Contributory Pension Scheme: Update on All You Need to Know : Current School News

Contributory Pension Scheme: Update on All You Need to Know

Filed in Articles, Banking, Insurance by on January 4, 2022

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– Contributory Pension Scheme –

Do you know what a Contributory Pension Scheme is? Do you realize how crucial it is to retire with a suitable pension plan?

However, there is a one-of-a-kind pension system that can assist you in achieving a comfortable retirement.
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 commenced in July 2004. This scheme assisted workers to save in order to cater for their livelihood during old age. 

However, it was for employees to save towards retirement, receive their retirement benefits, and 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 is composed of unsustainable pension liabilities, weak and inefficient administration of schemes in both public and private sectors.

Also, the existence of diversified arrangements which were 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 they drew payments to support the person’s retirement from work.

Also, it is as 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 they invested a fixed sum that then becomes available at retirement age.

Also, a pension should not be confused with severance pay. Whereas they usually pay the former in regular installments for life after retirement, they typically paid the latter 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 for 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 the 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 contribute 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 regarding 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 his 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, with 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

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The Defects of Pension Reform regarding the Contributory Pension Scheme

They are:

1. They do not scale the basic pension 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 regarding 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 help benefit, it should be awarded based on income criteria. And the pensioners’ income of any nature should have been considered. For example, rents.

The law cannot do this regarding pensioners with over 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, 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, despite the law’s assertions, lacks a true social help nature. It lacks that for persons with a contribution record of over 15 years. And it cannot serve the social help 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 inquiries, please always visit this web page for more information. Also, share this post with friends and relations using the share button below.

CSN Team.  

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