Pension Systems were introduced by employers to protect their employees against old age poverty. The essence, therefore, is to provide income after retirement that could at least meet the basic financial needs of retirees.  In this regard, governments throughout the world made retirement benefits one of their cardinal objectives and ensured that such schemes were established at least in the public service.  Provisions were also made for private sector employers to establish some form of retirement benefit scheme(s) for their employees, though this is hardly adhered to.

Inherent challenges were experienced during the many years that retirement benefit schemes were implemented.  These challenges necessitated many countries to take stock of these systems and on many occasions make adjustments to the underlying laws or some aspects of regulations governing the implementation of the laws.  However, the adjustments were too far so many, forcing many countries to make complete paradigm shifts from the old systems.

Beginning from Chile and some of its Latin American neighbours, a new system emerged that introduced a Contributory Pension Syatem that is personalized to the contributor and managed by licensed private sector entities. Nigeria is the first African country to introduce a variant of the Chilean system with flavours of African peculiarities.

This paper looks into the challenges of the old Defined Benefit (DB) system as the basis for the inevitability of the Contributory Pension Scheme, (CPS) in Nigeria. It also examines some of the opportunities and the challenges posed by the new scheme.

Given this task, the rest of the paper is arranged into 6 sections with section 2 providing the background information to the Nigerian pension system prior to 2004. Section 3 examines the rationale for the Contributory Pension Scheme while Section 4 discusses the opportunities provided by the scheme. The challenges and the conclusion are presented in Sections 5 and 6 respectively.

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In Nigeria, the first public sector pension scheme was the pension ordinance of 1951, with retroactive effect from January 1, 1946. The law provided public servants with both pension and gratuity.  Pensions Decrees 102 and 103 (for the Military) of 1979 were enacted, with retroactive effect from April 1974.  These Decrees remained the operative laws on public service and military pension in Nigeria until June 2004.  However, there were several government circulars and regulations issued to alter their provisions and implementations. For example, in 1992, the qualifying period for gratuity and pensions were reduced from 10 years to 5 years and from 15 years to 10 years respectively.


In 1997, parastatals were allowed to have individual pension arrangements for their staff and appoint Boards of Trustees (BOT) to administer their pension plans as specified in a Standard Trust Deed and Rules prepared by the Office of the Head of Service of the Federation.  Each BOT was free to decide on whether to maintain an insured scheme or self-administered arrangement.


On the other hand, the first private sector pension scheme in Nigeria was set up for the employees of the Nigerian Breweries in 1954; this was followed by United African Company (UAC) in 1957.  National Provident Fund (NPF) was the first formal pension scheme in Nigeria established in 1961 for the non-pensionable private sector employees. It was largely a saving scheme, where both employee and employer would contribute a sum of four naira (N4) each on monthly basis. The scheme provided for only one-off lump sum benefits.  The Nigeria Social Insurance Trust Fund (NSITF) was established by Decree No. 73 of 1993 to provide enhanced pension scheme to private sector employees.  The NSITF took over the assets of the NPF and commenced operations in July 1994.  Thus, all registered members of the NPF became automatic members of the NSITF.  Similarly, all private sector employers and employees were mandated to register as members as soon as they commence operations and assumed duty respectively.

There were three regulators in the pension industry prior to the enactment of the Pension Reform Act 2004; namely Securities and Exchange Commission (SEC), National Insurance Commission (NAICOM) and the Joint Tax Board (JTB).  SEC licensed pension fund managers while NAICOM is still the agency responsible for licensing and regulating insurance companies in the country.  The JTB approved and monitored all private pension schemes with enabling powers from Schedule 3 of the Personal Income Tax Decree 104 of 1993.


The Pension Reform Act 2004 is the most recent legislation of the Federal Government aimed at addressing the associated problems of our old pension system.  It established a uniform pension system for both the public and private sectors.  Similarly, for the first time in the history of the country, a single authority has been established to regulate all pension matters in the country.




