This is an updated post from October 16, 2012 – Updated on November 8, 2016
The Old Order Changeth…Lest One Good? Custom Should Corrupt the World: Alfred Lord Tennysson
As aptly articulated in Alfred Lord Tennysson‘s poem, Idylls of the King, change is necessary, sometimes not because the old traditions are bad, but because they were actions borne of the knowledge and the ideals of a certain age based on what was known then; and now, as Maya Angelou said; we know better, so we do better.
In the case of our pensions industry, change was critically necessary if we were to ensure that we had something good to show for the toils of our youth. So exit pure Social Security and National Insurance Trust (SSNIT) system with all its limitations and challenges, welcome to the new three tier pensions structure.
This new structure has liberalized the system to some extent and shifted a lot of the the controls and responsibilities for your retirement security to you as well.
The Old Order – SSNIT as Sole Fund Manager
- Under the old pension structure, the Social Security and National Insurance Trust (SSNIT) was the statutorily mandated body tasked with the management of our pension funds, and they could pretty much do whatever they deemed fit to achieve this goal
- A total of 17.5% (5% from you and 12.5% from your employer) of your gross monthly salary was contributed
- At retirement, your benefits, based on your total contributions and other considerations were allocated to provide; 2.5% NHIS cover, 11% monthly pension and a 4% lump sum payment – Purely Defined Benefit Plan
- Some companies had other contributory schemes, termed provident funds usually used as an incentive mechanism to retain employees. They were unregulated
The New Order – Welcome to NPRA
- NPRA The Regulator: Under the new structure, National Pensions Regulatory Authority (NPRA) was established as the regulatory body in charge of the pensions industry including the activities of SSNIT
- Establishment of public and private pension schemes: So now SSNIT has been restructured as the sole manager of the public or state pension component (Tier 1 defined benefit) whiles Corporate Pensions Trustees are now responsible for managing (through fund managers) the Mandatory second tier (Tier 2) as well as voluntary Provident Fund Schemes.
- Regulation of Service Providers: NPRA regulates the activities of all service providers within the Pensions management industry, primarily, Corporate Pension Trustees, Fund Managers, Custodian Banks, Fund Administrators, Fund Auditors
- Guidelines for Investments: NPRA also provides guidelines as to how pension funds should be managed, including the permitted investments, investment amount thresholds,, among others.
The Three Tier Structure
- Tier 1 – 13.5% Basic National Social Security; Tax Exempt, Mandatory & Managed by SSNIT) – Defined Benefit Pension Scheme
- Tier 2 – 5% Tax Exempt, Mandatory & Managed by private pension trustees through fund managers – Defined Contribution Scheme
- Tier 3 – Up to 16.5% Tax exempt,Voluntary & Managed by private trustees and pension fund managers – Defined Contribution Scheme
Retirement Income = What you put in+Returns. Put in More to Have More
What you Need to Know About The Contribution Structure
The underlying fact is that whether it is your SSNIT benefits or the lump sum payment, your receipts depend on how much you contribute, especially for SSNIT plus any returns accruing on your investments (for the lump sum defined contribution payments). SSNIT has various considerations for determining your benefit payments, basically dependent on the number of months of contribution and the underlying basic salary on which contributions were based.
- Out of the total 18.5% Mandatory contribution, employers pay 13% whiles employees pay 5.5%
- The second tier schemes are termed Occupational Schemes, whiles Tier 3 schemes are termed Provident Fund Schemes.
- Of the 13.5% managed by SSNIT, 2.5% is to provide NHIS cover and 11% regular monthly benefits during retirement. SSNIT component no longer provides any lump sum payments
- The mandatory 5% managed by private pension funds now provide the lump sum payment component of benefits
- Up to another 16.5% of your basic gross salary can be deducted pretax as voluntary contributions for a provident fund (if your employer has one or a personal pension plan, if they don’t).
- Provident fund schemes are now regulated by NPRA , although some are still not registered under new law
Duties of Employers
- Appoint Corporate Trustees: Employers are mandated to appoint Corporate Trustees or have their own Board of Trustees to direct the management of the Tier 2 & 3 contributions
- Appoint Board of Trustees and Other Service Providers: Employers can choose to have their own internal Board of Trustees made up of staff if they meet the minimum threshold set by the NPRA; in which case they will need to add a registered Independent Trustee as a member of the board and appoint a fund administrator to keep the records, fund manager to manage funds, custodian bank to keep assets and fund auditors to audit the schemes activities.
- Option to Join a Master Trust Scheme Even if Qualified for In-house Board: If you meet the NPRA threshold (for in-house board of trustees), you could still appoint a Corporate Trustee, by joining their Master Trust Scheme, if you do not wish to have your own Board of Trustees or do not want to assume the extra responsibilities associated with managing scheme with self-appointed board of trustees
- Join Master Trust Scheme if You Do Not Qualify for In-house: Alternatively, employers can join Master Trust Schemes established by various Corporate Trustees, (which operate by pooling funds of various employers and self-employed individuals under one scheme) if they do not meet these minimum thresholds or do not wish to have a separate managed scheme if they do meet these thresholds
- Register Existing Provident Fund Schemes – Employers should consider also formally registering their existing and new provident fund schemes under the NPRA to allow their employees to enjoy the benefits accruing from being part of that formal structure, notably the extra 16.5% tax exempt deductions (taxable if funds are taken out before 10 years of contributing at 15% tax rate)
What are your questions about your pensions and how this new structure affects you? Send your comments and questions using the comment forms below. In our next post we take a your duties as a contributor and employee and some tips to save more under the new scheme.