to consideration in
constituting the membership of the board as approved by the standard trust
deed. That was why political office holders and other categories of public
office holders who do not hold permanent and pensionable appointment
were excluded. The implications of placing overall responsibilities for
managing the scheme on the board are that it has to approve all pension
matters.
Financial management and payment of pensions in the public service is
practical, the ministry of finance gives funds to ministries and extraministerial departments for disbursement. The permanent secretary as the
accounting officer in each ministry is charged with the responsibility of
supervising the funds, though he can delegate the responsibility to whoever
he wishes (Adeleye, 1999).
PAYMENT OF GUARANTEED PENSION

30

Before the present reform of pension, government guarantee payment of

pension for five (5) years; this means that the pensioner will be paid his/her
pension for a period of five years without being physically present. After the
fifth anniversary of retirement, the pensioner is expected to be present
physically to show that he/she is still alive.
The pensioners are required to fill a life certificate form. Where an officer
dies within the officer dies within five years of retirement, the survivor/legal
representative shall be paid the balance of the five years pension on the
submission of a death certificate.
VERIFICATION OF PENSIONS
In order to ensure that only genuine pensioners are paid pensions, it is
desirable to conduct verification exercises of pensioners at interval to ensure
that they are the rightful owners of pensions received by them. The exercise
allows the fund manager to determine those pensioners who have died but
the relations have not reported their death and those who have fake
documents and received pension processes for the payment of retirement
benefits.
In the civil service, (federal, state and local government) the payment of
gratuities precede the payment of pensions. The documents and records

31

submitted or payments are usually the same. However, in parastatals and

quasi-government departments where there were pension schemes
established for the payment of retirement benefit, the payments of pension
and gratuities used to be done simultaneously depending on the availability
of funds. This allows for quicker processing and possibly accurate payment.
Whereas the slow and cumbersome process in the civil service, the process
of an officers retirement benefit starts when the officer gives notice of his
intention to retire from the service.
PAYMENT OF GRATUITIES
The office of the head of service of the federation was charged with the
payment of gratuities. This was decentralized to federal ministries in 1986 to
ensure early and fast processing of documents for the payment of gratuities
of their officers before payment of pensions by the officer of head of service
of the federation. Ministries were requested to apply for the release of A.I.E
and support such request with a properly designed performance containing
the names of the retiring officers and certain information about their records
while in service. Each ministry is recognized to forward a request letter in
which it will seek for the release of funds to enable it pay the gratuities of its
retiring officers. A profoma is attached to each request which contains the
following information; Name of referee, date of birth, date of first

32

appointment, salary grade level, length of service, estimated gratuity

payable, terminal salary etc.
The funds officer examines the data provided in respect of each retiring
officer, calculations, recalculations and corrections are made, at the end the
correct amount due to each retiree is confirmed. To qualify for the payment
of gratuity, the retiree must be alive, and must have his/her appointment
regularized or formalized. He/she must not be less than 15 years old or more
than 45 years old on entry into the service.
PAYMENT OF GRATUITIES IN THE STATE
In the states, the process and procedures for the payment of gratuities differs
from that of the federal government. When officers apply for retirement,
their applications are sent to the Bureau of establishment and pensions or the
pension board for computation of their benefits. The files and documents are
then sent to the office of the Auditor-General for the state audition.
The audited documents are returned to the Bureau of establishments for
recommendation to the Accountant General of the state, in which he
determines the pay point and raises voucher to the sub-treasure in charge of
the pay point.
PAYEMENT OF GRATUITIES IN THE LOCAL GOVERNMENT

33

The local government pension board was responsible for the payment of
retirement i.e. gratuities and pensions of local government retirees. On
receipt of the application for retirement from an officer, the board computes
the benefit due to each officer and sends it to the office of the Auditor
General for the local government auditing. The audited documents are
returned to the local government pensions before their payments are sent to
the local governments selected by the retirees for the receipt of their monthly
pensions.
PAYMENT OF GRATUITIES IN THE PARASTATALS
The pension scheme in the parastatals are funded and therefore the mode and
procedures of payment differ from the civil service even though payments
are made in accordance with the provisions of the Trust Deeds and rules,
which in most cases are replica of pensions, Decree 102 of 1997. On receipt
of an officers application for retirement from the service, the personnel
department processes the officers document for retirement and forwards it
to the secretary of the Board of Trustees of the institution. The secretary
thereafter prepares a schedule of all benefits and presents it to the Board of
Trustees at the next board meeting for consideration. After consideration, the
documents are sent to the insurer in charge of pension scheme who would

34

verify the data and send a cheque covering the payments to the Board of
Trustees for disbursement to the retirees.
COMPUTATION OF RETIREMENT BENEFITS
Computation of retirement benefits of a retiring officer is worked out based
on the length of pensionable service, basic salary and all allowances
enumerated in circular ref. B. 63216/S.I/x/168 of 13th, September 1991 and
the subsequent amendment. In computing an officers benefits, it must be
determined from the records available in the retirees files that he prima-facie
qualified for gratuity and pension. The following are the circumstances
under which a retiree qualifies for retirement benefits:1. On voluntary retirement after a qualifying service year of 10 years.
2. On compulsory retirement for the purpose of facilitating improvement
in the organization of an officers department or ministry so that
greater efficiency or economy can be effected.
3. On compulsory retirement in accordance with Section A of the
Pension Decree 102 of 1979.
4. On the advice of a properly constituted medical board certifying that
the officer is no longer mentally or physically capable of carrying out
the functions of his office.
5. On total or permanent disablement while in service.
6. On abolition of his office under Section 7 of the decree.
7. If the civil service commission of the federation requires him to retire
on grounds that his retirement is in public interest.
35

8. To take up appointment in a local government or as a member or head

therefore with the prior consent of the ministry of the establishment.
Payment of pensions shall not commence until the officer attains the age of
45 years; however, for officers who are compulsorily retired or whose
appointment are terminated or whose offices are abolished, the pension shall
be paid at their exit from service. Computation of retirement/terminal
benefits is very vital both to the officer and the government in that it is the
point which the officers benefits are measured in monetary terms.
The pension administration division provides data on the retiring officers
names, service, total emoluments, salary procession, indebtedness and
gratuity, if already paid. The data are provided in a profoma; retirees
establishment files are sent to the computation officer to determine in terms
of naira and kobo how much the retiring/deceased/terminated/missing
officer entitle to receive as gratuities and pensions.
PAYEMENT

OF

RETIREMENT

BENEFIT

TO

DECEASED

OFFICER
Pension can also be paid to the next-of-kin, dependant/legal representatives
of any person named as survivor of a deceased officer under the following
circumstances:-

36

Where officer dies in service after completing the minimum qualifying

service, pension are gratuity are paid to his as if he has retired on the date of
his death. He shall be paid 5 years pensions and gratuity.
However, where an officer dies in the actual performance of his duties and
without his fault, his next-of-kin shall be paid additional pension. Apart from
the benefit at the first circumstance above, the pensions are paid to his
widow(s) for life as long as she remains unmarried and of good faith.
Pension payable to his widow is one-third of the deceased officers accrued
pension as at the date of his death shall be paid to a minimum of six (6)
children.
The pension shall be paid to the children until each of them attains the age of
18years or in case of female children the time of marriage or attaining the
age of 18. Where a deceased officer does not qualify for pension by virtue of
the length of service, the dependent shall be entitled to pro-rata pension
calculated at the rate of 2% per annum of the pensionable service based on
the deceased officers total emolument. In the case of a missing officer that
is not found within a year and it is reasonable to presume that the officer has
died, his benefit are paid to his next-of-kin or survivors. The benefits are
paid as if the officer retired on the date he was declared missing.

