Pension Insight: Enhancing retirement benefits through voluntary contributions in CPS

Saving for retirement has become increasingly crucial as retirees have a plethora of needs during their retirement years. In Nigeria, the contributory pension scheme (CPS) has played a vital role in enabling individuals to plan effectively for retirement. The pension reform of 2004 aimed to establish a sustainable system that ensures a stable, predictable, and adequate source of retirement income for every Nigerian employee.

To achieve this goal, PenCom introduced the concept of voluntary contributions (VC), providing workers with the opportunity to increase their retirement income. The VC is a non-mandatory contribution remitted into an employee’s retirement savings account (RSA) through the employer. It allows employees to make additional contributions beyond the mandatory contributions set by law (minimum of 10 percent from employers and 8 percent from employees).

Highlighted below are some of the benefits of voluntary contributions:

ENHANCED ACCUMULATION OF PENSION SAVINGS

Voluntary contributions enable individuals to rapidly build up their pension savings during their working years, helping them meet their retirement income goals. Employees can determine the level of contributions required to reach their target income at retirement. Those with specific income targets can seek advice from their pension fund administrators (PFAs).  Furthermore, the “pension calculator”, which is available on most PFAs’ websites, can be utilised to make projections of amounts required to be saved to attain specified retirement income targets.

Through VC, employees can significantly boost their retirement income. By making additional contributions, which enables them to benefit from, individuals can harness the power of compounding interest over time, thereby enhancing the size of their retirement benefits when they exit active service.

FLEXIBILITY IN MAKING CONTRIBUTIONS

Voluntary contributions offer contributors the flexibility to decide the amount and frequency of their contributions. Contributions may be made monthly, quarterly, bi-annually, or annually. Contributors can start and stop their contributions at their convenience and increase or reduce the amount as needed.

INCLUSIVITY

Voluntary contributions are available to workers, including retirees under the defunct defined benefit scheme (DBS) and those under the CPS who rejoin service on contract. Additionally, workers in the private sector belonging to Closed Schemes or Approved Existing Schemes can also make voluntary contributions.

FIXED AND CONTINGENT PORTIONS

Voluntary contributions (VC) remitted into the RSA are segregated into two segments, i.e. contingent and fixed portions. The contingent portion, which constitutes 50 percent of the VC, is available for withdrawal by the contributors provided the contributions have remained in the RSA for a minimum period of two years.

On the other hand, the fixed portion, also comprising 50 percent of voluntary contributions, can only be accessed by the RSA holder an RSA holder at retirement. This fixed portion significantly bolsters an employee’s pension and lump sum upon retirement.

Since the inception of the CPS to February 2024, a total of 51,443 RSA holders have withdrawn N43.34 billion from their voluntary contributions.

TAX INCENTIVES

All income accrued to the VC investment is not taxable if the withdrawal is made five years later. Additionally, if individuals withdraw their VC after five years, no tax will be applied to the amount withdrawn. This provision further enhances the RSA balances towards higher retirement incomes.

HOW TO MAKE VOLUNTARY CONTRIBUTIONS

Eligible individuals should notify their employers in writing about their intention to make voluntary contributions, specifying the desired amount to be deducted. However, the amount cannot exceed 1/3 of the employee’s monthly salary, in accordance with the Labour Act of 1990.

Employers are responsible for remitting the voluntary contributions to the employee’s existing RSA. Failure to remit the contributions after deductions will result in penalties, as outlined in Section 11 (7) of the Pension Reform Act (PRA) 2014.

All Voluntary contributions, along with the mandatory contributions, are managed by PFAs and held in custody by pension fund custodians (PFC). The PFAs invest and manage the voluntary contributions in strict compliance with the regulations issued by PenCom governing pension funds and assets. Furthermore, in compliance with the Money Laundering Act (MLA) 2011 and requirements from the Nigerian Drug Law Enforcement Agency (NDLEA), any single voluntary contribution lodgement of N5 million and above must be reported by the PFC.

In conclusion, voluntary contributions within the CPS represents a proactive approach towards enhancing retirement planning and financial security for Nigerian workers. By offering flexibility and boosting retirement income, VC plays a crucial role in realising the vision of a sustainable and prosperous retirement future for employees.

Based on information from the National Pension Commission (PenCom).