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The Contributory Pension Scheme (CPS)

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By Mercy Kelani

Nigeria plans for the retirement of its employees by securing their finances.

Ever since the introduction of the Contributory Pension Scheme (CPS) about two decades ago, the pension system of Nigeria has changed remarkably. The scheme has enabled the revolution of retirement planning for employees, granting them provision of a range of benefits that guarantees financial security and peace of mind in subsequent years after employment. With the CPS, employees are offered a financial safety opportunity by addressing the prominent issue of insufficient funds to pay retirees their retirement benefits.

One of the mandatory features of this innovative scheme is that it ensures the commitment of employees in saving for their future, so as to reduce the risk of being financially handicapped at old age. To ensure this, employers have a mandatory contribution. They are to contribute a certain percentage of the salary of an employee to their pension fund. This contribution, together with the savings of the employee, will boost the growth of the pension fund. Resultantly, employees get to acquire a substantial retirement fund that helps their financial wellbeing at old age.

CPS ensures death and disability benefits for employees and families.

Funds accumulated under the scheme are invested on behalf of the employees by Pension Fund Administrators (PFAs). As time goes by, there is generation of returns from the investments, increasing the total value of the pension fund. Investment of the funds goes into various financial tools, such as bonds, stocks and real estate, guaranteeing diversification and higher returns. Through prudent investments, the pensions funds get boosted, increasing the long benefits it offers employees as they confidently anticipate retirement.

Another advantage of this innovative scheme is that it gives death and disability benefits. This is because death and unforeseen disabilities are part of the uncertainties of life that might occur during active working ages. Asides the retirement benefits, the CPS protects employees and their families in case of unforeseen death or disability. When this happens, the pension fund is paid as death benefits to the legitimate beneficiaries of the deceased employee. Also, in the case of incapacitation, the scheme offers immediate access to retirement benefits.

Effects of possible job loss is cushioned by the scheme.

Also, the CPS provides employees with a high level of portability and flexibility. Even when an employee’s job description or location changes, the accumulated pension funds remain secure in the Retirement Savings Account (RSA) and inaccessible by the employer. The flexibility this brings helps individuals to commit to their pension contributions without stress and reduced administrative complexities. These advantages of flexibility and portability also see to it that employees consistently benefit from the scheme, notwithstanding their employment history.

Furthermore, the scheme eases the effects of likely job losses, which is a reality for every worker. A worker, who is an RSA holder, has the right to access 25 percent of their balance to help ease the effect of a sudden job loss, in case of inability to secure a new job after four months. This withdrawal does not replace the retirement benefits but serves as a medium of offering immediate support in a trying period. The remaining RSA balance will keep accumulating until the attainment of retirement age by the RSA holder.

25% of savings can be used as equity contribution for residential property.

Holders of RSA are equally provided with the opportunity to use a part of their savings as equity contributions for residential mortgages. RSA holders who have consistently contributed to their accounts for the minimum of five years and have met specific eligibility criteria are permitted to use the maximum of 25 percent of the pension savings as equity contributions to purchase residential property. The policy is to be achieved in alignment with the commitment of the National Pension Commission (PenCom) to ensure that the funds drive economic development and social well-being.

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