37

PAYEMENT OF PENSION: NOTIFICATION OF THE DEATH OF A

PENSIONER
As soon as a report is received of the demise of an officer, steps should be
taken to stop further payments of salaries and allowances to the deceased
officer, this will reduce the indebtedness to the government. The family of
the deceased officer should be requested to submit a stamped death
certificate at a convenient time for processing of his benefits. Where a death
certificate was not issued at the time of death, affidavit sworn by a legal
recorded next-of-kin or a declaration by a very senior civil servant, legal
practitioner, clergyman or imam to the effect that he saw the corpse and
witnessed the burial will serve as an alternative.
The failure of this particular scheme to make the desired impact may be due
to a combination of two (2) factors. Inadequate funding and poor
management (Ebegbuna, 1999), for instance, without adequate funding,
there will be no surplus invested also the limited fund may not be enough to
pay all pensioners. One noticeable problem in the management of this
pension scheme was poor record keeping which did not only raise the
expected funding level to alarming proportions but also slowed down or
make payments of retirement benefits impossible. Up-to-date most states
have not paid gratuities to their retirees since 1992. This scheme was a

38

failure because it was not able to provide employment with a means of

securing on retirement standard of living which is responsibly constant with
what they enjoyed while in service. Other factors that led to the failure of
this scheme includes: corruption, irregular payment to pensioners, bad
leadership, the problems of ghost workers and mass retirement of employees
who became entitled to pension administration, diversion of allocation for
pension and the burden of payment rested solely on government (C.
Nnamdi, 1997).
PRIVATE SECTOR
In the case of the private sector, the NSITF, served as a provider of social
security to employees in the private sector. It was formally known as the
NPF (National Provident Funds) which was established in 1952 and on June
1994 it was changed to the Nigeria Social Insurance Trust Fund (NSITF).
During the era of NPF it registered 20,410 employees and when it was
changed to NSITF, members increased to 2,839,163 increased by 1,430,385.
The end product of any pension scheme is payment of benefits to members
and the fund has fared well in discharging its responsibilities. Unlike the
NPF scheme which was merely savings scheme that provided for lump sum
payment of what we contributed plus fixed interest as benefits, the

39

management considers payment of benefit as top priority. The NSITF was

very successful.
PENSION ADMINISTRATION IN NIGERIA AFTER THE PENSION
REFORM ACT
The debate on the pension reform attracted wide comments and also
generated a list of controversy among the stakeholders in the pension
industry. The pension Reform Act 2004 repeats that of 1990 and established
a mandatory pension scheme for employees in both the private and public
sectors in Nigeria which requires production from both of them. Verification
exercise was carried out on the pensioners that were owed by the
government in order to identify cases of personification and forgery. The
authentic and genuine loss of pensioners arrears were paid into their bank
account worldwide.
The Federal Government has been committed to the pension reform scheme
since its inception in July, as an employer of labour it has never defaulted in
its contribution. This contribution from both the employer and employees
has been kept in the Central Bank of Nigeria and invested in treasury bills,
some of the recognized and licensed pension fund custodian includes: First
Custodian, U.B.A Custodian and Zenith Custodian as their name denotes

40

they are all financial institutions that are well managed and they keep the
contributed fund.
They are also the licensed pension fund administrators (PFA) and the
premium pension limited. The working of the new system is that while every
employee that is contributing to the fund is expected to direct all such
contributions to be deposited with their choice of pension fund custodian
(PFC) and manage such deposits. Every employee who registers with a PFC
would be given a pin number or code which remains for the person alone.
Contributors cannot redraw from their account until they retire or are
unemployed by way of lost of job and unable to find another job for up to 6
(six) months. However, all contributors are supposed to know their balance
at certain intervals and at any time the contributor is not satisfied with any
PFA, he/she has the option to change to another PGA. With the new pension
scheme, every pensioner is expected to be paid or allowed to withdraw a
lump of money from his accounts to enable the retiree receive an account
that will not be less than 50% of the last salary on a regular basis. This
depends on the agreement reached which could be monthly or quarterly on a
basis the balance which is managed by the PFA is invested in the purchased
of annuity.

41

On the part of the private sector, the NSITF was amended to bring the new
fund fully under the ambit of the pension law. The funds contributed to the
NSITF by any person before the commencement of the new pension act
together with any attributable income thereof not required for the purpose of
administering minimum pension as required by the administering minimum
pension as required by the National Pension Commission shall be computed
and credited into the retirement savings account to be opened by the NSITF
for each contributor. However, any contributor or beneficiary under NSITF
shall have at least 5 years after the commencement of this Act select Pension
Fund Administrators of his choice for the management of the pension fund
standing to his credit. Where any person who contributed under the NSITF
Act retired before commencement of this Act, the funds due or in lump sum
in accordance with the rules and regulations of the National Pension
Commission.
The NSITF are now catering for both the public and private sector, they are
also required to shift from the defined benefits to Defined contributions.
In the required benefits arrangements, members benefits bear no direct
relationship with their contributions. The benefits they receive are likely to
be much higher than the contribution made. NSITF pools resources and
serves as a form of income redistributions. In the case of the defined
contributions, whatever pension benefits an employee will draw depends on
42

how much he contributed to the scheme. It links contributions directly to

benefits and has created individual poverty right to accumulate savings. It
shall also make more money for investment,
The most interesting aspect of the scheme is that the queues of pensioners
will no longer be there but the question is how efficient the Pension Fund
Administrators (PFAs) and pension fund Custodians (PFCs) could be to
avoid a relapse.

