Nigeria has witnessed a remarkable shift in its pension system in about two decades with the introduction of the Contributory Pension Scheme (CPS).
This scheme has revolutionised retirement planning for employees, providing them with the benefits that ensure financial security and peace of mind in their post-employment years.
The advantages of the CPS and its positive impact on workers cannot be overemphasised as it has provided financial security and stability, growth in pension contributions through investments, among others.
As at March 31, this year, the value of pension assets stood at N15.58 trillion while membership of the CPS was 9.95 million.
Financial security and stability
The Director-General, National Pension Commission (PenCom), Mrs. Aisha Dahir-Umar, in a statement, stated that the CPS offers employees a reliable financial safety net, addressing the longstanding issue of inadequate funds to pay retirement benefits to retirees.
She said by contributing a portion of their monthly income, employees gradually build a pension fund that grows over time, ensuring a stable income upon retirement.
She said: “The scheme’s mandatory nature ensures that employees remain committed to saving for their future, reducing the risk of financial uncertainty in old age. Similarly, one of the significant advantages of the CPS is the employer’s mandatory contribution.
“Under this scheme, employers must contribute a certain percentage of an employee’s salary to their pension fund.This additional contribution, combined with the employee’s savings, accelerates the growth of the pension fund. Consequently, employees can accumulate a substantial retirement fund, enhancing their financial well-being during their golden years.
“It is important to note that the CPS provides a social security framework for employees.The CPS reduces dependence on family members or social welfare programmes, enabling individuals to lead dignified lives after retirement.With the CPS in place, employees can confidently look forward to retirement, knowing they will have a regular income stream to support their living expenses,” she noted.
Growth in pension contributions through investments
She said the funds accumulated under the CPS are invested by Pension Fund Administrators (PFAs) for the employees.
According to the DG, these investments generate returns over time, boosting the value of the pension fund.
“The funds are invested in various financial instruments, such as stocks, bonds, and real estate, ensuring diversification and potentially higher returns. The growth of the pension funds through prudent investments increases the long-term benefits for employees. The value of pension assets stood at N15.58 trillion as of March 31, 2023, while CPS membership was 9.95 million,” he said.
Death and disability benefits
She stressed that life is full of uncertainties, including deaths and unforeseen disabilities during active working age.
“The CPS not only focuses on retirement benefits and protects employees and their families in the unfortunate event of death or disability. Under the scheme, the accumulated pension fund is paid out as death benefits to the legal beneficiaries of the deceased employee.
“Similarly, the CPS provides immediate access to retirement benefits if an employee becomes incapacitated.These provisions offer financial security and support for employees and their loved ones during difficult times.”
Portability and flexibility
She further stated that the CPS offers a high level of portability and flexibility for employees.
She said: “Regardless of job changes or relocation within Nigeria, an employee’s accumulated pension funds remain in the employee’s Retirement Savings Account (RSA). The employer cannot access the savings. This flexibility enables individuals to maintain their pension contributions seamlessly and reduces administrative complexities. It also ensures that employees can benefit from the scheme consistently, regardless of their employment history.”
Cushioning effects of possible job loss
“The risk of job loss is a reality for workers. As an RSA holder, an employee can access 25 per cent of their RSA balance to help cushion the effects of an unforeseen job loss if they cannot secure another job after four months. It is essential to note that this partial withdrawal is not a replacement for retirement benefits, but rather a means to offer immediate support during a difficult period. The balance in the RSA continues to grow and accumulate until the RSA holder attains retirement age.”
Residential homeownership
“Under the CPS, RSA holders can use a portion of their retirement savings as equity contributions for residential mortgages.This is part of the National Pension Commission’s (PenCom’s) ongoing efforts to provide greater flexibility and access to pension funds for the benefit of RSA holders.
“It recognises that many workers face challenges in securing adequate housing upon retirement and aims to address this issue by unlocking the value of their pension savings to facilitate homeownership. RSA holders who have contributed to their accounts for at least five years and meet specific eligibility criteria can use up to 25 per cent of their pension savings as equity contributions towards acquiring residential properties. This policy aligns with PenCom’s commitment to ensuring that pension funds catalyse economic development and social well-being,” she added.
Mrs. Dahir-Umar maintained that the CPS has revolutionised the retirement landscape, benefiting employees in numerous ways.
“With its emphasis on financial security, employer contributions, portability, investment opportunities, and provision for death and disability benefits, the CPS is empowering workers to plan for a prosperous and worry-free retirement. The CPS is a testament to the government’s commitment to the well-being and prosperity of the country’s workforce,” she said.
