Tax Alert

July 2014

The Pension Reform Act 2014: An Abridged Appraisal

Major Highlights

 Introduction
 Minimum Number of employees
 Rates & Contributions
 Group Life Insurance Policy
 Nigerian Social Trust Fund to Continue
 Access to RSA on account of loss of
livelihood
 Pension Contribution & Benefit of Tax
Exemption
 Nominal Retirement Savings
 Appointment of Director – General
 Restructuring the Pension Transition
Arrangement Directorate (PTAD)
 Creation of Pension Protection Fund
(PPF)
 Expansion of Pension Fund Investment
Scope
 Penalties & Offences
 Dispute Resolution
 Arbitration
 Application of Public Officers
Protection Act
 Confidentiality by PFAs & PFCs
 Power to make Regulations
 Evaluation of the New Act

1|Page
Introduction
P
resident Goodluck Jonathan, on July
1, 2014, signed a new law titled:
“Pension Reform Act 2014”
(Hereinafter called ‘The Act’). The Act
repealed the Pension Reform Act No. 2,
2004 and makes provision for the uniform
contributory pension scheme for the public
and private sectors in Nigeria. The Act has
no commencement date. In our view, it
should be in force with effect from the 1st
Day of July 2014 being the date that the
President signed the Act into law. Our view
is in accordance with Section 2,
Interpretation Act, Laws of the Federation of
Nigeria Cap I23, 2004. We also noted that
the Act is referred to as Bill. We believe that
this will be corrected when the gazette is
released.
The objectives of the Act are to:
I. Set rules, regulations and standards
for the administration and payments of
retirement benefits for the Public
Services of the Federation, FCT, State
& Local Government as well as Private
Sector1;
II. Provide for the smooth operations of
the Contributory Pension Scheme2;
III. Ensure that beneficiaries of the
Pension Scheme receives their
entitlements as at when due3;
Assist improvident persons to lay
aside funds for their livelihood at old
age4. It is unclear how these set
objectives are to be materially met.
For instance:
1
Section 1, Pension Reform Act 2014
2
ibid
3
ibid
4
ibid
- How does increase in contribution
that might lead to loss of jobs due to
operational costs management be
said to provide smooth operations of
the scheme? A smooth operation is
suggestive that no one will be
adversely affected compared with the
former law.
- How do many beneficiaries receive
benefits at 60 years when life
expectancy according to all reports
on age for Nigeria ranges between 46
years and 54 years? It is our view
that the beneficial age should be in
the region of 40 years if contributors
are planned to benefit at all.
Minimum Number of employees –
Sections 2, 11(3) and 120)
The provisions of the Act apply to any
employment in the Public Service of the
Federation, the Federal Capital Territory,
the States, the Local Governments and the
Private Sector.
The Scheme is applicable to a private
organization with 15 or more employees.
However, organizations with less than 3
employees and self-employed persons shall
be entitled to participate in the scheme in
accordance with guidelines issued by the
commission.
The issue here is what now happens to
organization with staff strength of 3 to 14
employees. The commission will need to
clarify this gap. Meanwhile, employer is
defined as any business that employs there
(3) persons or more. Invariably, you can be
an employer but not qualify to deduct if you
fall between 3 and 14 employees. On
another note, we believe that the figure 15
in section 2(2) is a drafting error. It is
inferable that the draftsman intended 3 but
inserted 15. Unless clarification is made,
employers with employees up to 14
2|Page
employees should not be challenged until
the Act is correct. Our view is that
employers with 3 employees or more should
contribute. This is based on the golden rule
of interpretation of law. The minimum was 5
in the old Act, and the general direction of
the law was to include more people and
increase contribution, therefore any
exclusion from the current contributors
would not have been contemplated by the
lawmakers. Besides, there are no specific
clauses on how those contributors should
be excluded from the scheme.
Rates & Contributions – Section 4 (1a) &
(1b)
The rate of contribution is reset to a
minimum of 10% & 8% by employer and
employee respectively of the monthly
emoluments.
This will amount to an increase of 2.5% and
0.5% in pension cost to the employers and
employees respectively.
Any employee may also make voluntary
contribution to his retirement savings.
Section 120 of The Act defines monthly
Emolument 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”
The definition above is not precise! It
confuses whether pension will now be
calculated on total emolument or the
aggregate of base pay, housing and
transport allowances.. Going forward, it is
important that employers define very clearly
what they mean by total emolument for the
purposes of the Act.
The employers and employees, upon
agreement, may revise the rates of
contribution upwards after which the
Pension Commission should be notified.
The Act allows the employer, if it chooses or
agrees, to bear the full responsibility of the
contribution provided that the contribution is
not less than 20% of the employee’s
monthly emoluments. All contributions are
tax deductible.
Group Life Insurance Policy
Every employer is now expected to maintain
Group Life Insurance Policy in favour of
each employee for a minimum of not less
than three (3) times the annual total
emoluments of such an employee.
Nigerian Social Insurance Trust Fund
According to the Act, the Nigerian Social
Insurance Trust Fund (NSITF) shall
continue to exist under this Act as it was
under the Pension Act, 2004.
Access to Retirement Benefits on
account of loss of livelihood – Section 7
(2)
Employee who disengages, or voluntarily
retires may have access to up to 25% of
amount in credit in his/her retirement
benefits account if such person is unable to
secure employment four months after the
disengagement. This used to be six
months in the repealed 2004 Pension Act.
Otherwise, the access age is upon
retirement or 50 years whichever is later.
According to the Public Service Rule 2008,
the compulsory retirement age is earlier of
60 years or 35 years of pensionable service.
The import of the above is that if an
employee’ starts working at 20 years and
retires at 55 years; He has to wait till 60
years before entitled to retirement benefits.
A better scheme would be to ensure that the
employees benefit rather than planning for
payments to their estates.
3|Page

