A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
For even more information feel free to visit the following external sites:
https://ao2law.com/a-decade-post-the-pension-reform-act-2014-any-need-for-change/
https://www.pencom.gov.ng/category/frequently-asked-questions/new-pension-scheme-introduction/
B] The Issue
Under the Pension Reform Act, any company in Nigeria with three or more employees must participate in the Contributory Pension Scheme. While the employees contribute 8% of their monthly salary, the employers add 10% or optionally cover full by contributing 20% of the employee’s salary, with the monthly remittances routed to a Pension Fund Administrator.
C] The Details
However, many micro and small enterprises ignore this legal requirement, which has resulted in low compliance with many workers within the Micro, Small and Medium Enterprises (MSMEs) not enrolled in the Contributory Pension Scheme. Gbenga Salaub explains why these enterprises flout the pension law and the consequences for employees and the broader pension system and the economy.
She worked for a construction company in Gbagada, Lagos, for about two years; however, she was not enrolled in the contributory pension scheme while with the company. As a result, no pension deduction was made throughout her stay there. She left the company in May 2024 and got a new job with another construction company in Lekki as a Quantity Surveyor (QS), however, over a year now, nobody has talked about pension enrolment with her in the new company, let alone pension being deducted and remitted to a pension fund administrator (PFA).
Olorunfemi revealed that the first company she worked for did not deduct tax from her salary too though she would have preferred that the companies, the former and the present, enrolled her into the contributory scheme with prompt deduction and remittance to a pension fund administrator. In the first company, Olorunfemi said there were about nine full staff and other adhoc workers based on need and request. The company she currently works for has about 12 full staff. So, both companies could be easily classified as micro and small businesses that are part of the Micro, Small and Medium Enterprises (MSMEs).
And there are many micro and small businesses like the ones Olorunfemi had worked for that are not bothered about complying with the Pension Act. Yet the Pension Reform Act mandates employers with at least three employees to participate in the Contributory Pension Scheme. Under the scheme, both the employers and employees should contribute towards the employees’ retirement.
The pension act also provides that the employer may voluntarily bear all the contribution cost, but the employer is expected to contribute a minimum 20% of the employee’s monthly emolument into the employee’s Retirement Savings Account with a Pension Fund Administrator monthly.
D] Reality
But many micro and small businesses do not comply with it. For instance, Kachi Okafor works for a logistic company with eight staff in her branch somewhere around Trade Fair area of Lagos. The company has two other branches in Lagos, more than two years after joining the company, the administrative department of the firm has not talked to her about enrolling for the contributory pension scheme just as the company has not been deducting pension from her salary even though the company subtracts tax from her monthly salary. She is, however, not bothered about the company deducting and remitting part of her salary for pension.
When she was told that the company is expected to provide an additional 10% to the 8% deducted from her salary that should be paid to a pension fund administrator, she expressed disdain. “My salary is not enough to cater for me for the whole month. I struggle with the little I earn and rely on supports from family and friends to survive the 30 days in a month. So, removing a percentage of the salary for pension will be a tough one for me. It will add to my pain. May be when I start earning better, I can consider asking that the company should start deducting the pension. The tax that is being deducted from my salary, I am not too happy about it because if it is possible, I will tell the company to stop deducting it,” Okafor stated.
Similarly, Oluwakemi Yusuf, who works for an insurance company, said her company started the deduction of pension from her salary in 2023 but the company only started remitting the deduction in 2024.
E] MSME’s
MSMEs are said to be the backbone of any economy because of the huge employment opportunities they provide. According to the Bank of Industry, as at 2024, there are 41.5 million MSMEs in Nigeria representing about 96 to 97 per cent of all businesses in the country and providing about 84 to 87 per cent of employment.
The National Pension Commission disclosed that as at third quarter of 2024, just 164,031 individuals from the informal sector cum MSMEs have registered under the Micro Pension Plan (MPP), only 12,241 of them have made actual funded contributions—totaling N967 million from 2020–Q3 2024.
The MPP was introduced specifically to cater for the interest of the MSMEs in 2019, especially micro and small businesses. Commenting, former Chief Economist, Zenith Bank Plc, Marcel Okeke, stated that it is not everybody that is even aware of the existence of the contributory pension scheme.
“So, there is the issue of lack of awareness. And we are talking about MSMEs, which are very small organisations with some of them just backyard businesses and their owners may not even understand or know about the contribution pension scheme. “Thus, lack of awareness is likely one of the factors why there is low compliance. The other thing is also the scale at which these businesses operate. Most of them operate at a very low scale and so the owners are not conscious of the fact that they are even a major factor in the economy, when they are aggregated together.
“They do not look at themselves as an entity, but as individuals, so they could feel; who are we? what impact do we make? So, that is the reason they neglect or do not bother about the existence of some of those laws, especially Contributory Pension Scheme. “Also, it is not all staff or former staff of these MSMEs that are even aware of their entitlements, even when the entities are deducting the money. They may not know that such a deduction is going on or it should be done. Therefore, there is also ignorance among workers,” Okeke stated.