THE NSITF AND THE PENSION ACT

The NSITF, in to which the National Provident Fund transmitted, was set for
another significant transformation with the enactment of the pension reform
Act 2004. The section 42 of the Act provides that;
a. The Nigeria Social Insurance Trust Fund (NSITF) shall establish a
company to undertake a business of fund administrator in accordance
with this Act.
b. The funds contributed to the NSITF by any person before the
commencement of this Act together with any attributable income
thereof not required for the purpose of administering minimum
pension as determined by the commission shall be computed and
credited into the respective savings accounts to be opened by the
43

NSITF for each contributor or beneficiary of the contributions made

under the NSITF Acts 1993.
c. Any contributor or beneficiary under the NSITF Act shall at least 5
years after the commencement of this Act, select the pension fund
administrator of his choice for the management of the pension fund
standing to its credit
d. Where any person who contributed under the NSITF Act has retired
before the commencement of this Act, the funds due him shall be paid
to him in accordance with section 4 of this act or in lump sum in
accordance with the rules and regulations of the commission.
The Act also mentions the death of an NSITF member at the commencement
of this Act, all pensions and assets shall be transferred to a custodian, this
shall be supervised by the pension commission.
The NSITF Act 1993 shall be deemed amended in all particulars to bring it
in full compliance with this Act.
From the foregoing, the operations of the Act will have far reaching
consequences for the NSITF whose major business was provision of social
security for workers in the private sector which it did mostly by providing
pension services for the contributors to the scheme. The Act also provides
that the NSITF shall continue to provide social insurance services other than
pension. The Act also requires that that the NSITF establish a company to
44

carry on the business of a PFA to which the pension funds in its custody will
be transferred shows that NSITF will continue to be active and relevant in
pension matters, as the influence it will retain its PFA and in its advantage, it
already has in terms of its track record in the field of pension over the years.
This should stand the NSITF and its PFA in good stead when it comes to
contributors choosing a PFA. The experience and nationwide proximity and
provision of excellent services by its PFA to its existing contributors who are
spread across the length and breadth of the federation. Another advantage of
the NSITF pension fund administrators is the early growth and accumulation
of the fund of its PFA as most workers in the private who already contribute
to the NSITF scheme will find it more convenient or even profitable to
remain with its PFA (Mbanugo, 2006).
2.6

REFORM METHODOLOGY
In 2003, a task force was set up to work out the details of a pension reform.
Membership of that task force remains unclear reference is made only to the
name of its chairman. In practice the pension reform committee becomes
synonymous with that person and thus was frequently referred to as the
Adeola Committee. The committee did not start its work from the scratch.
It based most of its consideration on the work already undertaken by the
Vision 2010 committee. The head of the pension reform committee had

45

been a member of that committee, although not a member of its pension

subcommittee and the Adeola committee drew very closely from its findings
and recommendations.
Accordingly, the committee considered not so much basic principles but
rather the details associated with establishing a Chilean style system with
drawing up the appropriate legislation. Drafts of the law were circulated for
discussion with interested and affected parties, in particular representatives
of business the Nigerian Consultative Organization (NECA) and labour
the Nigerian Labour Congress (NLC. The Trade Union Congress (TUC) and
Confederation of Free Trade Unions (CFTU). This did not prevent the
NECA from complaining that it was often excluded from critical
discussions.
Initially, both organizations argued that pension reform should focus on
addressing existing pension arrears in the public sector. Both were concerned
about the future of tri-par-title NSITF in the administration of which they
enjoyed on entrenched position. The NSITF, had collected contributions
from all employers and employees in the formal private sector and had built
up a reserve, and there were fears that one purpose of the reform might be t
acquire these assets and use it to solve the pension crisis in the public sector
(Oshinowo, 2003).

46

The demand of business and labour were in par satisfied by allowing the
NSITF to establish Pension Fund Administration (PFA), an option they had
infact featured in the 1997 report of the Vision 2010 Committee. that PFA
which took the name Trust fund is co-owned by the NSITF, the NLC,
the TUC, the NECA and three financial service companies and it has a
governing board on which there is equal representation of organized
business and labour. This did not prevent the NECA from continuing
criticism of the reform, although arm position became more muted. The
pension reform Act also required there to be one representative of labour and
one of business, and even one of the Nigerian Union of Pensioners among
the twelve ordinary board members of the pension committee (PENCOM),
the body the was to regulate the new system, although the majority of the
board members represent federal government interests.
Officially, both business and organized labour stand behind the new system
and through their participation in Trust fund, actively promote it. The
Pension Reform Act 2004 concerns only federal level schemes. The remote
of the federal government with respect to pension policy doesnt cover 36
federal states, the local government authorities below them or the parastatals
that these states might have established. The most the government could do
was to exhort this level government to emulate the reform and replace their
unfunded schemes with ones based upon private accounts. Pencom duly
47

drafted a law that each state could apply. It took a further two years until
august 2006, before they all agreed to enact the necessary legislation
(Komolafe, 2006).
2.7

OBJECTIVES OF THE REFORM

The primary objectives of the scheme are to ensure that every person who
worked in either the public or private sector receives his retirement benefit
as at when due. The scheme would assist workers to save in order to cater
for their livelihood during old age. The scheme was also concerned with
establishing a system that would ensure that workers receive benefits
generated by their own savings and not dependent on government
subsidiaries or future generations. The reform would stem the growth of
outstanding pension liability, thereby releasing resources to support growth
and development of the country (Pencom, 2006).
Fully funded scheme will reduce the vulnerability of the pension system to
demographic trends and political interference, which had adversely affected
the old schemes. Furthermore, the worker has direct control over his/her
retirement

savings

accounts

and

determines

which pension

fund

administrator manages his account. The arrangement will address the

problems of the failure of sponsors of defined benefit scheme to deliver on

48

promised benefits scheme to deliver on promised benefits and promote

confidence in the system.
The reform seeks to establish uniform rules, regulations and standards for
administration of pension matters as well as strong regulatory and
supervisory framework.

SECONDARY OBJECTIVES
Consistent with the key elements of the federal governments medium term
and development agenda, the National Economic Empowerment and
Development Strategy (NEEDS), the reform was also intended to reduce
physical cost of pension to the government, achieve fiscal reform through
measure designed to raise domestic savings and increase private
investments, mobilize long term savings to finance the real sector sustain
high and broad based GDP growth and promote the development of an
efficient capital market.
With the portability of the retirement savings account, labour mobility is
expected to improve because employees do not need to worry about
implications of changing jobs on their pensions. The incentive for workers to
withdraw from the labour market, which early retirement schemes tend to

49

encourage under the old scheme, will be minimized. The new scheme which
mandates savings, will encourage under the old scheme, will generate longterm investible funds that will deepen and strengthen the financial market as
well as facilitate the lowering of cost of capital. Consequently, higher
economic growth will be promoted (Pencom, 2006).

