i

“AN ASSESSMENT OF COMPLIANCE WITH THE

PENSION REFORM ACT 2004, TOWARD ASSURED AND

EFFICIENT RETIREMENT BENEFIT”

UMAR DAUDA B.Sc, M.Sc (Acct), PGDTI, ACA, MNIM

Chief Internal Auditor,

Debt Management Agency, Office of the Executive Governor, Bauchi State Nigeria

umardauda@ymail.com

08039704303, 08086995252

Kamba publishing company Kano, Nigeria (2012)

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ABSTRACT

This paper examined retirement benefits as a result of compliance with the

pension reform Act 2004 by the Federal Government. Related studies to the

topic were reviewed. Using survey method questionnaires were administered

to selected employees; the data collected was analyzed using table of simple

percentages and interpretations. Spearman rank order correlation technique

were employed and fortified with t-test to assess and measure the strength of

the relationship between the variables. The paper identified that, there are

still some employees in the public service who refused to comply with the

contributory scheme due to fear of fund misappropriations, however most of

the pension fund administrators (PFAs) failed to provide those who comply

with clear information about their investment strategy. It has been

concluded that employees are not assured and have no confidence of better

package after active service. The paper recommends that, national pension

commission should review the institutional framework of the reform and

urgently investigate the operations of PFAs as part of it supervisory

functions.

Keywords; pension Act 2004 Employees, Employers, PFAs, assured and

efficient benefits

INTRODUCTION

The most important issue that arises as any employee is approaching the end of his/her

service period relates to how one will ensure the continuity in making his needs after

retirement in terms of basic needs (i.e. food, clothing, shelter, children school fees, etc.).

It is in response to these that most employers packaged and put in place what is referred

to as terminal benefits (pension and gratuity).

Prior to year 2004, the public sector pension scheme in Nigeria are non contributory i.e.

the cost is fully borne by the government as contained in the pension decree No. 102 of

1979 as amended to then (2004). The first public sector pension scheme in Nigeria was

the PENSION ORDINANCE of 1951, with retroactive effect from January 1, 1946. The

law allowed the Governor-General to grant pensions and gratuity in accordance with the

regulations, which were reviewed from time to time with the approval of the secretary of

the state for colonial affairs in the UK government. Vesting period was fixed at 10 years

of the active service. Though pensions and gratuities were provided for in the legislation,

they were not a right as they could be reduced or withheld altogether, if it was established

to the satisfaction of the governor-general that the officer was found guilty of negligence,

irregularity or misconduct. (Agabi, 2006)

After then series of amendments and promulgation follows: the civil service pension

scheme which was established by the Basic Pension Decree No. 102 of 1979. The local

government pension scheme established the military fiat 1979 and the Armed forces

pension scheme treated through Decree No. 103 of 1979 with retroactive effect from

April 1974. There was also Pension Rights of judges Decree No 5 of 1985 as amended by

Amendment Decrees No. 51 of 1988 (as well No. 29 & 62 of 1991).The police and other

agencies pension scheme Decree No. 75 of 1993 which took retroactive effect from 1990.

All these represented another landmark development in the history of the Nigeria pension

system.

Ahmad (2008) opinioned that one of the major challenge of the Nigerian public pension

scheme lies in its dependence on the budgetary provision from various tiers of

government for funding.

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As well in the private sector, the scheme was characterized by very low compliance ratio

due to the lack of effective regulation and supervision of the system; in fact many private

sector employees are not covered by any form pension scheme.

The worse part of the scenario is when it comes to the benefit after service, where

payment procedures was often very tedious, sometimes the pensioners had to wait for

days and years, to collect their entitlement. Arimori (2004) similarly, viewed the

reimbursement process for the split of pension and gratuity payment between federal and

state services and other agencies as very clumsy, untidy and sometimes fraught with

bribery and corruption. There were also undocumented cases where the reimbursing

agency holds the recipients to ransom.

However, ineffectiveness of this decree was revealed early 2004 when the then president

Chief Olusegun Obasanjo, in one of his monthly briefings stated that the total amount

owed to all pensioners throughout the country amounted to about N2.3 trillion. There is

no doubt that clearing this indebtness will definitely not be an easy task; hence the need

to introduce a contributory pension scheme in the public sector and the establishment of

national pension commission proved to be indispensable. Mentioned but few, although

fundamental challenges of the Nigerian pension system which necessitate the

administration of President Olusegun Obasanjo in the year 2004 to undertook pension

reform so as to addressed the above and many other challenges in the system.

