Nigerian pension reform hopes compulsory pensions will tackle poverty in old age, while hardship loans supplement meagre salaries, says Jenny Keefe
If you read nothing else, read this …
- Although family ties are strong, many Nigerians face hardship in retirement.
- The Pensions Reform Act 2004 introduced compulsory pensions saving and all private sector employers with more than five employees have to set up a pension plan.
- The employer and employee must contribute 7.5% of salary each, saving a total of 15%.
- With bank loans out of the reach of many Nigerian families, employers often provide loans for employees.
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Old age is a grim prospect for many Nigerians. Although they live in one of the world’s largest oil producers, their national income has been squandered and mismanaged. And while family support networks are stronger than for the average Briton, hardship in old age is common, with most Nigerians working until ill health sets in.
So while the UK does battle with pensions simplification, the oil-rich west African state is reforming its own pensions system to try and tackle poverty in retirement. The previous, largely unregulated, system was open to abuse. David Gordon, a senior consultant at Hewitt, says: "There were some great problems with payments getting to recipients and general issues with administration so that the Reform Act basically was passed."
Part of the solution was a step which could well be on the horizon in the UK: compulsion. The Pensions Reform Act 2004 forced any private sector employer with more than five employees to provide a pension for staff. "It will affect many multinationals, however small their presence in Nigeria – basically every employee has to invest in a retirement savings account," says Gordon.
So in the last year private sector companies have set about putting schemes in place. Pensions are funded jointly by the employer and employee and contributions must be a minimum of 7.5% of salary each, totalling 15%.
Under the new legislation, staff sign up for a savings account with a Pensions Fund Administrator (PFA), a provider regulated with the National Pension Commission. Larger employers that previously managed their own defined benefit plans have to move their schemes into these accounts too.
Some firms that have successfully run their own plans are concerned about handing over funds to a new and untested system. But the aim is independence between employers and pension schemes, to safeguard employees. The snag is that no providers have registered with the commission yet. "The law has been in place for almost a year but there’s no actual retirement savings providers that have come up to be registered. So, as things stand, employers can’t actually invest in a retirement savings account. At the moment good employers are saving the back contributions for when these savings accounts get up and running," says Gordon.
Employers also have to maintain a life insurance policy for the employee, at the rate of three times salary. While not compulsory, loans are another common benefit. Larai Ahmed, deputy director in charge of compensation and benefits at the Central Bank of Nigeria, says: "Most salaries are so meagre that employers often have to lace their remuneration with a hybrid of loans. This has to be so because asking employees to source funds from the money market would be hard because the interest rates charged by private banks are beyond the reach of the average worker."
The Central Bank of Nigeria offers staff vehicle loans, vehicle refurbishment loans, housing loans, computer loans and compassionate loans. "In all of these there is a rule that no employee [can] take loans that take his take-home pay to below 50% of his gross monthly salary. So one cannot take all the loans at the same time," explains Ahmed.