  • Coverage

Under the old Scheme, coverage was mandatory for the public sector but was voluntary in the private sector. Many private sector workers were not covered at all by any retirement plan, and those who were covered were faced with very uncertain benefits due to the increasing insolvencies of the various plans. The NSITF Scheme, which was contributory, covered the private sector and other services such as Embassies, NGOs, etc. However, weak administrative process led to the scheme’s inability to enforce compliance leading to large evasions and hence, inability to meet the objectives for which it was established.


Thus, a major feature of the Nigerian pension system prior to reform was its limited coverage. There is thus the need for a system that is more accommodating and encompassing, hence the Contributory Pension System that covers both the formal and informal sector employees.


  • Funding

The public sector schemes were PAYG and only funded through budgetary provisions by all tiers of government while the sponsors of private sector schemes provided the necessary funds to offset the retirement benefit obligations. The experiences had shown that where budgetary allocations were made, there were late or no releases of funds to pay benefits, and where releases were made, payments were either delayed or not made at all due to mismanagement of funds. Similarly, in most of the private sector organisations, no monies were being set aside to meet the retirement benefits liabilities.


Demographic shifts have also increased the burden on many sponsoring organizations including the government. The Contributory Pension Scheme, being fully funded, was expected to reduce the burden of pension payments of the employers and ensure sustainability of the scheme. Indeed, in the public sector, the urgent need to share the funding burden cannot be overemphasized in the light of dwindling resources and increase in personnel costs and overheads. This is due to its contributory nature of the Scheme where both employees and employers are made to fund retirement benefits.

  • Supervision

The public sector schemes were not supervised and hence pensioners were left at the mercy of the various Pension Boards/Offices.  However, the unified and insured schemes operated by parastatals, self funding public agencies and the private sector were supervised by various government agencies, such as Securities and Exchange Commission (for schemes managed by asset management companies), National Insurance Commission (NAICOM) (for insured schemes) and the Joint Tax Board (for unified schemes). Thus, supervision was fragmented and subject to different rules and regulations.


For an effective pension system, there must be standard uniform rules that would apply to every scheme, hence, the need for a sole Regulator that would issue uniform rules on pension matters and enforce them.


  • Transparency

One of the major deficiencies of the PAYG Scheme was lack of transparency in its administration leading to all sorts of corrupt practices that are still bedeviling the payment of benefits to those exempted from the Contributory Pension Scheme. In the private sector, pension assets were not usually separated from the assets of the institutions and sponsors had, on many occasions, dipped their hands into the pension assets whenever the institution was in need. On many of such occasions, no refunds were made and the pension fund was left to suffer the consequences.


In addition, investment decisions were highly influenced by the Boards of Trustees, which on many occasions lacked the requisite experience to take such decisions. Consequently, many schemes were put in jeopardy, and in some case, were rendered bankrupt.


The most important remedy is to make sure that assets of the pension scheme are separated from the assets of the sponsor and are adequately administered by professionals that are not only versed in taking investment decisions but also adequately equipped with the necessary skills of pension administration.  In addition, Pension Fund Administrators must be responsible primarily to the owners of the pension assets under their management.




4.1     Individual Retirement Savings Account

One of the opportunities of the CPS is that participants are allowed to open individual Retirement Savings Account where contributions are accumulated till retirement. The Scheme also permits members to make voluntary contributions as an additional percentage of their salaries into their individual capitalized account. The mandatory requirement that PFAs provide regular/periodic statement of accounts to RSA holders ensures close monitoring of the accounts which could also guarantee quick report of errors and prompt correction of such errors.

4.2     Mobility of Labour

The individual capitalized account allows mobility of labour across sectors and the different tiers of government. Once RSAs are opened and Personal Identification Numbers (PINs) are issued to employees, these numbers are unique to each employee throughout his/her lifetime. Thus, where a member changes from one employer to another, the same individual account may be kept for future contributions. This implies that there is no need opening another RSA while changing jobs. It suffices for an employee to supply a new employer with his PIN and Pension Fund Administrator (PFA).

4.3     Contributors’ Rights

The CPS also affords participants the opportunity to select any PFA of choice for the purpose of opening RSA. This is contained in section 11(1) of PRA 2004. The sub-section 2 of section 11 also provided the opportunity to RSA holders to transfer their retirement savings account from one PFA to another once in a year without any reason for such transfer.