Pension Contribution & Benefit of Tax
Exemption – Section 10
Section 10 of the Act exempts contributions
to the Pension Scheme from taxes under
the relevant income tax law. Also, all
interests, dividends, profits, investments
and other income accruable to pension
funds and assets under the Act shall not be
taxable.
Retirements benefits received by
beneficiaries are no longer taxable. This
amends the Personal Income Tax Act Cap
P8 Laws of Federation of Nigeria, 2004
Section 3 under which Pension is currently
taxable. This is a major change that would
put disposable income in the hands of
retirees and it is a welcome development.
Voluntary contribution withdrawn after 5
years is not taxable. If withdrawn before
expiration of 5 years, it is taxable in line with
section 10 (4).
Deduction from employees and employers
contributions are to be remitted not later
than 7 working days from the date the
employee is paid his salary.
Penalty for failure to remit is to be stipulated
by the commission but not less than 2%.
In our view, this discretionary power may
aid corruption in the implementation of the
Act. It also creates a situation of
discriminatory penalty for the same offence.
It is our submission that penalty should be
fixed, certain and materially non-
discretionary.
Nominal Retirement Savings – Section
11 (5)
The Act makes provision for an employer to
open a Temporary Retirement Savings
Account (TRSA) on behalf of an employee
that fails to open an RSA within Six (6)
months of assumption of duty. This was not
required under the repealed Pension Act,
2004.
Appointment of Director – General –
Section 26
The Act allows for the appointment of a
Director-General who possesses relevant
and adequate professional qualification in
pension matters with 15 years cognate
experience. The repealed 2004 Pension Act
required the appointee to possess
professional skill and with not less than 20
years cognate experience relating to
pension matters and or Insurance, Actuarial
Science or other related field.
It is unclear why the required qualification
for appointment as a Director-General was
changed and reduced to 15 year with less
qualification whereas, the tenure was
increased from 4 to 5 years.
Exemption from the Scheme
The status of non-resident individuals
working in Nigeria is unclear as it was in the
old Act. The Existing arrangements or
understanding with respect to expatriates
may have to continue. It would have been
quite useful to make categorical statements
with respect to their exemption or otherwise.
Restructuring the Pension Transition
Arrangement Directorate (PTAD) –
Section 42
The Act restructures the Pension Transition
Arrangement Directorate (PTAD) to ensure
greater efficiency and accountability in the
administration of the Defined Benefits
Scheme in the Federal Public Service such
that payment of pensions would be made
directly into pensioners’ bank accounts in
line with the current policy of the Federal
Government.
4|Page
Creation of Pension Protection Fund
(PPF) – Section 82
The Act empowers the Commission to
create and maintain a Pension Protection
Fund with an annual subvention of 1% of
the total monthly wage bill payable to
employees in the public sector, annual
pension protection levy paid by the
Commission and all the licensed pension
operators at a rate to be determined by the
commission and income from investment of
the Pension Protection Fund.
The aim of the Pension Protection Fund is
to provide guarantee for minimum pension,
hedge against shortfall or financial losses
arising from activities and any other use as
determine by the Commission.
. region of 40 years if contributors
Expansion of Pension Fund Investment
Scope – Section 86
Section 86 (h) & (i) of the Act expands the
scope of investment of pension funds and
assets to include investment in real estate
development and specialist investment
funds and such other financial instruments
as Pension Commission may from time to
time approve.
Penalties & Offences – Section 99
The Act creates new offences and provides
for strict penalties to deter mismanagement
or diversion of pension funds’ assets. Any
operator convicted of mismanagement of
pension fund will be liable to not less than
10 years imprisonment or fine of an amount
equal to three-times the amount so
misappropriated or diverted or both
imprisonment and fine. In addition to the
penalty and fine above, the convicted
person or body corporate shall refund the
amount so misappropriated or diverted and
also forfeit to the Federal Government of
Nigeria of any property, asset or fund with
accrued interest, or the proceeds of any
unlawful activity under this Act.
How does increase in
contribution that might lead to
loss of jobs due to operational
costs management be said to
provide smooth operations of the
scheme? A smooth operation is
suggestive that no one will be
adv2ersely affected compared
with the former law?
How do many beneficiaries
receive benefits at 60 years
when life expectancy according
to all reports on age for Nigeria
ranges between 46 years and 54
years? It is our view that the
beneficial age should be in the
are planned to benefit at all?
The Pension Reform Act 2014 now
empowers Pension Commission to take
proactive corrective measures on licensed
