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://www.pencom.gov.ng/
https://blog.oakpensions.com/post/3-types-of-retirement-in-nigeria-you-must-know
https://kmoney.co.uk/your-guide-to-retiring-in-nigeria
B] The Issue
In order to see what the current retirement situation is in Nigeria, we will ask several questions to Opeyemi Aiku, who is a seasoned investment management professional.
C] What is the current situation?
A retirement plan ensures financial stability after one stops earning, helping to maintain living standards, cover healthcare costs, and prevent dependency in old age. Without a structured plan, retirees’ risk financial insecurity.
Nigeria’s pension system was overhauled with the Pension Reform Act (PRA) 2004, replacing the unreliable Defined Benefit Scheme with the Contributory Pension Scheme (CPS). The PRA 2014 further strengthened this system, mandating that employers contribute 10% and employees 8% of monthly salaries into a Retirement Savings Account (RSA). These funds are professionally managed by Pension Fund Administrators (PFAs) and safeguarded by Pension Fund Custodians (PFCs) to ensure security and long-term growth.
D] Is the current system effective?
The pension system in Nigeria has made significant progress. However, challenges remain.
Low informal sector participation is one major issue that has made comprehensive pension coverage difficult, leaving millions of self-employed and informal workers without structured retirement savings. Despite the introduction of the Micro Pension Plan (MPP) in 2019, adoption remains slow due to irregular income patterns, limited financial literacy, and a general lack of trust in formal financial institutions.
As a result, a significant portion of Nigeria’s workforce remains vulnerable to old-age poverty, relying on family support rather than structured pension benefits. I am also aware of significant bureaucratic delays. Retirees often struggle to access pension benefits due to slow processing, manual documentation, and regulatory bottlenecks, leading to months-long delays in receiving payments.
E] How about the safeguarding of employees pension claims?
The Pension Reform Act (PRA) 2014 introduced key measures to protect employees’ retirement benefits under the Contributory Pension Scheme (CPS), ensuring a structured and transparent approach to pension savings. Under this system, employees contribute 8%, while employers contribute 10% of an employee’s monthly salary into a Retirement Savings Account (RSA), providing long-term financial security.
The Multi-Fund Structure (Funds I–VI) was also introduced, allowing pension contributors to align their investments with their risk appetite and retirement timeline. For instance, younger contributors (Fund I & II) have higher exposure to growth assets, while retirees (Fund IV) are placed in lower-risk investments for capital preservation. Additionally, strict penalties are enforced to ensure compliance—employers who fail to remit contributions face a 2% penalty per month on outstanding funds.
The PRA also mandates investment diversification, ensuring pension funds generate stable returns while maintaining risk management safeguards. While these provisions have improved pension administration in Nigeria, continuous policy enforcement and periodic updates are necessary to address inflationary pressures, investment constraints, and economic volatility, ensuring retirees’ financial security.
F] What is the effect of inflation?
One major concern is inflation and currency depreciation, which significantly erode the purchasing power of pension savings. With inflation reaching 34.8% in 2024, many retirees struggle to maintain their standard of living. For instance, a pensioner who received ₦200,000 monthly in 2020 would need at least ₦600,000 today to afford the same lifestyle.
To address this, Pension Fund Administrators (PFAs) need greater access to inflation-protected assets and alternative investments that can generate higher real returns. Allowing wider investment in real assets and foreign-denominated securities would help pension funds better navigate economic volatility and protect retirees’ savings.
G] How about the participation of informal workers?
Another huge challenge is the low participation of informal sector workers, who make up over 80% of Nigeria’s workforce, yet contribute minimally to pension schemes. Despite the launch of the Micro Pension Plan (MPP) in 2019, participation remains low, with only 164,031 registered contributors as of Q3 2024, compared to 10.5 million in the formal sector.
Expanding financial literacy initiatives, introducing incentives for participation, and making MPP contributions more flexible will help boost inclusion. Ultimately, while the PRA 2014 provides a solid legal framework, its effectiveness depends on regular updates, stronger enforcement, and broader investment diversification to sustain retirees’ financial well-being.
H] Finally: How to go forward?
I am moderately confident in the Nigerian pension system due to its strong asset growth and regulatory oversight. As of December 2024, pension assets reached ₦22.5 trillion, reflecting strong financial sustainability and the ability to support retirees. Additionally, PenCom’s regulatory supervision ensures fund security and accountability, reinforcing trust in the system.
However, while these measures provide a solid foundation, the effectiveness of the pension system is still challenged by inflation and economic volatility, which can significantly erode the value of retirees’ savings over time.
To improve the system, there is a critical need for better investment diversification, allowing PFAs to invest in inflation-protected and foreign-denominated assets to safeguard purchasing power. Expanding Micro Pension Plan (MPP) participation will also strengthen the financial security of informal sector workers, who currently remain largely excluded.
Additionally, enhanced public awareness campaigns are essential to improve pension literacy, ensuring that contributors understand their options and can make informed financial decisions for retirement.