The public service operated an unfunded Defined Benefits Scheme and the payment of retirement benefits was budgeted annually. In the light of resource constraints, the annual budgetary allocation for pension is often one of the budgetary items most vulnerable to cuts. Even where budgetary provisions are made, inadequate and untimely releases of funds result in delays in payment and the accumulation of arrears. The accumulation of pension arrears was only a symptom of a much deeper crisis. Because the old pension scheme was unfunded, there was no opportunity for the accumulation of investible funds. Even in rare cases where funds were accumulated under some parastatal schemes, restrictive investment policies and practices sometimes limited the capacity of such funds to grow.
Political instability and unstable labour policies in the past had engendered massive premature retirements, thus creating an unstable pensioner-to-active worker ratio. In addition, poor administrative systems, inadequate delivery structures for payment, lack of a database of pensioners, and adverse publicity in the media had portrayed government as uncaring to the plight of senior citizens. This gave rise to insecurity and also encouraged corruption in the active workforce.
By 2003, it was estimated that the outstanding pension liabilities nation-wide was ₦2 trillion, and it became obvious that the Defined Benefits Pension scheme could not be sustained. The Nigerian Railway Corporation was a classic case of the unsustainable relationship between the income generating and non-income generating salary earners. The Corporation generates ₦30 million every month, but paid ₦250 million to pensioners and ₦200 million to its regular workers.
The pension situation in the country was clearly unsustainable and had been described by some as a ‘ticking time-bomb’. It was therefore necessary to rethink pension administration in Nigeria.
In order to address and eliminate the problems associated with the pension scheme in the country, government undertook an exhaustive review of all the existing laws relating to pension in Nigeria. It found that the applicable laws were inadequate and inconsistent with modern pension administration arrangements in other countries.
Pension Reform Act, 2004
On 25 June 2004, the federal government enacted the Pension Reform Act and it came into effect on 1 July 2004. The objectives of the Pension Reform Act are to:
Ensure that every person who has worked in either the public or private sector
receives his or her retirement benefits as and when due.
Assist to improve individuals by ensuring that they save to cater for their livelihood
during old age and thereby reducing old age poverty.
- Ensure that pensioners are not subjected to untold suffering due to inefficient and cumbersome process of pension payment.
Establish a set of standard rules and regulations for the administration and payment of
retirement benefits in the public and private sectors.
Stem the growth of outstanding pension liabilities.
The Act provided for a contributory and mandatory pension scheme with contributions from both employees and employers. It has 100% asset backing and is privately managed by Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs). The scheme contains life assurance cover and is strictly regulated and supervised.
Reference: Public Service Reforms in Nigeria (1999-2014) - A Comprehensive Review
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