The Need to follow global world practice-Odunze Reginald C

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.

Odunze Reginald is the Lead Consultant, Chareg Consulting, a management and marketing   consultant a social media and social marketing consultant, you can visit our twitter anchor @regydunze, find us on Facebook @ Reginald odunze and reginaldodunze.com, at Google+ @ Reginald Odunze and at LinkedIn Reginald odunze.