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All You Need to Know about Contributory Pension Scheme

Filed in Articles, Banking, Insurance by on April 15, 2021

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Have you heard of Contributory Pension Scheme? Do you know that Retiring with a good pension scheme is important? However, there is a unique pension scheme that can help you achieve a good retirement and that is the Contributory pension scheme.

Basic information about this pension scheme is given in this article. Thus, pay attention as you read through. However, before going on, what is a pension?All You Need to Know About Contributory Pension Scheme

If we must significantly reduce poverty and enhance the socio-economic conditions of Nigerians, the social security of the citizens needs to be improved upon.

The Contributory Pension Scheme (CPS) was enacted for this cause and in the long run, for economic growth.

About Contributory Pension Scheme in Nigeria

The Contributory Pension Scheme (CPS) in Nigeria which commenced in July 2004 was created to assist workers to save in order to cater for their livelihood during old age employees to save towards retirement, receive their retirement benefits, and to establish a strong regulatory and supervisory framework.

However, Before the adoption of the Contributory Pension Scheme, there existed other pension schemes like the Defined Benefit Scheme (DBS).

The downside to this old pension scheme and other similar ones comprised of unsustainable pension liabilities, weak and inefficient administration of schemes in both public and private sectors, and the existence of diversified arrangements which were largely unregulated in the private sector.

What is a Pension?

Before considering some vital information about the Contributory Pension Scheme, note. A pension is a fund into which a sum of money is added.

This is during an employee’s employment years. And from which payments are drawn to support the person’s retirement from work.

Also, it is in the form of periodic payments. Again, a pension may be a “defined benefit plan”. Here a fixed sum is paid regularly to a person.

Also, it is a “defined contribution plan”. And under which a fixed sum is invested that then becomes available at retirement age.

Also, a pension should not be confused with severance pay. Whereas the former is usually paid in regular installments for life after retirement the latter is typically paid as a fixed amount. And it is after involuntary termination of employment prior to retirement.

What is Contributory Pension Scheme?

This is a pension where the pensioner (or employee) must make contributions. In other words, both the employer and the members have to pay into the scheme. However, the employer often makes matching contributions.

Also, this pension scheme works on a contribution basis. And it has two tiers. Namely: Tier-I and II. Also, contribution to Tier-I is mandatory for all government servants. And it is to those who joined government service on or after 1-1-2004.

However, exceptions are given to the armed forces in the first stage. Tier-II will be optional. And it is at the discretion of government servants. Also, the Tier II account works more like a savings account. Here you can withdraw your money whenever you wish.

Comparing Old Pension Scheme with the Contributory Pension Scheme

In the old pension scheme, government employees were getting pensions as an additional post-retirement benefit. However, the new scheme provides for the pension. And this is based on the contributions of the employees. And the income accrued in a fund set up for the purpose.

Furthermore, the pension funds will be invested in the stock market. And the quantum of pension is therefore subject to its vagaries. Also, the lives of the retirees would, therefore, swing as per the bulls and bears of the capital market.

Contributory Pension Scheme and the New Order

As per a new order, you should note. A member of Employees’ Provident Fund (EPF), being a member of a co-operative society or a housing society having at least 10 members of EPF, can withdraw up to 90%.

This withdrawal is from the fund for the purchase of a dwelling house/flat. Or form construction of dwelling house/acquisition of the site. Also, in Tier-I, a Government servant will have to make a contribution of 10% of his basic pay plus DA.

This will be deducted from his salary bill every month. Also, the government will make an equal matching contribution. Furthermore, there will be no matching contribution in respect of non-government employees.

Age and Contributory Pension Scheme

A government servant can exit at or after the age of 60 years from tier-I of the scheme. However, at the exit, it would be mandatory for him to invest 40% of pension wealth. And this is to purchase an annuity. It can be from an IRDA-regulated Life Insurance Company.

This will provide for a pension for the lifetime of the employee. And will provide for his dependent parents/spouse. Also, he would receive a lump sum of the remaining pension wealth. With this, he would be free to utilize it in any manner.

However, in the case of government servants, who leave the scheme before attaining the age of 60, note. It would be 80% of the pension wealth. You can read more HERE

The Defects of Pension Reform with Regard to the Contributory Pension Scheme

They are as follows:

  1. The basic pension is not scaled up or down proportionally. This is to the amount of the contributory pension. And it is of persons who do not qualify for the pension.
  2. The basic pension practically results in contravening the contributory principle. This is with regard to pensions for a contributions record. And equal to or higher than 15 qualifying years or 4500 working days.

What if Basic Pension is a Social Assistance Benefit?

Assuming that the basic pension is a social assistance benefit, it should be awarded based on income criteria. And the pensioners’ income of any nature should have been taken into account. For example, rents.

The law fails to do this with regard to pensioners with more than 15 qualifying years. Thus, as a result, an insured person with pensionable earnings of €1000 and a contributions record of 35 qualifying years receives a pension with an 81.85% replacement ratio for €1000.

However, on the other hand, note. An insured person with pensionable earnings of €3500 and a contributions record of 35 qualifying years receives a pension with a 56.13% replacement ratio for €3500. And this is even if this person has no additional income.

Basic Pension and Law

Basic pension, in spite of the law’s assertions, lacks a true social assistance nature. It lacks that for persons with a contribution record of more than 15 years. And it fails to serve the social assistance concept.

However, assuming that basic pension is a social insurance benefit. The lack of being scaled up or down in terms of the contributory pension is not consistent.

It is not with its nature. As it contravenes the contributory principle and equalizes different categories of insured persons.

Finally, the above information is vital. Please ensure you read and understand. For any inquiry, please always visit this web page for more information. Also, do not hesitate to share this post with friends and relations using the share button below.

CSN Team.  

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