Participants retiring under the new scheme have the opportunity to take decision on the mode of their retirement benefit payment. Retirees under the new scheme can choose either the Programmed Withdrawal (PW) method, which is a periodic withdrawal calculated on the basis of expected life span or purchase annuity for life from a life insurance company licensed by the National Insurance Commission with periodic payments.


4.4     Access to Retirement Benefits

Already Contributors under the Scheme have started retiring and accessing their retirement benefits including their accrued pension rights for services rendered under the old Scheme, which had been recognized under the Contributory Pension Scheme. So far, the Federal Government has paid N80 billion into the RSAs of about 13,000 FGN employees who retired under the new Scheme between July 2007 and April 2009.

4.5     Minimum Pension Guarantee

The CPS also provided for a Minimum Pension Guarantee (MPG) as contained in section 71 of the Pension Reform Act 2004 (PRA 2004). This is a provision for all individuals who have contributed for some years but have not accumulated enough to have a minimum pension. This guarantee comes into play when a member does not have enough accumulations to enable him to draw down a pre-specified minimum benefits; the State provides the required assistance by topping up the member’s account with the required amount. Thus, the MPG can provide progressive transfers to those with less than complete contribution histories while taking income into account to avoid some leakages.


The National Pension Commission (PenCom) as the apex regulatory agency of pension matters in Nigeria would have to come up with guidelines/regulations for the implementation of the MPG.

The MPG can be seen as a variant of social security policy that ensures redistribution of resources. PenCom would have to design appropriate techniques for the determination of eligibility for the MPG apart from the required number of years of contribution. This is important in order to avoid retrogressive tendencies that could arise from a high income household benefitting from the minimum pension guarantee.

4.5     Accumulation of Long-term Funds

The contributory pension scheme has generated a pool of long-term funds For example, the Contributory Pension Scheme has generated a pool of N1.1 trillion investible funds that have been invested. Thus, the Contributory Pension Scheme has directly fulfilled the functions of transferring resources over time and pooling of funds in a potentially efficient manner. The transfer of resources in favor of long-term assets could have significant positive impact on capital formation and investment and hence GDP growth.




The implementation of the pension reform in Nigeria has not been without its fair share of challenges especially as it affects the Nigerian worker. Some of the issues are outlined hereunder.


  • Pension Contribution Ratio

The issue of pension contribution ratio between the Government and its employees also comes to the fore in discussing the challenges of the Contributory Pension Scheme. It is unjustifiable and unacceptable that both the Government and its employees should be contributing the same percentage of the employee’s income as pension contributions. The Government introduced the Contributory Pension Scheme and it has the oversight function, therefore, it should provide some cushion to the employee by contributing higher percentage than the employee.

5.2     Accessing Retirement Benefits

There are some inherent problems in accessing retirement benefits under the CPS. First, the statutory retirement age is not quite clear from PRA 2004. For example, while the public sector statutory retirement age is either 60 years or 35 years of service, whichever comes first, the retirement age varies between 55 and 60 years in the private sector. The PRA 2004 just stipulated that nobody should be entitled to make any withdrawal from their retirement savings account before attaining the age of fifty (50) years as contained in section 3(1) of PRA 2004.

The ambiguity about retirement age is very clear in section 3(2)(C) of PRA 2004 that stated explicitly that any employee who retires before the age of fifty(50)  years in accordance with the terms and conditions of his employment, shall be entitled to make withdrawals in accordance with section 4 of PRA 2004. This suggests that the Act recognizes that retirement age depends on the relative bargaining power of both the employee and the employer.

There is also the challenge posed by the inability of voluntary retirees who are not up to 50 years to access their retirement benefits. This challenge is further compounded by the breakdown in informal social security system in Nigeria. Thus, this category of voluntary retirees may not have a dignified living standard until they are able to access their retirement savings account.

