Post by Ismail AbdulAzeez on Jan 5, 2021 17:44:39 GMT 1
Why Should State Governments In Nigeria Be Allowed To Borrow From Pension Funds?
Before discussing whether or not state governments in Nigeria should be allowed to borrow funds from the contributory pension fund scheme, let us first understand what it is and what the law that established it says.
What exactly does pension mean or what does it stand for? A pension is a regular payment made to a person during his or her retirement from a job or other ventures from an investment fund that he or she has participated in during his active working years. Mostly these contributions to the investment fund were made by both the employee and employer at that time. A simple meaning is that during your active working years a certain amount is deducted from your earnings and added to what your employer can contribute and the total is invested in order to earn interest for the employee. When you retire from active service you will now be receiving monthly pension from your investment.
The Pension Reform Act 2014 (PRA) is the law that governs all procedures concerning pensions in Nigeria. According to this Act, it is referred to as a contributory pension scheme, because both employees and employers contribute certain minimum percentages to the scheme. The employers will contribute a minimum of 10% of the monthly salary of the employee, while the employee must contribute a minimum of 8% of his monthly salary to the scheme.
Who manages the pension funds? The Pension Reform Act 2014 (PRA), empowers the National Pension Commission (NPC) to manage it by enforcing and administering the pension regulations as laid out in the Act establishing it. There are two types of companies to be regulated and they are: Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs).
The employee reserves the right to choose a PFA to manage his or her pension, and after choosing, the employee will inform his or her employer of the choice of PFA. When the pension is deducted by the employer, the amount is paid to the Pension Fund Custodian (PFC) specified by the Pension Fund Administrator.
When the PFC receives the funds, it informs the PFA of the receipt of such funds, and then the PFA will credit the Retirement Savings Account of the employee.
What do the Pension Fund Administrators (PFAs) do with the deductions from both the workers’ salaries and those of their employees? The funds are invested in approved investments portfolios that are safe and with good returns. It can be in government bonds, real estate, and any safe and approved investment scheme. It has to be safe because you are dealing with the life savings of workers that will retire in the future and will depend on them for livelihood.
The strict monitoring of this scheme is carried out by the Pension Fund Commission. The commission has been invested with the power to sanction erring Pension Fund Administrators (PFAs) with huge fines and penalties when they are found wanting.
This narrative has opened our eyes to how the funds that the state governors want to borrow from were accumulated. This simply means that they want the Fund Administrators to invest these funds with them. The Chairman of Nigeria Governors’ Forum wants his members to be given the opportunity to borrow money from this fund. Do not forget that this fund belongs to employees who will soon retire and they need these funds to start new lives as retirees.
There is really nothing wrong in borrowing money for investment purposes, but in this instance how are the PFAs going to make sure that these funds are safe in the hands of these state governors?
In the next segment of this article we are going to critically look at the merits and demerits of this investment demand on the PFAs by the Nigerian Governors’ Forum.
Before discussing whether or not state governments in Nigeria should be allowed to borrow funds from the contributory pension fund scheme, let us first understand what it is and what the law that established it says.
What exactly does pension mean or what does it stand for? A pension is a regular payment made to a person during his or her retirement from a job or other ventures from an investment fund that he or she has participated in during his active working years. Mostly these contributions to the investment fund were made by both the employee and employer at that time. A simple meaning is that during your active working years a certain amount is deducted from your earnings and added to what your employer can contribute and the total is invested in order to earn interest for the employee. When you retire from active service you will now be receiving monthly pension from your investment.
The Pension Reform Act 2014 (PRA) is the law that governs all procedures concerning pensions in Nigeria. According to this Act, it is referred to as a contributory pension scheme, because both employees and employers contribute certain minimum percentages to the scheme. The employers will contribute a minimum of 10% of the monthly salary of the employee, while the employee must contribute a minimum of 8% of his monthly salary to the scheme.
Who manages the pension funds? The Pension Reform Act 2014 (PRA), empowers the National Pension Commission (NPC) to manage it by enforcing and administering the pension regulations as laid out in the Act establishing it. There are two types of companies to be regulated and they are: Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs).
The employee reserves the right to choose a PFA to manage his or her pension, and after choosing, the employee will inform his or her employer of the choice of PFA. When the pension is deducted by the employer, the amount is paid to the Pension Fund Custodian (PFC) specified by the Pension Fund Administrator.
When the PFC receives the funds, it informs the PFA of the receipt of such funds, and then the PFA will credit the Retirement Savings Account of the employee.
What do the Pension Fund Administrators (PFAs) do with the deductions from both the workers’ salaries and those of their employees? The funds are invested in approved investments portfolios that are safe and with good returns. It can be in government bonds, real estate, and any safe and approved investment scheme. It has to be safe because you are dealing with the life savings of workers that will retire in the future and will depend on them for livelihood.
The strict monitoring of this scheme is carried out by the Pension Fund Commission. The commission has been invested with the power to sanction erring Pension Fund Administrators (PFAs) with huge fines and penalties when they are found wanting.
This narrative has opened our eyes to how the funds that the state governors want to borrow from were accumulated. This simply means that they want the Fund Administrators to invest these funds with them. The Chairman of Nigeria Governors’ Forum wants his members to be given the opportunity to borrow money from this fund. Do not forget that this fund belongs to employees who will soon retire and they need these funds to start new lives as retirees.
There is really nothing wrong in borrowing money for investment purposes, but in this instance how are the PFAs going to make sure that these funds are safe in the hands of these state governors?
In the next segment of this article we are going to critically look at the merits and demerits of this investment demand on the PFAs by the Nigerian Governors’ Forum.