Pension Reform Act No. 2 of 2004 laws of the federation of Nigeria provide for the

establishment of contributory pension scheme for the payment of the employees of the

public service of the federation, FCT and private sector. Although the Act came into the

effect for public sector employees on the July 1, 2004, but implementation for the private

sector began in January 2005 after the guidelines was approved. The provision of the Act

which is a uniform pension system for both the public and private sectors and similarly

for the first time in history for the whole country, as single authority the National Pension

Commission (PenCom) was established to regulate and supervise all pension matters in

the country. The scheme consists of licensed Pension Fund Administrators (PFAs) whose

major function is to manage the pension fund (accumulated contribution) and the

custodian of the pension fund assets (PFCs) all licensed by PenCom. Despite a

comprehensive and detailed provision of the Pension Reform Act 2004, so, many

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complaints were raised more recently vanguard newspaper published on article that a

case has been made “Military Withdrawal from Pension Reform who benefits?” (19

August 2010), some were complaining of non assurance in their contributions. Others are

bitterly criticizing some sections of the Act. Thus concerned citizens more specifically

employees in the public sector of the federation, FCT and those in private sector services

begin to worry and ask, will the compliance with the provisions of the new scheme

(Pension Reform Act 2004) provide any assured and effective package (pension and

gratuity) after their retirement?. It‟s in line with this exhibition that the paper examines

the major fact of the new scheme (contributory pension scheme) which is expected to be

fully funded by contributions from employees and their employers. The paper is designed

to assess whether if the introduction, application and compliance with the contributory

pension scheme will assures the beneficiaries (employees) any efficient package after

they must have left service under the scheme.

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CONCEPTUAL FRAMEWORK AND REVIEW OF THE LITERATURE

The provisions of the Pension Reform Act 2004, repeals the pension Act 1990 and

addressed the problems and difficulties in all the previous laws and enactments. It then

establishes in uniform a contributory pension scheme for both the public and private

sectors in Nigeria. It entails the following major features;

(a) Contribution of funds by both the employers and the employees to fund retirement

benefits thus: section 1 part 1 of the Act stated that “There shall be established for any

employment in the Federal Republic of Nigeria, a contributory pension scheme (in this

Act referred to as “scheme”) for payment of retirement benefit of employees whom the

scheme applies under this Act.

Employees and employers are under the obligation to contributes at the rate of 71

/2% of

the employees monthly emoluments, although the employer may elect to beer the full

responsibility of the contribution, provided that is not less than 15% of the employees

monthly emoluments. The employee may also elect to make additional voluntary

contributions, to the total contributions jointly made by his employer and him/herself.

Agabi (2006) pointed that its important to note that it is the employer‟s responsibility to

remit both the employees and its own contributions to the Pension Assets Custodian

specified by the PFAs of the employee within 7 days from the day the employee is paid

his/her salary. However, it is equally important to note that, the National Pension

Commission may impose a penalty of not less than 2% of the contribution remaining

unpaid on the employer for failure to remit contribution and such penalty shall be

recovered as a debt owing to the employee‟s retirement savings account (RSA).

Ahmad (2008) identified that, Contribution made by the employees form part of tax

deductible expenses in the computation of tax payable by the employees or the employers

and amount payable as retirement benefit are not taxable” However any contribution

voluntarily made by the employee in addition to contribution already made by him/her

and his/her employer which is withdrawn before the end of five years from the date the

contribution was made shall be liable to tax at the point of withdrawal (section 10 (c))

and 11(1-4) of the Act 2004).

Babalakin (2009) Making successful transition to the contributory pension scheme

requires some steps ranging from these employers already operating a particular pension

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scheme before coming into force of the Act, who are required to perform an Actuarial

valuation to determine the Pension Fund Assets. Or where the employer did not operate

any pension scheme that are required to decide on the structure of the scheme to be

adopted, taking into consideration the outcome of the preceding exercises.

