The government of President Goodluck Jonathan signed the Pension Reform Act of 2014 a few years ago updating critical provisions of the 2011 Act which changed the way pension funds are managed and operated in Nigeria.
In this article, we will highlight the most important changes reflected in the Pension Reform Act 2014 explaining what the implications are for employers and employees.
Nigeria’s Pension Fund is said to have over N6 trillion in Funds under Management and about 7 million Nigerians as contributors, so this is as important as it gets.
Here is a summary of the key changes
- increase in the minimum contribution into the Scheme. Employers are required to contribute a minimum of 10% of their employees’ monthly emoluments while the employees are to contribute not less than 8%. Under the old law, the minimum contribution by both parties was 15% of basic pay, housing and transport allowances with a minimum of 7.5% by the employer;
- inclusion of more private sector employers. A private sector entity is now subject to the scheme where it has less than 3 employees or self employed shall be entitled to participate in accordance with the Pension commissions regulations.
- the imposition of fines and penalties on Pension Fund Administrators (PFA) for failing to meet their obligations to the pension contributors and for failing to comply with the provisions of the Act; and
- the imposition of a 10-year jail term for persons found guilty of misappropriating pension funds.
What it means for an employer?
The law defines “monthly emoluments” as total emoluments as may be defined in the employee’s contract of employment but shall not be less than a total sum of basic salary, housing allowance and transport allowance. This means the way employers define emoluments in an employees contract letter can go a long way to determining how much more they pay as pension contribution. If your total emoluments is the same as your employees full salary, then you basically have a 10% of your salary cost as your contribution based on the Pension Reform and Amendment 2014. However, if you define emoluments in your employees letter to include just Basic, Housing and Transport allowance then you only contribute 10% of basic, housing and transport as pension. Keep this in mind as this finer detail could increase or reduce your employee cost.
What it means for an employee (Take Home Pay)?
For an employee, this new law changes the percentage you contribute monthly from 7.5% to 8% per annum. As such your employers will deduct 8% of your total emoluments as pension contribution. The same issue of how employers define emoluments in your employment letter also plays a part in determining what you take home at the end of the month. If you employers are able to restructure your salary optimally then the impact of the increase in pension fund contribution will be less on your take home pay.
If your contract letter says total emoluments of N1 million then you contribute N80,000 annually as pension contribution. However, if your emoluments if N500,000 and the balance N500,000 is classified as bonuses or other allowances other than Basic , Housing and Transport then you get to contribute N40,000 annually. Therefore, it all depends on how your salary is structured.
What else for Small Businesses?
Small business with as little as 3 employees are now bound by this law. 3 employees can be a business owner, a driver and a secretary. Most small businesses in Nigeria have staffing structure therefore dragging them into the pension fund contribution net. Small businesses now have an added responsibility to deduct 8% not just employee contribution, they also get to bear additional 10% increase in their salary cost. Not doing this exposing them to fines from penalties and a possible trip to jail.
This article originally appeared on Nairametrics on July 9, 2014 and has been slightly updated.