Image credited to azcapitoltimes
The idea of enacting
the pension reform act 2004 came up when the committee set by the federal
government in conjunction with bureau of public enterprises’ on the sale of
NITEL and NEPA, and other government parastatal discover that the foreign buyers could not price it effectively
because of huge pension liabilities. Because one question they continuously ask
is are you operating define benefit scheme or define contribution scheme.
The committee
subsequently reported to the presidency and the result was formation of a
committee to look into ways of reforming the pension scheme. The result was the
pension reform act 2004.
The global world
practice in pension is defined contribution scheme. Wikipedia noted that “In a
defined contribution plan, contributions are paid into an individual account
for each member. The contributions are invested, for example in the stock
market, and the returns on the investment (which may be positive or negative)
are credited to the individual's account. On retirement, the member's account
is used to provide retirement benefits, sometimes through the purchase of an
annuity which then provides a regular income. Defined contribution plans have
become widespread all over the world in recent years, and are now the dominant form
of plan in the private sector in many countries. For example, the number of
defined benefit plans in the US has been steadily declining, as more and more
employers see pension contributions as a large expense avoidable by disbanding
the defined benefit plan and instead offering a defined contribution plan.
Continuing Wikipedia noted
“Money contributed can either be from employee salary deferral or from employer
contributions. The portability
of defined contribution pensions is legally no different from the portability
of defined benefit plans. However, because of the cost of administration and
ease of determining the plan sponsor's liability for defined contribution plans
(you do not need to pay an actuary to calculate the lump sum equivalent that
you do for defined benefit plans) in practice, defined contribution plans have
become generally portable”. Continuing
Wikipedia noted that “In a defined contribution plan, investment risk and
investment rewards are assumed by each individual/employee/retiree and not by
the sponsor/employer, and these risks may be substantial.
The "cost"
of a defined contribution plan is readily calculated, but the benefit from a
defined contribution plan depends upon the account balance at the time an
employee is looking to use the assets. So, for this arrangement, the contribution
is known but the benefit is unknown (until calculated).”
The idea of a defined
contribution plan cannot be over emphasized as one special of our Retirement
Savings Account is that of portability.
Portability: where an employee transfers his
employment from one organization to another, the same RSA shall continue to be
maintained by the employee
It also reduces the
employer’s liability in the event of retirement, it also enhance the
marketability of a business entity in cases of acquisition, amalgamation and
even outright purchases.
It also makes it easy
for entry strategies of multinationals in other countries.