2.8

REGULATION OF THE NEW SYSTEM

The importance of institutional capacity and effective regulation to the
success of a pension system based upon individual accounts is widely
acknowledged. The necessary infrastructures include effective banks and life
assurance that can operate as providers and custodians and a transparent and
well-functioning equities and securities market in which pension assets can
be invested. A dedicated regulator usually oversees the activities of the
pension system itself, but separately regulators oversee financial services
and financial information is enhanced by the application of accounting
standards and reliable measures of credit worthiness.
By the time of the Nigerian pension reform, there was considerable number
of the necessary elements in existence buy not all of them were functioning
satisfactorily. Thus, the World Bank economic governance project finance

50

improvements to the technical and professional capacity of the Economic

and Financial Crimes Commission (EFCC) and the Securities and Exchange
Commission (SEC) and sought to assist in the greater use of international
accounting standards and to strengthen the Nigerian accounting board. The
size of appropriations for these objectives (USD 6.6,) was almost equal to
that made specifically to assist the pension reform (World Bank, 2004).
Pencom is responsible for setting rules governing investment portfolios, both
in terms of mix and the acceptable risk of assets. In Nigeria, an indigenous
rating agency had existed since 1992, but a second one has come into
existence only recently and its funding appears not unrelated to the
requirement that, any security in which pension assets are invested must
have been rated by at least two agencies.
At present, the investment rule laid down for the Nigerian system requires
that all investment be domestic. There is a tight limited on the extent to
which equity investment is permitted. On the other hand, investment in
federal government securities is encouraged, at least in so far as these are
committed to being of investment grades even if they have not been rated
investment rules shown in the table below;
INVESTMENT RULES RESTRICTION
Investment Rules Restriction
51

Asset type

Details

Maximum
within
portfolio

Minimum rating

Federally issued instruments

No limit

100%

None (But currently

rated BB by SEP and
BB by fitch)

Instruments issued by a
federal state

Max 2% of assets one states and

not more than 2% of any one
issue

20%

None (none currently

rated)

Corporate bonds REITS,

Mortgage-and-asset-backed)
securities
and
debt
instruments

Max 2.5% of all issue of that

corporate entity and not more
than 2.5% of any one issue

30%

BBB

Certificate of deposit and

bankers acceptances (money
market instrument)

Max 1% with respect to any

bank,

25%

Ordinary shares

Max 1% in any one company

and not more than 1% of the
companys value

25%

BBB but AAA if IPD

Open and closed funds

Max 0.5% in any fund and not

more than 0.5% of that
companys value

5%

Foreign Investments

Guidelines still to be issued

Source: Pencom, 2005

Prime factor, the 2004 pension reform act and the subsequent guidelines
issued by Pencom established as strict regulatory system. Then demand a
high level of professional misconduct. They set strict asset allocation rules
and mandatory investment targets, and they follow many of the recently
issued OECD Guidelines on pension fund Asset Management, (206). On
the other hand, the guidelines ignore the OECD recommendation that a PFA

52

provide obligatory strategies and this means potential members of PFAs

have no opportunity to evaluate differences in providers investment
strategies when making their choice of provider.
2.9

THE IMPACT OF PENSION REFORM ON CAPITAL MARKET

It is frequently suggested that establishment of a founded scheme can
contribute to the development of capital markets and the accumulation of
savings that follow will promote economic growth. The Nigerian
government certainly repeatedly stressed this. Thus, under the description of
the strategic implications of the reform; reference was made to the new
scheme potential to promote the national savings and the implication,
economic growth, to how funded pension scheme hence the capacity to
promote capital market development and to how DC schemes are believed
to the potential to generate positive economic externalities, including the
promotion of deeper, more competitive and more liquid financial markets
(Pencom, 2004).
Others have been more skeptical. This, it is argued that pension reform by
itself will not lead to improved capital markets since successful reforms also
require regulatory changes, market liberalization and the privatization of
state-owned industries (Uthoff, quoted in Matijascoc and Key, 2006).

53

The impact of funded pension systems on savings rate is even less clear. The
academic literature is at best agnostic. It is recognized that saving can take
many forms, one of which might substitute for another, and that increased
savings by one party might merely finance increased indebtedness by
another (Orzag and Stigliz, 2001, but also Holzmann and Hinz, 2005).
As important as the level of saving is the form that they take. Funded
pension schemes are argued to contribute to the development of longer term
savings and so to the availability of long-term finance for investors. If
productive projects are less liquid, an increase in the availability of longterm capital should on average, increase the return that can be made in
investing in such projects (Holzmann and Hinz, 2005). Even is pension
scheme invest solely in government bonds, they can be argued to have a
positive impact insofar as they stimulate the debt market. They can create a
demand for long-term rather than short-term public debt, and this eventually
helps to build the yield curve (Ibid, pp. 133-114).
An assessment of whether the Nigerian pension reform is likely to contribute
to economic development requires as a first, an approval of the countrys
financial infrastructure. It has to be noted that inflation in Nigeria, although
lower than it has been for much of the 1990s, was running at 15% or more in
the early years of the new decade and that total (federal, state and local)

54

government expenditure was exceeding total government revenue by some

five percent of GDP.
The IMF albeit not in relation to the pension reform has concluded that
overall, (infrastructure) has not fostered stability or supported investment
and economic development. It deemed the financial environment of Nigeria
to be one of high risk, and an important reason for this was the unstable
macroeconomic environment. As a consequence, banks were reluctant to
supply loans to the real economy (IMF, 2006).
The implications of a stock market structure have pointed out clearly with
respect to Latin America (Matijascot and Kay, 2006 p.11). First, shares tend
to be highly concentrated in a limited array of government issued paper. In
the case of a certain Latin American country, some of these government
bonds had been issued specifically to pay the transaction cost associated
with the new system. How important such issuances will be in Nigeria is
unclear, but the government is supposed to credit the accounts of the
members of NSITF with the value of their accrued rights. It is also suppose
to make transfers into a special recognition fund to cover its obligations to
the federal civil servants, the police and the military who are transferring to
the new scheme. Moreover, there is no requirement for this government

55

paper to meet an investment grade and there is no limit on the extent to

which pension funds can invest in paper issued by the federal government.
Second, insofar as pension funds are over-reliant on investments in stateissued bonds, investment risk is higher than it would be with a (more)
diversified portfolio. Third, Pension funds tend to concentrate investments
in shares in a few large firms and mutual funds, leading to a rapid rise in the
value of those shares. This can lead to speculative bubbles that burst with
long-term consequences for these markets. Exchanges in emerging markets
tend in any case to be much more volatile than those of developed countries.
2.1.1 IMPLEMENTATION EFFORTS AND CHALLENGES
A number of measures have been taken to implement the pension reform
since the enactment of the act in June 2004. The highlight of the
implementation efforts are summarized in the following paragraphs:
establishment of supervisory and regulatory framework.
Against the backdrop of a less sophisticated employees who do not have
expertise in investment and funds management as well as the need to
promote and sustain public philosophy that makes the employee as its main
focal point and primarily ensures the safety of their pension assets.
Consistent with the key objectives of the scheme the commission will ensure

