BY The Explainer
The Contributory Pension Scheme (CPS), introduced in 2004, was a response to the failures and unsustainability of the old defined benefit scheme (DBS). Under the DBS, retirees often faced severe delays in receiving their pensions due to a plethora of inefficiencies. The system was plagued by corruption, and other challenges, leaving many retirees destitute and dependent on family members for survival. In contrast, the CPS offers a more transparent and predictable system, where workers’ contributions are managed by pension fund administrators (PFAs) under the regulation and supervision of the National Pension Commission (PenCom).
The CPS ensures that each worker’s pension is funded by both the employee and the employer, creating a pool of funds that is invested to generate returns. These returns help secure the future of retirees, ensuring a stable income after retirement. Unlike the DBS, where pension payments were subject to government budgetary allocations and uncertainties, the CPS guarantees that workers’ pension savings are readily available for payment of retirement and terminal benefits.
Despite the significant successes recorded in the implementation of the CPS in Nigeria, there are concerns about low pensions, particularly among public sector retirees, who often have lower pay compared to those in the private sector. The issue of low pensions under the CPS can be attributed to several factors:
THE PATH TO INCREASED PENSIONS
To address factors contributing to low pensions, the PRA 2014 allows employers to establish additional benefits schemes (ABS), providing enhanced retirement benefits, including gratuity payments, to their employees. Contrary to misconceptions, the CPS has not abolished the payment of gratuity to employees. Indeed, many organisations have instituted ABS from which gratuities and other retirement benefits are paid to retirees in addition to the RSA balances. This flexibility enables employers to offer more benefits beyond the mandatory provisions, depending on employment terms, affordability, and collective bargaining.
It is crucial to understand that profits generated from pension fund investments continue to seamlessly reflect in retirees’ RSA balances, further boosting their pensions. Consequently, in 2017, PenCom introduced the periodic enhancement of pensions for CPS retirees because the returns generated by the PFAs on the RSAs of most retirees were sufficient to enhance their monthly pensions. Over the years, many RSAs have seen significant growth due to high returns from PFAs, despite ongoing monthly pension payouts.
As outlined above, various options are available to employers and employees to improve pension adequacy, particularly for public service retirees who are disproportionately affected by lower pay. Offering additional retirement benefits can attract and retain talent, boost employee morale and loyalty, and enhance an organisation’s reputation.
Based on information from the National Pension Commission (PenCom).
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