Retirement Planning: Key Facts of the National Pension Scheme (2)

CONTRIBUTION MODALITIES

The new pension scheme is a contributory scheme. Both the employer and the employer are contributors to the scheme, for the benefit of the employee. The expectation is obviously that contributions by both parties, with the added growth from the invested funds, should generate a fund value that can help the employee maintain a reasonable level of comfort in retirement. That is why, also, the scheme allows for and encourages additional contribution, above what is specified, by both the beneficiary and his employer. Because contribution of the stipulated rates is a compulsory statutory requirement, the scheme at least assures some meaningful benefit for each employee participant, at retirement. The challenge of making capital of the scheme is however that of the employee who should drive the scheme to full value by expanding his contribution. Being a deduction at source, it is an easier way to save, especially for those who may not have much financial discipline. For a minimum, the rules require the following regular contributions, under the scheme:

Regular Contribution Rates
The following rates currently apply:

1. For employees of the Federal Public Service and Federal Capital Territory:
   • 7.5% of employee's monthly emoluments to be contributed by the employer, as a minimum;
   • 7.5% of employee's monthly emoluments to be contributed by the employee, as a minimum;
2. For the military:
   • 12.5% of employee's monthly emoluments to be contributed by the employer (the Federal Government), as a minimum;
   • 2.5% of employee's monthly emoluments to be contributed by the employee, as a minimum;
3. In other cases (i.e. public sector, etc):
   • 7.5% of employee's monthly emoluments to be contributed by the employer, as a minimum;
   • 7.5% of employee's monthly emoluments to be contributed by the employee, as a minimum;
4. Other important stipulations:
   • the employer and employee may mutually agree to raise the contribution rate and notify the Commission accordingly;
   • an employer may elect to bear the full burden of the employer and employee contributions, provided total contribution is not below 15%;
   • an employee may, in addition to the total contribution stated above, elect to make additional voluntary contribution to his retirement savings account;
   • an employee, exempted from the scheme or not ordinarily covered, can also elect voluntarily to contribute;
   • the government's contribution (as employer) in the case of employees in the Federal public service and the Federal Capital Authority shall be a charge on the Consolidated Revenue Fund of the Federation and shall, at the request of the Commission, be deducted by the Accountant General of the Federation.
   • the employer shall, in addition, maintain a life insurance policy in favour of the employee for a minimum of 3 times the annual total emolument of the employee;
   • for income tax computation, the contributions by an employee shall be a tax- deductible expense for the employer and employee respectively.

It is important to emphasize that the stated contribution rates are the minimum. The individual contributor can elect to contribute more. This may prove a prudent way of achieving increased savings (deduction at source works!) and thus building a bigger reserve for the future. The employer may also choose to motivate its employees with an enhanced employer contribution which builds a stronger financial base for the employee. The law only guarantees a minimum total contribution of 15% of total monthly emoluments for each contributing employee but allows room for much higher contributions.

What Contribution Rate is Appropriate?
It’s appropriate to ask whether it’s in the employee’s interest to contribute more than the mandatory 7.5% and if so, by how much? This decision is ultimately a personal one but that choice should be influenced by the following factors:

• What other options for savings and investment are available to the individual and how he ranks them relative to the pension account;
• The individual’s level of personal discipline to save regularly – when there is some doubt as to ability to save regularly and consistently, a system that deducts compulsorily at source is the sure-fire solution. That’s why the Act speaks of helping improvident people to save.
• Besides, if the Pension Fund Administrator is an experienced and effective fund manager, you will enjoy the added benefit of professional management of the investment portfolio.
• Given the tax benefit inherent in the contributions, employees may persuade their employers, if and where the opportunity exists, to adopt this medium to pass on further benefits to the staff. Contributions by the employer and employee are tax-deductible (that is, will be treated as expenses before arriving at taxable profit or earnings). The benefits, when received, are also tax-free. Raising the contribution is therefore a tax-effective channel for staff remuneration. Its also a good tax shield for the contributing employee.
• Finally, loading up on savings is hardly ever a bad thing: the more you save and invest the better for your future. Increasing your contribution is therefore unlikely to hurt.

However, it is important to caution that these Pension Fund Administrators are yet to prove themselves. The scheme is also yet to mature. Until these happen, a prudent approach will be necessary. First is to be sure to deal with a PFA that has ownership track record: who are behind it and what else have they been involved with. All said, the general appearance is that most PFAs have strong parentage, with major financial institutions as key shareholders.

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