56

that everyone who worked receives her/his retirement benefits as and when
due by protecting the employees interest and safeguarding the stability of
the system.
In carrying out its supervisory responsibility, the commission adopts a
surveillance model that involves prudential assessments compliance
monitoring and promotion of transparency and good corporate governance
(Pencom, 2006).
In this regard, various regulations and guidelines have been issued by the
commission to guide the operations of the industry. These regulations and
guidelines were issued after due consultation with industry stakeholders
which has greatly enhanced their robustness and acceptability.
REGISTRATION OF CONTRIBUTORS
The PFAs have also, commenced the registration of contributors with the
commission providing necessary support and facilities such as the personal
identification numbers (PIN) through the National Data Bank. Over 1.2
million employees have been registered by the PFAs within the past five
months since the exercise started (Pencom, 2006).
PUBLIC SECTOR EMPLOYEES ACCRUED PENSION RIGHTS

57

The Pension Reform Act 2004 requires that the accrued pension rights of
employees who are to join the new scheme shall be recognized for the period
they had worked for the government before the commencement of the Act.
As a result, actuarial valuation and accrued pension rights for the FGN
employees was concluded and retirement benefit bond would be issued.
Meanwhile the retirement benefit bond redemption fund at CBN is being
funded by the government (Pencom, 2006).
PUBLIC EDUCATION AND ENLIGHTENMENT
As part of the strategies for implementing the pension reform, the
commission embarked on intensive public education and enlightenment
programmes. Moreover, copies of frequently asked questions (FAQ) on the
pension reform have been compiled and printed in English, Hausa, Yoruba,
Igbo and Pidgin languages. The commission also developed, distributed and
published fliers on rights of employees, registration of contributors etc
(Pencom, 2006).
INCREASING COVERAGE AND BUY-IN OF THE SCHEME
In order to further expand the coverage of the scheme, the commission has
held discussion with many state governments on the possibility of
implementing the reform at state and local government levels. These tiers of

58

governments were not covered by the Act. To facilitate the process of

adoption of the scheme, the commission has also drafted a model state
pension law foe adoption by states (Pencom, 2006).
IMPLEMENTATION CHALLENGES
There are quite a number of challenges in the implementation of the reform.
As laudable as the new reform is, the change process to a new contributory
scheme has been greeted by a share of general misconception and
apprehension in the system, especially in the public sector. There are
concerns as to whether the reform can be effectively implemented given the
past experience of policy inconsistencies even when the process has just
commenced (Pencom, 2006).
A stable macro-economic environment is a prerequisite for the success of the
scheme. There is a growing concern about the death of investment outlets for
pension funds that will yield appreciable rates of returns on investment to
keep pace with inflation. There is also the challenge as to whether capital
market can optimally absorb the available and expected pension funds
without causing a gut and over valuation of the few securities in the market.
A review of the current high primary and secondary market transactions
costs is also desirable as part of other measures, to make the capital market

59

more investor-friendly so as to encourage more companies to seek quotation

on the Nigerian stock exchange, thus increasing available investment outlets
(Pencom, 2006).
There is the challenge of building necessary capacity needed for an effective
and efficient pension industry both for the operators and the regulator. While
the investment management aspect poses no significant threats due to the
existence related experience, the skills and expertise critical to successful
pension administration and custody would have to be developed over time
through training and education to expose staff to international best practices
in pension matters, so as to build the necessary expertise (Pencom, 2006).
The informal sector constitutes a major part of the Nigerian Economy, where
a sizeable proportion of working population are engaged in agriculture, petty
trading, domestic, artisan and other related fields. There is a challenge of
how to identify these set of people and secure their buy-in into the new
pension arrangement. Furthermore, there is the problem of determining the
rate and mode of contribution for these workers who have no fixed income
(Pencom, 2006).
Many provisions of the Act bothering on issues such as insurance cover,
annuities and risk rating of investments instruments that relate to other
industries and fall within preview of other regulatory authorities such as the
60

securities and exchange commission (SEC), National Insurance Commission

and Nigerian stock exchange. The co-operation of other regulatory agencies
is therefore critical to the successful implementation of the pension reform
(Pencom, 2006).
2.1.2 THE PROBLEMS AND PROSPECTS OF THE NEW PENSION
REFORM
PROBLEMS OF THE NEW PENSION REFORM ACT
This project would first like to examine the problems of this pension reform.
Section 1(2) defines the beneficiaries of the scheme to include all employees
in the private service of the federation, federal capital territory and the
private sector. The implication here is that persons employment comes
within the contemplation of the Act can benefit from the fund. Thus, for an
employee in Nigeria to enjoy the benefits of the Act, he comes within the
contemplation of the Act as stipulated in the above section. In the case of the
private sector, the scheme shall only apply to organizations having 5 or more
persons. The question then arises about those who are employed in the
private organizations with less than 5 persons. It is obvious from the
provisions of the Act that such employees are not covered by the scheme.
The observation of the Guardian Newspaper in one of its editorials on this
discriminatory provision states thus:
61

The provision of the pension reform act excluding private sector

organization with less than 5 employees from the new pension scheme may
also require re-examination. Since many Nigerians are either self-employed
or are employed in an organization with less than 5 employees, the objective
of the scheme is to ensure that every person who works is either the public
service or the private sector receives his benefits as and when due, and to
assist improvident individuals by ensuring that they save in order to cater for
their needs and livelihood during old age will be substantially defeated if
the large swathe of self-employed individuals and those employed in very
small organization are excluded from participation in the scheme. Rather
than their exclusions, Pencom and PFAs ought to have means and incentives
to encourage self-employed individuals and those working in organization
with less than 5 employees to participation in pension schemes under the Act
or otherwise is very instructive (The Guardian, 2006).
Investment of pension fund assets outside the shores of Nigeria is
permissible, under section 74 of the Acts states subject to the subsisting
Central Bank of Nigeria foreign exchange rules, the commission may
recommend to the president for approval of the investment of pension fund
asset outside the territory of the federal republic of Nigeria. It is quite clear
how this process will be instead, whether the commission will at its own
instance or at the instance of PFAs obtains blanket approval for specific time
62

of offshore investment by any PFA. One wonders the exact purpose of this
provision because it discourages diversification of business investment
outside the shore of Nigeria since it suggests that pension asset cannot be
invested abroad unless with the approval of the presidency. The Nigerian
Economy is big enough to accommodate other foreign investments that will
help guarantee the security and growth of the pension funds without wasting
of time and unnecessary safeguards for overseas investments therefore, there
should be no restrictions.
An important but contentious of the Act is Section 70(i) providing for
charges and fees of the service providers. It states that all income earned
from the investments of pension funds under this Act shall be placed to the
credit of the individual retirement savings account holders save for clearly
defined and reasonable fees, charges, costs and expenses of transactions
made by the pension funds administrators. Allowing the service providers
leverage to determine whatever is reasonable as fees and charges much to be
desired.
It means that the PFAs and the PFCs can come up with any outrageous
charges as long as they deem it reasonable and beneficiary will have no
choice but to watch his account debited accordingly however outrageous the
fees maybe (Mbanugo, 2006).