Ahmad (2010) opined that, the pension reform of 2004 has some peculiar features that

positioned it as a catalyst for sustainable social welfare programme. For example, the fact

that, the reform is fully funded to ensure that the overall retirement income is maintained

from the onset of the scheme, allowed the retirement benefit be paid on sustainable basis

because funds are always readily available to defray any pension obligation that falls due.

Jorg (2010) in contrast identified two major failures of the scheme;

- The 2004 Reform in the Nigerian pension system has failed to allow for coverage of

workers outside the formal sector of the employment. And even those covered from

the formal sector of public service were not saved.

- Also the reform has failed to contribute to basic social security in old age for the

majority of Nigerians employed in the formal sector before the introduction of the

scheme

Jorg (2010) conclusions however contradict that of Ahmad (2010) despite the fact that

both studies were conducted in the same year. This might be as a result of three reasons:

Lack of facilities and ineffective way of gathering and processing sufficient data, to

which no doubt most of researches in Nigeria are subjected,

Secondly, there may be bias in conclusion of Ahmad(2010) as the researcher is from

PenCom a body saddled with the responsibility of administering the Act, thus,

probably it may be sentimental assessment. And likely Jorg (2010) have not

opportune to collected all that is required to conclude due to nature of the

methodology adopted in that study as a content analysis from Korea. However, recent

empirical studies supported the later argument as can evidence in the next section.

Barr, and Diamond (2008) are of the opinion that „in the Nigeria context, one can expect

a match between the accumulation of pension savings and the failure to find appropriate

investment outlets that would produce real returns to pension severs. In spite of the

proliferation of PFAs, their competence must be questioned: they appear to fail to provide

their customers with clear information about their investment strategy. A survey of PFA

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web sites conducted in September 2009 showed that many had not been updated for at

least two years. Moreover, virtually all companies were in breach of PenCom guidelines

to publish the rate of return of their Retirement Savings Account (RSA) funds at the end

of each financial year and to make the unit prices of their RSA funds readily accessible

online. In fact, only 14 PFAs (out of 26) provided any information about the value of

their respective RSA units on their web sites. Of course, seven offered out-up-date or

undated unit prices that lack informational value. Of the seven that provided more recent

data, only three provided sufficient data to calculate approximate rates of return, and only

a single PFA provided full coverage of the value of the company‟s RSA unit since its

inception, which allowed calculating the actual rate of return.

RESEARCH METHOD

Longitudinal survey design was adopted in this study, considering variations in legal

enactment as a factor responsible for changes in independent variable. However both

primary and secondary sources of data were used in the study. The primary data

collection was via fieldwork which took place within the month of November 2010.

Questionnaires were administered in the selected sample of federal government

employees from randomly selected ministries and extra-ministerial departments/units,

direct personal interview was also conducted.

The populations of the study consist of all the employees of the federal government.

However, for convenience the population was narrowed to cover only federal government

secretariat Kano. Using multistage sampling technique, 120 employees as a sample size

were drawn from only 12 ministries and extra-ministerial departments/units,120

questionnaires hence was then administered in ratio of 10 for each of the 12 ministries

selected.

The sample had also been limited to only senior and middle cadre officers, this has been

decided at that time because these categories tend to respond more appropriately and they

are more likely to understand the direction of the exercise. More so, it‟s assumed that

certain academic level they achieved, will guide their perceptions. The secondary data

were extracted from the materials obtained from library and internet in form of books,

journals, magazines and government official publications. The data collected was

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analyzed using simple percentages, tables and interpretations. Spearman Rank Order

Correlation technique fortified with Student t-test was then employed to test and measure

the strength of the relationship between the variables in the hypothesis formulated.

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RESULT AND DISCUSSIONS

Table 1: Distribution Pattern of the sampled out of the population:

Ministries and extra-ministerial departments

S/N Ministries/Extra-ministerial

departments

Total

quantity

administrati

on

Unreturned

or damage

Data

producing

sample

percentage of

Data producing

sample to total

questionnaire

administered

1

Federal ministry of housing

& house department

10 0 10 100%

2 Federal ministry of works 10 0 10 100%

3 Federal ministry of

environment

10 0 10 100%

4 Federal ministry of agric 10 0 10 100%

5 office of the accountant

general of the federation

10 1 9 90%

6 Federal character

commission

10 1 9 90%

7 Federal ministry of power

and steel

10 0 10 100%

8 Federal min. of labour&prod. 10 2 8 80%

9 Federal ministry of justice 10 0 10 100%

10 Establishment 10 2 8 80%

11 Office of the Surveyor

General of the Federation

10 2 8 80%

12 Federal Ministry of

Education

10 2 8 80%

Total 10 10 110 91.67

Source: Field Work (Nov, 2010)