There is equally the challenge posed by general low income in Nigeria that translates into low balances in RSA at retirement. This low income earners may not be able to take up to a minimum of 25% lump sum from their RSA and still have RSA balance that would give them guarantee of periodic payments. This would have to be addressed because all retirees should be entitled to dignified retirement life.


5.3     Funding Minimum Pension Guarantee

The fiscal requirement for the MPG is shouldered by the government in other jurisdictions. For example, in Chile, the provision of MPG is a permanent cost to the government. Hence, the need for government at all levels to recognize this provision of the PRA 2004 and bear its full cost in order to ensure a dignified retirement living standard. Presently, more than 11% of retirees receive a minimum pension guarantee benefits, which cost 0.1% of GDP in Chile. Similarly in the UK, government ensures that that pensioners will not have less than a certain amount to live on, this amount is known as the minimum income guarantee. If your income from all sources, i.e. state pensions, private pensions and investments, adds to less than the MPG then you are entitled to receive income support from the government.

The foregoing suggests that all stakeholders should be responsible for funding the MPG as found in other jurisdictions. In view of this, government should also set certain part of her monthly wage bill apart in order to avoid lack of budgetary provisions.

Leakages could occur on household basis where the spouse of a high income worker may accumulate a relatively small balance and qualify for the minimum pension guarantee unless this is subject to a household asset or income test.


5.4     Compliance

Compliance in the provision of the Pension Reform Act 2004 was more in the public sector as participation is compulsory for all public employees. In the private sector, organizations with at least five employees are required to implement the Contributory Pension Scheme. However, compliance by the private sector has remained a challenge due to lack of comprehensive database of employers of labour in the country, which limits the extent of enforcement by the regulator. Similarly, employers themselves are not willing to comply with the provision of the Act because it is regarded as additional cost to their Organizations.


The Contributory Pension Scheme provides for an all encompassing system that involves not only the public and the private sectors but also the informal sector. However, because the informal sector in Nigeria lacks a coherent structure and has an unwieldy composition, its integration into the new scheme is very herculean and difficult. For informal sector participation, some policy issues like contribution rate, mode of collection and enforcement would have to be addressed.



In conclusion, the Contributory Pension Scheme is inevitable in view of the issues associated with the old Scheme, including but not limited to coverage, funding, transparency, lack of supervisory authority resulting in inadequate supervision. Untimely payment of benefits had resulted in accumulation of huge pension liabilities that are yet to be fully settled.


Indeed, experiences with the old scheme had demonstrated that employers alone cannot shoulder all retirement benefit obligations. Therefore, it is necessary to introduce a system that is contributory where both employer and employee would contribute a percentage of the employee’s earnings towards meeting pension obligations. This would ensure sustainability and adequate provision of resources to defray all pension liabilities.


The implementation of the Contributory Pension Scheme in Nigeria has not been without challenges as highlighted above. When these challenges are mitigated, the system would no doubt be more effective and efficient in ensuring that its objectives are met. In suggesting measures to mitigate some of the challenges highlighted, the National Pension Commission, as the regulatory agency of pension matters in Nigeria, must come up with the following;


The maximum number of years of contribution will have to be determined in view of the peculiarities of the Nigerian economy. As in other jurisdictions, it is hereby recommended that Stakeholders at all levels should fund the MPG. In this regard, it is further recommended that Government should consider setting aside 1% of its monthly wage bill for this purpose. These funds should be kept in a dedicated account with the Central Bank of Nigeria and monitored by the National Pension Commission.


The eligibility criteria would have to be clearly spelt out in order to avoid unqualified households from enjoying the MPG. This is because MPG is a progressive social security programme that should benefit less privileged households.


The issue of ambiguity of retirement age would have to be clarified. In this case, the minimum age requirement for any condition of service should be explicitly specified.


Secondly, the issue of voluntary retirement and accessibility to RSA would have to be addressed, especially when the retiree has a few years to meet the age requirement of 50 years as specified in the Act.


The government would have to come up with policies to address low levels of income and hence low contribution ratios among certain categories of workers. The issue of social pensions as obtained in other jurisdictions (e.g. Chile) should be carefully examined, especially with the commitment of the present administration to come up with social security policies in Nigeria.




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