PENSION REFORM ACT 2014

 Key Highlights and Salient Points

On 1 July 2014, President Goodluck Jonathan signed into law the new Pension Reform Act 2014 which repealed the Pension Reform Act No. 2 of 2004 (repealed Act). Like the repealed Act, the new Pension Reform Act governs and regulates the administration of the contributory pension scheme for

both the public and private sectors in Nigeria. The commencement date is 1 July 2014.

Some of the key changes include:

• ·         increase in the minimum number of employees required to make contributions under the  Act mandatory. A private sector entity is now subject to the scheme where it has 15 or more employees (previously the minimum threshold was 5 employees)

• ·        increase in the minimum contribution into the Scheme. and 

•       the imposition of fines and penalties on Pension Fund Administrators (PFA) for failure to meet their obligations to contributors and violation of the provisions of the Act. The imposition of a 10-year jail term for persons found guilty of misappropriating pension funds.

The Pension Reform Act 2014 (Act) was signed into law by the President on 1 July 2014. The

Act does not specify a commencement date, however, Section 2 of the Interpretation Act CAP I23 of LFN 2010 is to the effect that where no date of commencement is contained in an Act, the commencement day shall be the day the Act is passed or signed into law. Unless a commencement date is inserted before the Act is gazetted, the commencement date will be 1 July 2014.

Changes in the Act have a more profound and broader effect on employers and employees of both the public and private sector.

The salient changes are outlined in the paragraphs below:

Scope of the Act

The crux of the Act is to encourage participation in the Contributory Pension Scheme (Scheme). The Scheme applies to two categories of employees. These include all employees in the public sector and employees of private organisations in which there are 15 or more employees. The Act also provides that in the case of private organisations with less than 3 employees participation in the Scheme would be governed by guidelines issued by the National Pension Commission (PenCom).

However, the Act is silent on the applicability of the Scheme to private organisations with more than 3 but less than 15 employees. Persons exempted under the Act are substantially the same as under the repealed Act.

Contribution to the Scheme

There are changes in the rates of contribution to be made to the Scheme. Under the Act, both employer and employee are required to make a minimum of 10% and 8% respectively of the employee’s monthly emoluments (7.5% of the employee’s monthly basic, housing and transport allowances by both parties under the repealed Act).

The definition of ‘monthly emoluments’ has been expanded to mean the total emolument as defined in the employee’s contract of employment provided it is not less than the total of the employee’s basic salary, housing and transport allowance.

This definition is vague and could be interpreted in several ways. Pending clarification from PenCom, one of the credible interpretations that could be considered by companies is that all items that are paid on a monthly basis (in addition to basic, housing and transport) would form part of the base on which the pension rates are applied. 

The Act also provides that an employer can take full responsibility of the contribution. In that case, the contribution shall not be less than 20% of the employee’s monthly emolument. In addition, a Group Life Insurance Policy must be maintained in favour of the employee for a minimum of thrice the employee’s annual total emoluments similar to the old Act.

Investments

The Act expands the scope in which the pension funds can be invested and this includes specialist investment funds and other financial instruments the Commission may approve.

Implication

Employers affected by these changes need to take immediate steps to ensure full compliance. Where necessary, it may be useful to restructure staff compensation to minimise the impact of the increase in staff cost while maintaining staff take home pay at the current levels.
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