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It can be understood from the above table that total number of the questionnaire

administered these unreturned or damaged and the difference which forms data producing

sample upon which the subsequent tables were based. (110 respondents)

Table 2: Demographic Data of the respondents

Respondent OLC OND/NCE HND B.Sc/others PG/Professional Total

Male 02 30 15 13 8 68

Female 08 10 05 17 2 42

Total 10 40 20 30 10 110

Source: Field Work (Nov, 2010)

The above table revealed a lot of information ranging from gender variation in the active

service of the federal government (using the sample studied) and recent studies revealed

that gender and education level impacted a lot in the way people behave and their

perceptions toward various phenomena.

Table 3: Length of the active Service of the respondents

Respondents Responses

Years of service 1-5 years 6-10 years More than 10

years

Total

Middle cadre

officers

15 50 24 89

Senior cadre

officers

5 10 6 21

Total 20 60 30 110

Source: Field Work (Nov, 2010)

It can be comprehended from the above table that more than 80% of the responses came

from the middle cadre employees who mostly put 6-10 years in the active service and are

therefore the class to be affected much by the new scheme.

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TABLE 4: Respondents’ Choice of Pension Fund Administrators

PFA RSA Holders Percentage

Stanbic-IBTC-Pension 50 45.5%

Premium-Pension Ltd 15 13.6%

ARM-Pension Ltd 25 22.7%

Sigma Pension Ltd 10 9.01%

Other 10 9.01%

Total 110 100%

Source: Field Work (Nov, 2010)

The above table represents various PFAs to which the sampled employees belong and the

percentage each PFA takes from the employees.

The implication of table 4 above means, any opinion express concerning PFA‟s by the

respondents is on these PFAs and their mode of operations.

Table 5: How will you assess the level of services delivery of your PFA?

Responses Respondents Percentage

Very effective 0 0%

Effective 20 18.2%

Fairly effective 40 36.3%

Ineffective 50 45.5%

Total 110 100%

Source: Field Work (Nov, 2010)

Table 5 clearly shows the employees‟ impression toward the services of their PFAs

which shows that more than 45% are not satisfied with the services of their PFAs and

they described it as ineffective while about 36% described it as fairly effective although

less than 20% say it‟s effective.

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Table 6: Assessing the level of transparency in Investment Portfolio of

Pension Fund by the PFAs

Responses Respondents Percentage %

Satisfied 20 18.2%

Dissatisfied 80 72.7%

Undecided 10 9.09%

Total 110 100%

Source: Field Work (Nov, 2010)

The above table shows that, the respondents are not satisfied with the way their

accumulated savings is invested. About 70% described it as not transparent while 18%

are satisfied. However, this might have influence by the global economic meltdown

which engulf billon stocks in which substantial pension fund was invested. Even though

after the sudden crash in the capital market most PFAs took necessary steps to improve,

the shake will take long for them to fully recover.

Table 7: Compliance with the Scheme by the Ministries/Departments

Year of adoption No. of Min./Dept. Percentage %

2004 10 83.33%

2005 2 16.7%

2006 0 0

2007 up ward 0 0

Total 12 100%

Source: Field Work (Nov, 2010)

The above table shows that most of the ministries and extra-ministerial departments/unit

start implementing the provision of the new scheme at the effective date, probably due to

an order from above. Another significant factor that facilitated that early compliance is

the readiness of the provision of the scheme dealing with the public sector as at the time

of its introduction with a little delay in package treating the private sector.

