The Contributory Pension Scheme (CPS) in Nigeria was established in 2004 by the Pension Reform Act. It is a retirement savings plan designed to provide financial security for employees in the public and private sectors after their active working years. This scheme replaced the previous pay-as-you-go pension system, which was unsustainable and resulted in significant pension arrears.
Under the contributory pension scheme, both employees and employers make contributions towards the pension fund. The employee contributes a minimum of 8% of their monthly salary, while the employer contributes a minimum of 10%. These contributions are deducted from the employee’s salary and remitted to their Pension Fund Administrator (PFA), who manages the funds on their behalf.
The funds contributed by employees and employers are invested in various financial instruments such as government securities, corporate bonds, and equities, with the aim of generating returns and growing the pension fund. The investment decisions are guided by guidelines set by the National Pension Commission (PenCom), which regulates and supervises the pension industry in Nigeria.
The contributory pension scheme offers several benefits to both employees and employers. For employees, it provides a secure and structured way to save for retirement, ensuring a steady income stream during their non-working years. It also allows employees to transfer their accrued pension from one employer to another, ensuring portability and continuity of their retirement savings.
For employers, the contributory pension scheme helps in creating a more stable and predictable retirement benefit liability. It also reduces the burden on employers to fund pension liabilities directly, as the responsibility for managing the pension fund rests with the Pension Fund Administrators.
Upon retirement, employees are entitled to a pension account statement, which shows the total contributions made and the investment returns earned over the years. The accumulated funds can be accessed through programmed monthly withdrawals or as a lump sum, depending on the retiree’s preference.
The contributory pension scheme in Nigeria has brought about significant improvements in the pension system. It has enhanced transparency, efficiency, and accountability in the management of pension funds. With the establishment of the Pension Transitional Arrangement Directorate (PTAD), pensioners who were not captured under the old pension scheme have also been included, ensuring wider coverage and inclusivity.
However, challenges remain in the effective implementation of the contributory pension scheme. Some of these challenges include inadequate pension coverage particularly in the informal sector, delays in remittance of contributions by some employers, and poor compliance by some PFAs in managing the funds and providing quality customer service to contributors.
In conclusion, the contributory pension scheme in Nigeria is a significant reform that aims to ensure retirement security for employees. It provides a structured and accountable framework for saving towards retirement and has brought about positive changes in the pension system. However, continued efforts are required to address the remaining challenges and further improve the effectiveness and inclusivity of the scheme.