The Pension Reform Act 2014 (PRA, 2014) makes provision for the participation of self-employed persons and employees of organisations with less than three (3) staff. Collectively, these set of people operate majorly within Nigeria’s vast informal sector, which has been out of the coverage of the contributory pension scheme, even though the Act makes provision for their inclusion.

The delay in absorbing the informal sector in the “pension net” was due largely to the absence of a guideline for the administration of a pension scheme for that sector. In 2018, the National Pension Commission (PenCom) eventually came up with a guideline for what it has called the “Micro Pension” scheme. The scheme was recently launched by the President, who registered the first contributor to the scheme.

With a larger portion of Nigeria’s working population being engaged in the informal sector, the micro pension plan or scheme is indeed long over-due. In this piece, we will look at the key features of the scheme, its operating framework as outlined in the PenCom guidelines and also highlight how it differs from the mandatory contributory pension scheme.

• Registration: although, signing up for the micro pension plan is voluntary, the registration process is similar to that of the mandatory contributory scheme. A potential contributor to the micro pension plan is required to approach a Pension Fund Administrator (PFA) of his/ her choice to open a Retirement Savings Account (RSA). PenCom will also generate a unique Personal Identification Number (PIN) for each contributor. The PINs will be passed on to contributors by their respective PFAs. To verify the employment status of a potential contributor at the point of registration, PFAs are required to demand any of the following – evidence of membership of a registered association, union or cooperative society; certificate of business registration; certificate of incorporation; letter of employment; and Bank Verification Number (BVN). This is in addition to the presentation of a valid means of identification.

• Contributions: contributions to the micro pension plan can be made daily, weekly, monthly or in any other manner as convenient for the contributor. Amounts contributed will depend entirely on the capacity and preference of the contributor as the PenCom guideline does not define any limit. Contributions received by PFAs through their custodians (PFCs) will be split into two components – 60% for retirement benefits and 40% for contingent withdrawals.

• Investments: investments of the micro pension funds shall be done in line with the existing PenCom guidelines for the investment of pension assets. Hence, the funds will be invested in the same instruments (majorly government securities), as the mandatory pension funds.

• Contingent Withdrawals as stated earlier, contributions into the micro pension plan will be split into two. Withdrawals and access to benefits shall therefore be in two parts. The contingent funds which make up 40% of the RSA balances will be more easily accessible than the retirement benefits portion. Contributors will be allowed to make withdrawals from the contingent funds three months after making their initial remittances. Subsequent withdrawals can be made once a week. There will be no restrictions to how much withdrawals can be made from the contingent funds. Contributors will be allowed to withdraw the entire balances in the contingent portion of their RSAs if they so wish. The interest earned on such contributions shall however be taxable if withdrawn before 5 years of contribution. Contributors may also exercise the option of transferring part or all of their contingent funds into the retirement benefit portion of their accounts.

• Administration of Retirement Benefits: at the point of retirement (which should not be earlier than 50 years of age), or in the event of a health-induced early retirement, a micro pension contributor will be allowed to access the balance on his/ her retirement funds. Such withdrawals shall be in line with the existing guidelines for the administration of retirement benefits, either in the form of programmed withdrawals or an annuity plan with an insurance company.

• Conversion from Micro Plan to the Mandatory Scheme: a contributor under the micro pension plan will be allowed to convert to the mandatory scheme if he/ she secures employment with an organisation employing three or more people. The request for conversion shall be made by the contributor. Where such conversion has been made, the balance on the retirement benefit portion of the micro plan shall be migrated to the defined contributory fund. The balance on the contingent portion can be drawn down by the contributor, but where he/ she chooses not to withdraw the balance on the contingency fund, it shall be merged with the retirement benefit portion of the RSA. If a contributor fails to apply for conversion after the change of employment status, the PFA shall execute the conversion a month after receiving remittance from the contributor’s new employer and notify the contributor accordingly.  

It is hoped that pension operators and the regulators will create the required level of awareness to increase participation in the micro pension scheme. The guidelines provided by PenCom for the micro pension scheme are indeed well-intentioned, and the implementation provides a very good opportunity to attract the informal sector, thereby consolidating on the success so far recorded by the 2004 pension reforms.