Nigeria’s Pension Reforms Require More Clarity

By Roy Maurer Oct 31, 2014

There are good, bad and ugly sides to Nigeria’s recent pension reforms, and there is a need for the newly created National Pension Commission to provide clarifying guidance to employers, experts said.

President Goodluck Jonathan signed the Pension Reform Act 2014 into law on July 1, introducing significant changes to the country’s contributory pension plan. By some measures, Nigeria is the largest economy in Africa.

The main objectives of the reform were to encourage participation in the pension plan, ensure contributors receive their benefits when due and to assist individuals to save for their retirement. The plan is open to all public-sector employees and to private-sector workers in organizations with a staff of 15 or more employees.

In the absence of a commencement date, it has come to be understood as July 1, 2014, the day of signing.

“While the new act is generally a step in the right direction, some of the changes introduced appear not to have been well-thought through and some of the changes appear to have been made at the last minute, thereby creating some gaps, ambiguities and inconsistencies within the law,” remarked Taiwo Oyedele, partner and head of tax and corporate advisory services at PricewaterhouseCoopers Nigeria, based in Lagos.

Only about 2.4 million out of over 60 million Nigerians of working age contribute to the national pension plan. “Effectively, this means less than 5 percent of Nigerians are covered, leaving over 95 percent exposed to social insecurity in their old age,” said Oyedele.

Some of the key changes in the law include an increase in the minimum number of employees required to take advantage of the pension plan, an increase in the minimum contribution into the plan, and the levying of fines and penalties on pension fund administrators for failing to meet their obligations to contributors.

The Good

According to Oyedele, some of the reform’s improvements include:

  • Exempting interest, profit, dividends, investments and other income accruable to pension funds or assets from taxation. In addition, the withdrawal of voluntary contributions is no longer subject to taxation, if withdrawn within five years.
  • Allowing unemployed individuals to withdraw funds from their retirement accounts. “An employee who disengages from employment or is disengaged before the age of 50 and is unable to secure employment within four months of disengagement is allowed to make withdrawals from the account, not exceeding 25 percent of the total amount credited to the retirement savings account,” he said.
  • Expanding the scope of investments in which pension funds can be invested. “While this is a good thing on the one hand, care should be taken not to lose sight of the need to protect and preserve contributors’ wealth,” said Oyedele.
  • Imposing higher penalties for misappropriation of funds.
  • Creating a pension protection fund. “The objective of the fund is to guarantee a minimum benefit to contributors in the event of any shortfalls in the investment of pension funds,” he said.
  • Adding to the venues for employee redress. Aggrieved individuals are now obligated to file complaints with the National Pension Commission, established to regulate the effective administration of pension matters in Nigeria, before exploring arbitration or commencing an action at the National Industrial Court. “More opportunities for dispute resolution is a positive development, as it gives more contributors confidence in the plan,” Oyedele said.

The Bad

Some of the troubling changes within the reform have to do with coverage and contribution levels, according to Oyedele.

Raising the number of workers necessary for mandatory contributions from five to 15 reduces the number of employers and employees that are likely to benefit from the plan, he said. “Given the low level of contributors under the scheme, this change is counterproductive.”

Changes to the base and rates of contributions are also worrisome for employers, he said. According to the new law, contributions are to be based on “monthly emoluments,” or total earnings defined in the employee’s contract of employment, and “shall not be less than a total sum of basic salary, housing allowance and transport allowance.”

“This definition is vague and could be interpreted to mean that all items that are paid on a monthly basis, in addition to basic salary, housing and transport, would form part of the base on which the pension rates are applied. This potentially larger base could well mean that many employers will see an increase of over 100 percent in their pension contribution obligations, while employees’ net pay will reduce unless their employers choose to increase their salaries to accommodate the additional contribution,” said Oyedele.

The definition of “monthly emolument” has created confusion for employers, according to the Nigerian office of global professional services firm Deloitte. “Granted that the intention of the law is to widen the base of the contribution for the benefit of the working population, the definition appears vague and has given rise to different interpretations by companies,” said Oluseye Arowolo, a partner in tax services at Akintola Williams Deloitte, based in Lagos.

“Will this emolument be limited to cash allowances? What happens to benefits whose monetary value may not be easily quantified, such as share options and other incentive schemes? Does it matter if some of the allowances are not paid on a monthly basis? How about employees who are not paid transport allowances but [are] given official cars? Will this benefit-in-kind be considered? Since a minimum threshold of basic salary, housing and transport allowances was specified in the act, will employers not go via this route of minimal cost?”

The rates of contributions to be made by both employers and employees have also been raised, to a minimum of 10 percent and 8 percent respectively, both up from 7.5 percent. Experts agree that this change will increase the cost of employment and may force many employers to lay off staff. “Employers must prepare for either an increase in staff cost or some restructuring of staff compensation to maintain the contribution at the current levels,” said Oyedele.

According to Arowolo, there are fears “that the increased cost could set in motion another wave of retrenchment in order to reduce the consequential increase in labor cost.”

The Ugly

The Pension Reform Act was signed into law without a commencement date, which has come to be accepted as July 1. This oversight gave no room for a transition process or proper planning by affected employers, said Oyedele.

The law also leaves out employees who work for an employer with more than three and fewer than 15 workers. Only employers with a minimum of 15 employees are required to contribute to the plan. The law states that companies with fewer than three employees will be governed by guidelines issued by the National Pension Commission. However, “the act is silent” on the applicability of the plan to these other employers who fall in the middle, Oyedele noted.

Employers are also now able to assume full responsibility for contributions under the new reforms, but not less than 20 percent of the employee’s monthly earnings. “This does not make sense given that the combined contribution by both parties is 18 percent. Employers will therefore be discouraged from taking full responsibility,” Oyedele said.

He stressed that the newly created pension commission must provide clarifications regarding transition arrangements, contributions by employers with three to 14 employees, and the definition of monthly emolument. The commission should “promptly issue regulations and guidelines to address the bad and the ugly sides of the new law,” he said. “Where an amendment to the law is required, this should be done by the national assembly in proper consultation and engagement with stakeholders.”

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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