F] Numbers
From 2012 to 2023, the National Pension Commission (PenCom) recovered N25.45 billion in unremitted pension funds, including N12.93 billion in principal contributions and N12.52 billion in penalties. In the second quarter of 2024, PenCom recovered N336.26 million from 35 defaulting employers, comprising N125.57 million in principal contributions and N210.68 million in penalties.
While some workers commended PenCom for the recovery, they however, called for more action as it relates to enforcement. This is more so that there are consequences for failure to deduct or remit, which could serve as a deterrent for non-compliance.
According to the pension act, an employer who fails to subtract or remit the contributions within seven days of the payment of the salary of the employee, will, in addition to making the remittance already due, be liable to a penalty, which the law said shall not be less than two per cent of the total contribution that remains unpaid for each month or part of each month the default continues.
It also stated that the amount of the penalty shall be recoverable as a debt owed to the employee’s retirement savings account. Additionally, if contributions are not forwarded to the PFA by the 14th day after salaries are paid, the PFA must escalate the case to PenCom, which enforces penalties in addition to the actual contributions.
G] Awareness & Financial Literacy
Commenting on enforcement, Okeke said PenCom and other relevant agencies should up the ante in terms of creating awareness, which would aid better enforcement of the relevant laws. “This is so that retirees do not come out to suffer. This is because if employees do not get what they should get as pension, they may retire into poverty. And this is why despite the government on one hand is doing everything to reduce the rate of poverty in the country, the rate of poverty in Nigeria is even increasing!
“When there are so many people becoming poor in the society, it reduces the lifespan and life expectancy rate in the country aside increasing the number of beggars on the roads cum vulnerable people in the society. And what that means is that these categories of people will lack purchasing power, principally because they have been denied what they should get as pension or they are not getting what they should get.
“The implication for the economy is that when so many people are impoverished, the purchasing power is not there. And that is what we now detract from the overall Gross Domestic Product (GDP) growth. The pension industry is also not going to get what it ought to get, which may affect the available fund for investment and size of the pension fund,” Okeke stated.
On his part, Oyedokun Godwin Emmanuel, a tax consultant, said the primary reason for low compliance of MSMEs in Nigeria with pension contributions is lack of awareness as many MSME owners may not fully understand the Pension Reform Act 2014 or the importance of pension contributions. He also identified financial constraints, noting that tight cash flow and limited financial resources can make it challenging for MSMEs to allocate funds for pension contributions. He added that administrative burden mentioning that the perceived complexity of processing pension contributions may deter compliance. He also identified weak regulatory enforcement, stating that weak enforcement mechanisms and lack of penalties for non-compliance can lead to lax adherence to regulations.
H] Finally
On how the non-remittance of pension deductions by MSMEs impact the retirement savings of employees, Emmanuel stated that with insufficient retirement funds, employees may face inadequate savings for retirement, leading to financial insecurity in their old age. He added that this category of employees would lose some of the benefits that come with pension deduction and remittance. “Non-remittance means employees miss out on potential pension benefits, reducing their overall financial stability.”
As a result of this, he said the country would experience increased poverty risk. “Over time, the lack of proper pension savings can contribute to higher poverty rates among retirees.” On how non-compliance by MSMEs with pension remittance obligations affect the overall growth and sustainability of the pension industry in Nigeria, he said that there is reduced capital pool as non-compliance limits the funds available for investment in the pension industry, stunting its growth. He further said the level of trust in the system would dip because persistent non-compliance could erode public confidence in the pension system.
“A fragmented compliance landscape can hinder the development of robust pension products and services.” Emmanuel noted that financial illiteracy may lead to a lack of understanding of pension benefits and compliance requirements.He added that MSME owners who lack financial literacy may struggle to manage their finances effectively, leading to prioritisation of immediate expenses over long-term obligations like pensions.
On incentives and support systems to aid compliance among MSMEs, Emmanuel said that offering tax breaks or deductions for timely pension remittances can encourage compliance. He also said that providing financial literacy programmes to MSME owners can help them understand the importance and processes of pension contributions.
“Streamlining the remittance process and offering digital solutions can reduce administrative burdens.”He added that government should establish support frameworks, such as advisory services or partnerships with financial institutions that could help MSMEs navigate pension regulations more easily. Emmanuel was optimistic that if a multi-faceted approach is adopted it could help improve compliance rates among MSMEs and support the overall growth of the pension industry in Nigeria.
Attempt to get the Head of Corporate Communications Department at the National Pension Commission (PenCom), the Ibrahim Buwai, to speak on the challenges PenCom is having with getting MSMEs to comply with contributory pension scheme as well as efforts enforce strict compliance by MSMEs to the pension scheme was not successful.