operators whose situations, actions or
inactions jeopardize the safety of pension
assets. This provision further fortifies the
pension assets against mismanagement
and/or systemic risks. This was not
contained in the repealed 2004 Pension Act.
The Act lists the Courts of competent
jurisdiction to include the Federal High
Court, High Court of the Federal Capital
Territory, High Court of a State and the
National Industrial Court.
Prosecution of offences in contravention of
the Act shall be instituted before a court in
the name of the Federal Republic of Nigeria
by the Attorney-General. That makes
contravention of the Act a national offence.
5|Page
Dispute Resolution – Section 106
An employee or beneficiary of a Risk
Savings Account, who is dissatisfied with a
decision of the Pension Fund Administrator
or employer in respect of pension matters
under the Act, may approach Pension
Commission with a written petition.
Arbitration – Section 107
A matter may be referred to arbitration, in
accordance to the Arbitration and
Conciliation Act, where either party (person
or body corporate) in a dispute resolution is
dis-satisfied with Pension Commission’s
decision or resolution. The dis-satisfied
party may also approach the National
Industrial Court.
Application of Public Officers Protection
Act – Section 108
The Act allows for the application of the
dictates of the Public Officers Protection
Act, with respect to suit instituted against an
officer or employee of Pension Commission.
No suit can be instituted against a member
of the Board, Director-General,
Commissioner or any other officer or
employee of Pension Commission for any
act done in pursuance or execution of the
Act.
Confidentiality by Pension Fund
Administrators & Pension Fund
Custodians – Sections 113 & 114
Every member and employees of Pension
Commission, Pension Fund Administrators
& Pension Fund Custodians shall not make
any unauthorized disclosure. They are
expected to treat all piece of information,
obtained directly or indirectly, with strict
professional confidentiality.
Power to make Regulations – Section
115
The Act empowers Pension Commission to
make rules, regulations and guidelines
where it deems necessary, to give full effect
to the provisions of the Act.
Contravention of the regulation is a
punishable offence.
General Comments on the New Act
- The upward review of the rate of
contribution from 7.5% to 10% in the
new Act will result in an increase in the
staff cost for employer of labour. The
base has also been widened to cover
“Total emolument” instead of basic pay,
housing allowance and transport
allowance. The Government needs to
provide a cushion effect in form of tax
rebate to the companies to make it
equitable. The staff cost increase could
lead to loss of job and thereby endanger
the future of the employee the Act seeks
to protect.
- The creation of a Redemption Fund
Account to be managed by Central Bank
Nigeria in favour of Public Service
employees appears to be discriminatory
to the extent that it excludes employees
in Private organizations.
- The Act reviewed upward the penalties
and sanctions, having discovered that
those provided under the old law were
no longer sufficient deterrents against
infractions of the law. This will safe
guide the fund and increase the
confidence of the contributors in the
Fund.
6|Page
- The reduction of the scope of
participation from 5 employees to 3
employees will enable wider
participation for the informal private
sector; this is a mixed development for
both employers and employees in small
scale employment. While fewer
employees are not left out of the
contributory benefit to secure their
future, it is unclear how unregistered
small businesses could comply with the
provision of the Act in view of their
economic base.
- The upward review of the employer’s
contribution will also bring more joy
to the employee knowing fully well
that additional saving is in their
favour. However, it is doubtful that
most employees would benefit
because of the higher beneficiary
age than the life expectancy age.
With due respect to contrary views,
we believe that most of the benefits
would go into their estates as they
can only be entitled after the life
expectancy age.

Disclaimer
Please note that this memorandum is not intended to give specific technical advice and it should not be construed as
doing so. It is designed to alert clients to some of the issues. It is not intended to give exhaustive coverage of the
topic.

Professional advice should always be sought before action is either taken or refrained from as a result of information
herein.

In any case, Ascension does not accept any responsibility for any decision whatsoever made based thereon or any
liability incurred for failure to consult with professionals on any specific areas of issues raised.

For enquiries, please contact:

Azeez Alatoye Ademola Olanrewaju
+234 809 993 4520 +234 809 856 8889
azeez.alatoye@ascensioncsng.com ademola.olanrewaju@ascensioncsng.com

Abbas Iromini Adeniyi Sunmola

+234 817 207 4294 +234 809 993 4537
abbas.iromini@ascensioncsng.com adeniyi.sunmola@ascensioncsng.com

Mobolaji Akinboboye Sola Dada

+234 809 993 4533 +234 809 993 4528
mobolaji.akinboboye@ascensioncsng.com sola.dada@ascensioncsng.com

7|Page