Pension Insight: Upholding responsibility — employers’ commitment to contributory pension scheme

In a world where financial security during retirement is paramount, the contributory pension scheme (CPS) is a vital pillar for providing a dignified post-work life for employees.

The Pension Reform Act (PRA 2014) clearly defines the roles and responsibilities of the employer and the employee under the CPS.

The CPS is a contributory scheme under which the employer and the employee contribute to paying the employee’s retirement benefits. This article focuses on the key obligations of employers under the CPS, emphasising their crucial role in safeguarding the retirement aspirations of their workforce.

Obtaining an Employer Code

To ensure seamless integration into the CPS, employers must prioritise the first step, which is to obtain an employer code from the National Pension Commission (PenCom). The employer code is a unique identifier that enables effective tracking and monitoring of an employer’s pension obligations. By acquiring an employer code, organisations demonstrate their commitment to transparency and accountability within the pension system.

Employers who do not have an employer code cannot remit pension contributions for their employees. To obtain an employer code from PenCom, the employer must fulfil the following requirements: A company registration certificate issued by the Corporate Affairs Commission (CAC), a tax identification number (TIN), and an application letter on the company’s official letterhead.

Deduct and Remit Pension contributions for employees

One of the fundamental obligations of employers under the CPS is the regular payment of pension contributions on behalf of their employees. The employer is required to deduct the monthly contributions of the employee, not later than seven working days from the day salary is paid, and remit an amount comprising 8 percent in respect of the employee and 10 percent employer contribution to the Pension Fund Custodian (PFC) specified by the Pension Fund Administrator (PFA) of the employee.

To maintain the integrity of the CPS, employers must remit pension contributions promptly. Timely remittance not only ensures the smooth functioning of the pension system but also safeguards employees’ trust in their employers. By fulfilling this obligation diligently, employers contribute to the stability and growth of the pension fund, ultimately benefiting all participants.

The Pension Reform Act 2014 (PRA 2014) states that an employer who fails to deduct or remit the contributions within the stipulated time frame of seven working days from the day salaries are paid shall, in addition to making the remittances already due, be liable to a penalty, which shall not be less than 2% of the total contributions that remain unpaid for each month or part of each month the default continues. The penalty amount shall be recovered as a debt owed and paid into the employee’s RSA.

It should be noted, however, that the 18 percent monthly pension contribution is a prescribed minimum, as the employer may elect to increase the rate or bear the whole burden on behalf of the employee. Employers must deduct the specified percentage from employees’ salaries, demonstrating their commitment to fostering a culture of personal financial planning among their workforce. This deduction strengthens employees’ retirement prospects and instils financial discipline when made consistently.

Procurement of Group Life Insurance Policy for employees

In line with the CPS, employers must procure a group life insurance policy (GLP) for their employees. This policy serves as a safety net, providing financial protection to employees’ families in the event of their death while in active service.

The insurance policy pays the ‘sum assured’ benefit to the next of kin or dependents of an employee who dies in active service. Specifically, the provisions of the GLP affect employers in the public and private sectors covered under the CPS. Employers must maintain a GLP in favour of each employee covered by the CPS for at least three times their annual total emolument.

The premium in respect of the GLP shall be paid not later than the date of commencement of the cover. Where the employer fails or refuses to make payment as and when due, the employer shall arrange to settle claims arising from the death of any staff during such a period.

Opening Nominal RSAs

Employees are responsible for initiating the process of opening retirement savings accounts (RSAs) for their pension contributions. RSAs are personalised accounts that enable individuals to accumulate their pension contributions over their working lives.

Employers are pivotal in facilitating this process, ensuring all employees have their RSAs duly registered to commence contributions promptly.

However, where an employee has yet to open an RSA six months after employment, the employer must open a Nominal RSA for the employee. This proactive step ensures the employee’s pension contributions are not neglected and paves the way for a smoother transition once the employee establishes his RSAs.

Employers’ commitment to inclusivity and comprehensive coverage reflects their dedication to supporting all employees in their retirement aspirations.

In conclusion, as the backbone of the nation’s workforce, employers play a pivotal role in upholding the integrity and success of the CPS.

By obtaining an employer code, opening nominal accounts for employees without RSAs, deducting employees’ contributions, remitting pension contributions on time, and procuring group life insurance, employers demonstrate their commitment to their workforce’s financial well-being and future security.

Robust and responsible employer participation in the CPS ensures a retirement landscape built on trust, transparency and a shared vision for a dignified future for all employees.

Based on information by the National Pension Commission (PenCom)