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Table 8: Employees’ expectations on assured and efficient package From

the Contributory Scheme

Responses Respondents Percentage

Yes 15 13.6%

No 80 72.7%

Undecided 5 4.54%

Total 110 100%

Source: Field Work (Nov, 2010)

Although 13.6% of the sampled employees blindly answered to have good expectation on

the scheme, table 5 above clearly indicated that employees have no confidence in the

contributory scheme more specifically due to lack fairness and accountability in the

services provided by PFA as shown on table 5. More than 70% of the respondents have

no assurance of effective retirement benefit from the contributory scheme and table 6

shows that this has to do with lack of transparency in the activities of Pension Fund

Administration (PFA). The implication of the data presented on table 5 is as expressed in

the words of Barr, and Diamond (2008) „in the Nigeria context, one can expect a match

between the accumulation of pension savings and the failure to find appropriate

investment outlets that would produce real returns to pension severs”

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Hypothesis and hypothesis testing

H1: Compliance with the pension reform Act 2004 has a significance influence on

assured and efficient retirement benefit.

HO: Assured and efficient retirement benefit is independent of compliance with the

pension reform Act 2004.

Using the original data analyzed on table vii and that of table viii as follows

MINISTRIES Variable-X Variable-Y

Fed. Min. Housing 7 5

Fed. Min. Works 10 9

Fed. Min. Environment 10 7

Fed. Min. Agric 10 10

Fed. Pay Office 10 7

Fed. Character Com. 10 7

Fed. Min. Mining & Steel Dev, 8 79

Fed. Min. of land & Physical Planning 10 10

Fed. Min. of Justice 10 10

Establishment 9 10

Office of the surveyor General of the Federation 10 8

Fed. Min. of Education. 3 6

Source: Field Work (Nov, 2010)

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Using spearman Rank Order Correlation analysis:

r = 1-6∑d12

n (n2-1)

NB r = rho value, d1 = rank of X- rank of Y, n = sample size

di =R(Xi)-(RYi) i.e. Rank of variable X, minus Rank of variable Y.

X Y R(XI) R(XI) dI (RX-RY) di 2

7 5 11 12 -1 1

10 9 4.5 5.5 -1 1

10 7 4.5 9 -4.5 20.25

10 10 4.5 2.2 2.2 4.8

10 7 4.5 9 -4.5 20.25

10 7 4.5 9 -4.5 20.25

8 9 10 5.5 4.5 20.25

10 10 4.5 2.2 2.3 5.29

10 10 4.5 2.2 2.3 5.29

9 10 9 2.2 6.8 46.24

10 8 4.5 7 -2.5 6.25

3 6 12 10 2 4

154.91

r = 1- 6(154.91)

12(144-1)

r = 1 - 929.4

12(143)

r = 1 - 929.46

1,716

= 1 - 0.542

0.458

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This shows low but positive correlation between the compliance with pension Reform

Act 2004 and “assured and efficient Retirement benefit”

Let us now examine the strength of this correlation by converting the rho-value to t-

score, thus,

t = rs n-2

1-rs2

= 0.458 12 – 2

1- (0.458)2

= 0.458 10

1- 0.210

= 0.458 10

0.790

= 0.45 12.65

= 0.45 (3.557)

= 1.630

NB: Degree of freedom= n-2 →10-2=8

At a critical value of t for ∞ = 0.10, is 1.860. Thus, t=2.04 i.e. t 0.90 = 1.860

MAJOR SUMMARY OF THE FINDINGS

The following sentences summarized the major findings of the study;

Despite all the complaints raised by employees over the operations of

licensed pension fund administrators, almost all employees registered and

opened Retirement Savings Account(RSA) into which they have being

making payment through deductions by their employers together with

employers‟ contributions of 7.5%.

Sampled employees described the investment strategies of the PFAs.

Over their contributions as fairly effective although 36% of them said it‟s

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ineffective, but almost all agreed that there is no transparency in the

investment portfolio of PFAs because their customers were not being

provided with sufficient information to draw reasonable conclusion.

Most of the federal ministries and extra-ministerial departments started

complying with the provisions of the contributory scheme(Pension Reform

Act.2004) stipulated time, but the implementation in the private sector did

not kicked up in time due to delay in the issuance of guidance for their

implementation.

There are still some employees who refused to join the contributory

scheme through PFAs for the reasons of fund mismanagement

,unsatisfied performance of PFAs so far recorded, non transparent

operations of both PFAs and Pension Fund Custodians(PFCs) and many

more.