63

In this new pension scheme there are individual risks for the employee such
as the earning capacity of an employee. An employee who earns very little
will find it difficult to feed his family and then saving for his pension will
even be more difficult, there is also the problem of unemployment skill
obsolete, in a situation where a person does not have a job at all, he wont
even have a way for feeding for himself before he even thinks of saving
pension. The same thing goes to those whose skills are going out of date, the
jobs they specialized in are now carried out by machines such groups of
people are not considered in the new pension Act.
There is also the problem of pension of the promised that are not being
backed up by a well diversified assets pool segregated from employers
assets. This was also the problem with the 1990 Act, where the employer is
willing to pay, there may be a situation where promise to pay pension
collapses, the money contributed by both the employer and employee are
expected to be invested by the pension funds in the hopes of earning a
positive rate of return, in an event where the investment does not work out
well, all those who invested will lose out, this is one of the major problem of
this Act. This pension scheme also attempt to run from governance yet there
is a considerable concentration on government securities, the other securities
that are expected areas of investment are without restrictions. The
investment managers may want to restrict themselves to government
64

securities which have a low return on investment, another thing is that the
government was unable to pay pension that resulted in this reform, again
they could refuse to return the investment with interest. The current reform
also does not provide insulation against economic and other shock affecting
the economy as a whole, there is also the problem of the value of the naira
and strikes. Once efforts of are not made to ensure that inflation remain
minimized and almost nonexistent. The value given to the retired workers as
pension may not address the economic problems and the worst if such
investment does not yield any return as a result of stoke action in the
country. Finally what is the guarantee that successive administrators will
enliven the vision and not jettison it like the national housing fund of the
Babangida administration?
THE PROSPECTS OF THE NEW PENSION REFORM
This refers to the chances this pension reform act has to e successful just like
there are many setbacks to this reform, it also has its positive aspects which
we shall examine.
Like previous reforms in the past, the present reform is meant to ensure that
employees when they retire have something to fall back to. This new
pension Act ensures that when an employee retires, his retirement benefit is
ready as and when due, the pensioner does not need to rely on his extended
65

family system, they dont need to rely on their employers, each pensioner
would have saved to cater for their needs when they retire. The Act hopes to
establish a sustainable, simple and transparent pension system to empower
workers. The scheme also reduces political risks by moving pension plans
outside the direct control of government, it permits individual to have
enough in their accounts and decide when they retire. It is worthy to mention
that this arrangement shall make more money available for investment,
create employment opportunities and reduce social vices. Competition
among pension fund administrators shall provide some incentives for
investments performance and the economy shall undoubtedly receive a
boost. The Act also has some legal implication of the which are certainly
central to the smooth implementation of the law, the national assembly has
no powers to legislate on pensions for the entire public service i.e. states and
local government. It also has no constitutional powers to legislate on pension
generally that are not paid out of the Consolidated Revenue Fund (CRF) of
the federation.
Fraud and misappropriation of funds and corruption will be reduced
generally as this as this arrangement will ensure that the service providers
act as checks and balances between them, such as in section 59 of the Act
which requires both the PGA and PFC to report to the commission as soon
as reasonably practicable, any unusual occurrence. The phrase any unusual
66

occurrence could as well be the ill-conduct or misconduct of either the PFA

or PFC. The license of a PFA and PFC can also be resolved according to
section 54(2) of the Pension Act, therefore, if any of these bodies mismanage
a pension fund, their license shall be revoked. The commission shall cause
the retirement savings account being managed by the PFAs whose license
has been revoked to be transferred to another PFA, the same applies to a
PFC. To ensure that their license are not being revoked, both bodies will
want to manage the savings kept in their care well, the PFA and PFC also
have the duty to submit annual return to the commission on the pension fund
being managed by them and including the audited account to the report
(Mbanugo, 2006).
The new pension Act provides exemption from tax of retirement benefits,
additional voluntary contribution if so desired by employees, transferability
of pension accounts and benefit, creation of individual retirement savings
accounts, establishment of pension fund administrators, selection of pension
fund administrators by employees and the introduction of the private
managed pension fund that is strictly regulated. It has also made government
to be serious with the issue of pension and managers are made more
accountable. This new pension Act will also improve the living standards of
elderly, secure financial autonomy and independence of retirees, the
pensioner will no longer be at the mercy of employer as he is assured of
67

regular payment of retirement benefits. It also improves the labour market

by reducing incentives for early retirement and also increases the supply of
labour. It reduces unemployment due to GDP growth as well as promoting
labour mobility as retirement savings accounts is made portable.

2.1.3 SUMMARY OF THE REFORM INITIATIVE

The reform initiative culminated into enactment of the pension reform act
2004. The Act seeks to establish for the public and private sector a scheme
that is contributory, fully funded based on the individual accounts that ate
privately managed by pension fund administrators with the pension fund
custodians as well as a strongly regulated and supervised (Pencom, 2006).

68

CHAPTER THREE
RESEARCH METHODOLOGY
3.1

INTRODUCTION
Research methodology refers to the collection and analysis of data which
enabled the researcher to provide information to solve the research problem.
According to Cohen and Mabion (1980: 260), method refers to the range of
approaches used as a basis for interpretations, explanations and predictions.
It also analyses these methods, throwing light of their limitations and
resources whole clarifying their pre- suppositions and consequences. Isaac
(1969) defines methodology as simply referring to the basic principles and
assumptions of enquiring which must cover data analysis, sampling,
populations and techniques of data analysis.
The research is undertaken in order examines the impact of the pension
reform act 2004 on pension administration in Nigeria.

3.2

RESEARCH DESIGN
Research design in the specification of method and procedures for acquiring
the information needed to structure or solve the problem under
consideration; it is therefore, the overall operational pattern or framework of
the project. It stimulates the information to be collected from which source

69

and by what procedures. In this research, the historical research design was
used to this is generally seen as the best design applicable to the
administrative

and this approach is chosen due to its administrative

appropriateness to deal with complex relationship that exist in this research.

Hence, it is purely a description of the impact of the pension reform act
2004 in pension administration in Nigeria.
3.3

POPULATION OF THE STUDY AND RESEARCH SAMPLING

The research examined the pension industry as a whole and used it as the
research population. The pension industry consist of the some key operators
such as pension commission, pension funds administration, pension funds
custodians etc. These operators run the activities of the industry. Some of the
key operators of the industry were used for the research sampling (i.e.
pension commission, Penman pension Ltd) and which were eventually used
to generalize the study of the population or industry.

