Pension, Gratuity & PFA

Pension, Gratuity & PFA

Quick Answer: Since the Pension Reform Act 2004 (re-enacted by PRA 2014), Nigerian federal officers participate in the Contributory Pension Scheme (CPS): each employee holds a Retirement Savings Account (RSA) with a licensed Pension Fund Administrator (PFA), contributions of 8% (employee) and 10% (employer) flow through a Pension Fund Custodian (PFC), and the National Pension Commission (PenCom) supervises the whole system. Pre-2004 officers keep their accrued rights under the old Defined Benefits Scheme.

From Defined Benefits to Contributory

Before 2004, the federal public service ran a Defined Benefits Scheme (DBS): pensions were paid from general revenue, calculated on final salary and length of service, with no funded individual accounts. The scheme accumulated huge unfunded liabilities and delayed payments. The Pension Reform Act (PRA) 2004 dismantled the DBS for new service and introduced the Contributory Pension Scheme (CPS), under which both employer and employee contribute into a funded, individually owned RSA. The PRA 2014 amended and substantially re-enacted the 2004 Act, raising the employer rate and extending coverage.

The Four Institutional Pillars

The deliberate separation of investment management (PFA) from asset custody (PFC) is a core safeguard: a PFA cannot abscond with the funds because it does not physically hold them, and a PFC cannot misdirect investments because it only acts on PFA instructions.

Contribution Rates (PRA 2014)

Section 4(1) of the PRA 2014 fixes the minimum monthly contributions as a percentage of the employee's emoluments (basic salary + housing allowance + transport allowance):

Two important variants:

• Employer-bears-all option (Section 4(4)(b)): if the employer elects to bear the full cost without employee deduction, its contribution shall not be less than 20%.
• Voluntary contributions: an employee may add more, provided total deductions do not exceed one-third of monthly emoluments; investment income on voluntary contributions withdrawn within 5 years is taxable.

Employers must remit both shares to the PFC within 7 working days of salary payment; default attracts a penalty of at least 2% of the unpaid amount per month of delay (PRA 2014 §11). Every employer must also maintain a Group Life Insurance Policy of at least 3× each employee's annual total emolument, premium paid by the employer (PRA 2014 §9).

Gratuity Under the CPS

Under the DBS, gratuity was a lump sum computed separately from pension. Under the CPS, the RSA balance is the source of both the lump sum (gratuity equivalent) and the periodic pension. At retirement, a retiree may withdraw a lump sum from the RSA — the amount is not a fixed percentage but is calculated from the RSA balance, age, gender, and final salary, on the condition that the remaining balance can still fund a programmed withdrawal or annuity of at least 50% of the retiree's last annual remuneration. Where the RSA balance is ₦550,000 or below (PenCom periodically reviewed), the retiree may withdraw the entire balance en bloc.

Grandfathering of Pre-2004 Officers

A transitional provision protects officers who were already in service before 1 July 2004. Their service up to 30 June 2004 counts as accrued rights under the old DBS, computed on final salary and pre-2004 length of service, and redeemed through the Retirement Benefits Bond Redemption Fund (RBBRF) managed by the Central Bank of Nigeria under PRA 2014 Section 39. Service from 1 July 2004 onward is funded by CPS contributions in the RSA. PTAD (Pension Transitional Arrangement Directorate) administers the DBS side for treasury-funded MDAs. Employees who were within 3 years of retirement as at 30 June 2004 were exempted from joining the CPS and remained fully on the old scheme.

Coverage and Tax Treatment

• Mandatory coverage: public service of the Federation, FCT, States and LGAs; private-sector organisations with 3 or more employees (PRA 2014 §2).
• Exemptions: judicial officers, armed forces, intelligence/secret services, and existing pre-2004 pensioners.
• Tax: pension contributions and investment income on pension funds are tax-exempt; voluntary contribution income withdrawn before 5 years is taxable.

Exam trap: Do NOT state the old 7.5% + 7.5% (15%) rate — that was the PRA 2004 figure. The PRA 2014 raised the employer share to 10%, producing the current 8% + 10% = 18% minimum. If a COMPRO question gives a date before July 2014, the 7.5/7.5 split may apply; otherwise default to the PRA 2014 figures.