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CONCLUSION AND RECOMMENDATIONS

Although, pension Reform from budgetary dependant to contributory pension scheme has

recorded a remarkable achievements with high level of efficient fund management and

wide range of acceptance in Japan and Malaysia, but the Nigerian version have been

bitterly criticized over the last six years of its implementation. The employees whose

interests are to be protected as contained in section 2 (a-c), impact the provisions of this

section are all to be apply on the employees as stated in section 1 (1) “There shall be

established for any employment in the Federal Republic of Nigeria, contributory pension

scheme (in this Act referred to as “the scheme”) for payment of retirement benefits of

employees to whom the scheme applies under this Act. However, same employees are

dissatisfied and have no confidence in the scheme as shown on table VIII of the last

section. Also, the Pension Fund Administrators whose mode of operations are guided,

supervised and initially licensed by the pension commission are not discharging their

duties effectively.

In general, the outcome of the Pension Reform in Nigeria raises the issue of how the

assembled pension savings might be used for productive investment for example, a

Nigerian working group on finance recently expressed concern about lack sufficient

depth in the capital market to effectively accommodate the available and expected

pension fund without causing a glut and overvaluation of existing capital market

securities (Nigerian National Planning Commission 2009, 43-44).

However, deliberation has so far failed to produce new insight to enable future action and

the problem of lack of suitable investment outlets, remains the crucial policy making

dilemma (Stewart and Yermo 2009, 25).

RECOMMENDATIONS

Going by the findings in section four above, the following measures are hereby

recommended to the relevant stakeholders;

First and famous the National Pension Commission should as a

matter of concern review the institutional design of the reform

system and urgently examine and investigate the operations of

PFA as part of its supervisory functions.

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For those who prefer the old scheme, PenCom should embark

on campaign to enlighten them on the implication and

impossibility of that idea (section 1(1) of the Act).

To ensure high level of compliance with the requirements of the Act both by

PFAs and PFCs, PenCom. Should make it mandatory on them to be issuing

separate comprehensive report of their activities each month to the PenCom.

This will help in keeping the track of their activities under tight supervision.

PenCom. Should ensure confidence in the Nigerian pension system to

encourage those who were uncovered by new scheme to voluntarily join and if

still resist, then, the provision of section one of the Act. Should be enforcing

on them.

However, urgent research is needed to deeply expose and provide solution on

the way pension fund is being managed in Nigeria.

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REFERENCES

Adams R.A. (2008) “Public Sector Accounting and Finance Made Simple (Lagos;

Nigeria)

Babalakin A. and Ayodele J. (2008)”Pension Reform Act 2004 Implication and

Obligation to an Employer (Lagos, Nigeria)

Barr N. and Diamond P. (2008) “Reforming Pension” Principles and Policy Choices

(New York) Oxford University Press

Cussey B. and Dostal J.M. (2008) “Pension Reform in Nigeria How not to Learn from

Others” Korean Journal of Policy of Studies

Davis E. P. (2003) “Is There a Pension Crisis in the UK” (Japan: Tokyo)

Dostal J. M. (2010) “Nigeria Pension Reform 2004-2010: Great Leap or Inappropriate

Policy Design? Korean Journal of Policy Studies

Funmi Komolafe and Victor Ahinma (2006) “Military Withdrawal from Pension Reform

who Benefits (Vanguard Newspaper Nigeria)

Gillian C. (2000) “Social Security Pensions” Development and Reform (General)

International Labour Office Publication

Jorg Michael Dostal (2010) “Nigeria Pension Reform 2004-2010 (Korea)

Agabi, K. (2006) “Pension Reform Act 2004 an assessment of the adequacy of the legal

framework

M. K. Ahmad (2008) “Pension Reform Process in Nigeria: Transition from Define

Benefits to Define Contribution. A Publication of National

Pension Commission (Nigeria)

M. K. Ahmad (2010) “The Nigeria Pension System” Nigeria Tribune Newspaper

Miki Arimori (2004) “Evaluation Criteria for Pension System and their Applications to

Pension Reform in Japan (2010)

National Pension Commission June, 2008: “Highlight of the Contributory Pension

Scheme in Nigeria

Nigerian National Planning Commission (2009) June bulletin pp43-44

Public Sector Accounting and Finance (2010) ICAN Study Pack (Nigeria)

Quinn, F. Joseph (1999) “Criteria for Evaluating Social Security Reform” (Pennsylvania:

USA) University of Pennsylvania Press

Stewart, E. and J. Yermo (2009) “Pension in Africa: OECD Working Papers on Insurance

and Private Pensions