3.4

SOURCES OF DATA
The data used in this research work is mainly secondary data, this
constituted of those collected from available materials in the library such as
textbooks, journal and also interpret materials.

70

3.5

TECHNIQUES OF DATA ANALYSIS

The data gathered as revealed by the relevant materials were grouped to
ease the analysis. The presentation of data is in tabular form and further
analyze with the aid of percentage (%) apportionment. The researcher has
analyzed the data collected in the order in which they appeared in the
materials. The statistical technique used for analyzing the data is percentage
(%) apportionment.

71

CHAPTER FOUR
4.1

DATA PRESENTATION AND ANALYSIS

Analysis of data is a process of inspecting, cleaning, transforming and
modeling data with the goal of highlighting useful information, suggesting
conclusion and supporting decision making. (Queisser, M 1998).
According to Adaeze (2006), he said, before data can be used for any
analysis, it must be extracted and organized in presentable and readily
comprehensive form.
This chapter deals with presentation and analysis of data collected in the
course of the research work by the researcher. The date from the materials
were presented in table and further analyzed with the aid of percentage (%)
apportionment. The researcher has analyzed the data collected in order
which they appeared in the materials.

4.2

DATA PRESENTATION
The data gathered in order to carry out this research work were presented in
a tabular form

72

Table 4.2.1 Nigerian Stock Exchange all Share Index

Before 2004

After 2004

2003- 2004

2008-2010

Year 45% Increase High

65% decrease

Change

-20%

Sources: O. Ogunyemi, Investment Analyst, available at http://www.docstoc.com/docs

6764814/Technical-Review-of-the-Nigerian-Stock-Exchange-(All-Share-Index)-as-atJune-2-2010.

From table 4.2.1 above, the share index of the Nigerian Stock Exchange
increases by 45% from the year 2003-2994 (Pre-Pension reform). But there
is significant decrease in the share index from the year 2008-2010 (PostPension reform) this shows that the safety of pension funds invested by the
Pension Fund Administrators (PFA) would be questioned while the Nigerian
Stock Exchange has already fallen by more than two-thirds in comparison to
its peak in 2008/
4.2.2 Pension facts Before and After 2004
Before 2004

After 2004

Change

Number of Pension Administrators

0.41%

0.59%

0.8%

Social Security Funds

45%

55%

8%

Management Charges

0%

3%

3%

Pension Coverage Rate

8% (2004

9% (2010)

1%

Payments to retirees

68%

75%

7%

Growth of RAS Funds

0%

Decrease by 2.5%

-2.8%

Accrued Pension Liability

43% (2004)

75% (2010)

32%

Inflation Rate (Average)

7.2% (2004)

11.8% (2010)

4.6%

Sources: Pencom, 2010 and Okpaise, 2009.

73

From the table 2.2.2 above, 26 Pension fund Administrators had been
licensed and 18 existing schemes was also approved to continue. But the
new scheme introduces management charges to be charged on the pension
funds. 3% management charges is to be charged. Inflation is also another
factor that affects the pension funds negatively.
The social fund before the pension reform is 45% while that of the postpension reform is 55%. This shows no significant increase of the social
security funds. Inflation rate increases faster than the rate at which the social
security funds increases. The funded accounts, administered by the pension
fund administrators (PFAs), have so far produced negative real returns for
pension savers. The charge is just 10%.
There were no management charges in the old pension scheme (Pre-2004
pension reform). The 2004 pension reform introduces the deduction of
management charges before the 2004 pension reform was 0% while that of
the pos 2004 reform is currently 3%. The 3% management charges are being
splitted among the Pencom, PFC and PFA. This management charges
obviously have negative effect on growth of RSA fund as well as the safety
of the invested pension funds. The table also shows 3% increase.
The coverage rate of the old pension scheme was 8% while that of the post2004 reform is 9%. The coverage rate difference is just 1%. Closely related
74

to the limited coverage of the Nigerian Pension system was the way in
which the vast majority of covered workers were public sector workers. The
2004 pension reform hasnt yet addressed the problem of coverage of the old
pension scheme.
During the pre-2004 era, the old pension scheme has been able to be paying
68% of the pension due. And the new pension scheme pays 75% of the
pension due. But the new reform ignores workers outside the formal sector.
The 7% increase of payment to retirees will be of no significance since it has
failed to include those (worker) in the informed sector.
Before 2004, there is no Retirement saving account, therefore no growth will
be expected. The growth is 0%. In the post-2004, there is 2.8% decrease of
RSA fund. The funded accounts administered by pension fund
administrators have so far produced negative real returns for pension savers
(negative change of 2.8%).
During the post-2004 era, accrued pension liability was 43%. During the
post-2004 era was 75%. The new pension reform hasnt yet addressed the
deadly problem defined benefit scheme, but rather worsened the situation.
There is 32% increase in the accrued pension liability.

75

Inflation rate before the pension reform (2004) is 7.2% and that of the postpension reform (2010) is 11.8%. And there is 4.6% increase in the inflation
rate. The increment in the inflation rate negatively affects the growth of RSA
funds as well as the social security fund. Management charges tend to
increase because of the increase in the inflation rate.
4.3

DISCUSSION OF FINDINGS
From the above analysis, the reform has failed to contribute to basic social
security in an old age for the majority of the Nigerians employed in the
informal sector. The scheme does not only fail to provide social security to
workers in the informal sector but also the poor. As it now stands, the funded
pension is isolated from larger social security concerns. It only caters to the
needs of workers in the formal employment sector. How Pencom is going to
address these managerial and structural issues is everybodys guess.
Furthermore, none of the originally stated goals of Nigerian pension reform
have been achieved so far. The federal state continue to carry significant
pension arrears from the earlier unfunded defined benefit system (old
scheme) and it is obvious that unpaid pension have reached new record high.
The table above shows 32% increase of pension arrears.

76

Moreover, the funded accounts administered by pension fund administration

(PFAs) have so far produced negative real returns for pension savers. Factors
such as; unsound capital market, management charges, inflation rate and
poor administration are some of the factors behind the poor performance of
the funded accounts.
However it is doubtful whether the introduction of a funded pension system
is able to address the issue of workers outside of the formal sector of
employment in order to address the current shortcomings, a new direction of
Nigerian policy-making regarding pension would be necessary. This could
combine with a broader concern for expanding basic social security. Such a
new course would have immediate benefits and would address the issue of
economic development from the grassroots and improve on promises of a
great leap that is likely to remain a mirage.
Although clear regulations are a necessary condition for good governance,
they are not a sufficient one. An appropriate implementation structure and
enforcement culture is required. It is here that question needs to be asked.
Nigeria is known for its low scoring on measures on sound administration.
Even by 2005, there were only five countries placed lower than Nigeria out
of the 158 rated by transparency international (www.transparency.org).

