Challenges Of Nigeria’s Old Pension Scheme 


Civil servants, prior to Pension Reform Act of 2004, bore no direct responsibility, by way of payroll tax, for the provision of pension; instead pension benefits were paid through budgetary allocations to be kept in the Consolidated Revenue Fund. Budgets are estimates of revenues and expenditures for the fiscal years concerned. It is entirely possible that the amount released may fall short of the actual appropriation for pension payment. For instance, in fiscal year 2001, N6.4b was needed for payment of military pensions but only N2.1b was released for Defence, leaving a balance of N4.3b pension arrears.

Political control of the public sector pension

Both Davis and Diamond argue that social security pensions provided on the basis of pay-as-you-go are subject to political risks. The risks contemplated take three forms. The first relates to the tendency of politicians, eager to capture the votes of the electorate, to offer fabulous pension increases that they are either not going to pay or which may fall on regimes other than theirs. The second aspect of the risk refers to the fact that the pension account, in not being distanced from political control, falls easy ‘prey’ to politicians who dip hands into pension funds to cushion up temporary fiscal shocks. The third relates to the socio-political indifference to the plight of pensioners by politicians.

Pension payment default by state governments

Furthermore, it is also claimed that pension debts in the public sector mount, in part, because of the failure of some state governments to provide their counterpart funds necessary to make up the amount provided by the federal government, in situations where the affected pensioners worked for both federal and state governments. As a rule, further release of money by the Federal Government to the State government can only happen on proven evidence that pension for the previous month has been settled. This seems to explain why a state would fail to collect federal government counterpart funds, for months, because the States affected could show no evidence of being up to date in payment of pensions.

Pension record and disbursement flaws

Both the way a record of pensioners in the public sector is kept and the procedure for payment of pension create avoidable problems. In some establishments no accurate record of actual pensioners exists. Corruption breeds more in the absence of facts and figures. This claim was dramatized in bold relief when verification of military pension account led to the discovery of 23,000 fake pensioners on the Army pension roll.

Tardiness in pension disbursement

Another weakness found in the public sector system concerns the less than dignifying manner with which the senior citizens are treated. One observes how weak and frail-looking elderly citizens are compulsorily required to travel long distances to the point of pension payment. Worse still, they are left, under inclement weather for long hours and sometimes for days, before collecting their stipends. Some pensioners were claimed to have died while standing in a queue waiting to receive pension money.

The politics of pension reform

Various scholars have attempted to theoretically explain the likely triggers of pension reforms. They include: the character of political leadership, pension system and debt crises, the balance of power between reform advocates and opponents, weak structures of governance, the combined roles of domestic and external economic and political influences, the influence of neo-liberal ideas, relationship between international demonstration effects and domestic policy choices, and the role of international organisations in cross-regional diffusion of ideas and models. These factors and how they apply to the particular Nigerian experience are examined below.

Studying four countries in both Latin America and Eastern Europe, namely Argentina, Bolivia, Hungary and Poland, Muller identifies five likely variables that could trigger reform – dynamic political leadership, the role of international financial institutions, pension system crisis, intelligent reform strategy design, and the respective power or powerlessness of reform advocates and opponents. Of all the five variables, Muller finds the role of political leadership to be critical in the four case studies. In particular, she finds that paradigmatic reform is often triggered by new actors being involved in the process. In addition, while severe financial crisis may strengthen the position of the finance ministry, high foreign debt may enhance the arguments of international financial institutions pushing for reforms. She also reports that the state-labour movement relationship could also facilitate or hinder reforms.

Some of the factors identified by Muller are relevant in analysing the pension reform process in Nigeria. For example, many of the economic reforms, including pension reform, could not be carried out under military dictatorship. They could only be realised under a civilian political regime. In other words, it appears that an active combination of both actors and type of political system tends to influence the feasibility of changes in social policy. 

As Muller also found pension system and debt crises play important roles in the pension reform process. The powerlessness of the trade union movement was also clearly demonstrated in the process of legislative changes. Though all the three central labour organisations (the Nigeria Labour Congress [NLC], the Trade Union Congress [TUC]and the Conference of Free Trade Unions [CFTU] were opposed to the fundamentals of the pension reform, radical changes were made in the new legislation on pension without reflecting the inputs of labour. Similarly the organised private sector resisted the lumping together of pension schemes in both the public and private sectors. However, the new law disregarded private sector’s inputs to the new scheme, in spite of existing constitutional provisions, which support their position. In spite of the inability of the unions to prevent the enactment of the Pension Reform Act, 2004, they seem to have delayed its full implementation.

The new pension reform act 2004

The Pension Reform Bill, an Executive Bill, was submitted to the National Assembly in September 2003. The Bill sought to repeal all existing Pension Schemes including the Nigeria Social Insurance Trust Fund (NSITF) and replace it with a contributory and privately managed Pension Scheme. The Senate on the 23rd March 2004 passed the Pension Reform Bill and the President signed it into law on the 25th of June 2004. The implementation of the Act began on the 1st July 2004. The Act has brought about fundamental changes to the structure of leaving service benefits and the way they are provided for. The Act in section 1 establishes a contributory Pension Scheme for any employment in the Federal Republic of Nigeria. The scheme ensure that every worker (public or private) receives his retirement benefit as and when due, assist improvident individuals save for their old age and establish a uniform set of rules for administration and payment of retirement benefits. It is useful to note that all pension schemes existing before the commencement of this Act ceased to operate. The Act applies to persons in the permanent employment of the public sector as well as private sector employees who are in the permanent employment of organisations in which there are five or more employees subject to the provision of section eight. However, a firm having less than five employees is eligible to participate in the scheme.

Every employee will choose any Pension Fund Administrator (PFA) of his choice, maintain a Retirement Savings Account (RSA) and each employee shall neither have access to the account nor have any dealings with the custodian with respect to the Retirement Saving Account except through the Pension Fund Administrator. The employer shall deduct at source the monthly contribution of the employee and remit an amount comprising the employees’ contribution and the employers’ contribution to the custodian, specified by the Pension Fund Administrator, of the employee to the exclusive order of such Pension Fund Administrator not later than 7 working days from the day the employee is paid. The custodian shall notify the Pension Fund Administrator who shall cause the Retirement Saving Account of such employee to be credited. The rates of contribution to the Retirement Saving Account by the employee and the employer are specified in section 9 (1). However, these rates of contribution may upon agreement of the employer and the employee be revised from time to time and notice of such revision shall be given to the commission.

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