77

CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1

SUMMARY
The study is concerned with the impacts of pension reform act 2004 on
pension administration in Nigeria with particular references to pension
commission and it is an almost exhaustive research work that deeply
analyzed the operations of pension fund administrators and the custodians in
the pension industry.
The reform initiative culminated into enactment of the pension reform act
2004. The act seeks to establish for the public and private sectors a scheme
that is contributory fully funded, based on individual accounts that are
privately managed by pension fund administrators with the pension funds
assets help by pension fund custodians as well as strictly regulated and
supervised.
However, the research work gives an overview of the study follow by on indepth of the literature review of the study. The research also gives an indepth
of the methodology adopted in carrying out this research and also how data
were systematically presented and analyzed.

78

5.2

CONCLUSION
The pension reform has created a platform for the realization of all other
reform programmes of the federal government. Long-term pension funds are
being generated to facilitate the infrastructural development, leading to
reduced interest rate and promote the growth of the real sector, leading to
overall growth of GDP. The PFAs as instructional investors will facilitate
increased market integrity, transparency and corporate governance and
overall growth of the capital market. Workers are guaranteed peaceful
retirement and reduced poverty in retirement. A secured future for workers
will ensure job satisfaction and increased productivity.
The issue of the Nigerian pension reform highlights the crucial role of local
regulatory capacity. So far, Nigeria is alone on the African continent that
purses the project of individual funded pensions. The project suffers
therefore form two difficulties at the same time. First, the reform would
demand a rapid expansion of the scope and quality of Nigeria regulation,
which even if forthcoming would still leave question marks behind the
purpose of the reform. Second Nigeria tries the Chilean example at a
moment in time when the original model is about to be substantially
reformed by the Chilean government.

79

5.3

RECOMMENDATION
If neither the pre- 2004 nor the new pension system is appropriate, policy
matters might be encouraged to look at whether there are other ways to
provide for older people in countries such as Nigeria. One of these other
ways might be the social pension a pure cash transfer to old people in
which eligibility is not base on history of the recipients earmarked
contributions (Pacious and Slichynsy, 2006). The contribution of social
pensions to the objective of poverty relief in developing countries has been
long advanced by the international labour organization. More recently, it has
been recognized by the World Bank as well (Holzmann and Hinz, 2008).
Social pension have been credited with positive developments in those
countries that have intruded them.
Significantly, the Chilean government is about to introduce social pensions
or is dependent of social assistance termed basic solidarity pension
(Gobierode Chile, 2008). Currently, some 60% of the elderly population is
receiving either a very low pension or is dependent on social assistance. The
basic solidarity pension will be paid on grounds not of a contribution record
is an acknowledgement that after 25 years, the system of funded pensions
has failed to address the pension needs of the majority of Chilean citizens.

80

The cost of setting up social pensions have to be judged on their relative

merits in targeting resources at the poor as compared to other social policies
such as support for primary education or basic healthcare. Some studies have
suggested that social Pensions have contributed to improving womens
health, supporting the rural poor, heightening the status of older people in
the family and increasing school enrolment (Johnson and Williamson, 2006).
However, social pension also have some disadvantages. In the Nigerian case,
these go beyond the more general, although by no means empirically funded
objection that they might weaken traditional system of informal family care
for the elderly. The social pension would be reliant upon the same revenge
base as the old, unfunded pension. It would merely involve an alternative
way of distributing government revenue scheme, channeling it away from
elites to broader swathes of the population. The instability of the revenue
source would remain and thus, the likelihood that the payments would fall
into arrears might not be removed.
Moreover, for a social pension to fulfill its objectives, effective delivery
mechanism would have to be in place. Determining eligibility almost by
definition has to be undertaken at a local rather than a national level. This
place considerable powers in the hands of local administrative structures
informal ones. The administrative capacity of state and local government in
Nigeria has been frequently questioned
81

- a recent survey of state

government by the National Planning Agency fund that on a fiscal

management, service delivery and transparency, only 13 out of 36 states
score a minimum of 25 percent (White, 2008).
On the other hand, it might also be argued that a social pension was well
suited to address the catch 22 of a state such as Nigeria that needs to
maintain a strong federal centres based on centralized recourse endowment
but that is lacking legitimacy. Social pension would distribute some of the
revenue of the countrys oil wealth in an equal manager between richer and
poorer states. The states and the federal government would gain additional
legitimacy through a social system. In addition it is unlikely that current low
coverage rates in the countrys pension system could be increased in any
other manner in the near future.
To sum up, Nigeria might have tried learning from Chile, but it learnt from
the wrong book. Moreover, not only was that book wrong, but it was also
becoming outdated. Tackling the problem of social security in oil age
demands a new approach. Nigeria could learn lesson from abroad but it
should also learn lessons from abroad, but it should learn the latest not the
outdated lesson from Chile.

82

BIBLIOGRAPHY
Ahmed, M. K. (2009) The contributory pension scheme: Institutional and
Legal framework. CBN Bullion 30 (2):1-6
Balogun, A. (2010) Understanding the new pension reform act (PRA) 2004.
CBN Bullion 30 (2): 7-18
CBN (2001). A Study of Nigerians Informal Sector Vol. II In Depth Study of
Nigerians Informal Manufacturing Sector, Lagos, Nigeria
Government of Nigeria (2004). Meeting Everyones Need National Economic
Empowerment and Development Strategy Abuja.
Holzmann, R and Hinz, R (2009) Old Age Income Support in the Twenty
First Century. An International Perspective on Pension Systems and
Reform Washington DC, World Bank.
Ilo (2008) Nigeria Report to the Government Actuarial Assessment of NSITF
Accrued Liabilities Under the New Pension Scheme.
IMF (2006) Pension Reform in Nigeria Selected Issues and Statistical
Appendix. Washington DC
IMF (2006) Nigeria First Review Under the Policy Support Instrument
Washington.
Johnson, J and Williamson, J. (2006). Do Universal Non- Contributory Old
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Okafor, A.o (2004). Paper Presented by Okafor on Historical Background on

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APPENDIX
Department of Accounting,
University of Abuja,
Abuja, Nigeria.
26th February, 2012
Dear Sir/Madam,
I am a student of the above named University, carrying out a research report work
on the Impacts of Pension Reform Act 2004 on Pension Administration in Nigeria:
A Case study of National Pension Commission, Abuja.
I will be pleased , if you can assist me with necessary materials and information
needed to will assist me in carrying out my research work.
All information and materials given will be used purely for academic work and
will be treated confidentially.
Thanks for your understanding.
Yours sincerely,

Ismail Abubakar

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