Reforming Nigeria's pension system
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Nigeria launched a major reform of its pension system last year- replacing a range of largely unregulated and highly diverse pension arrangements with a mandatory and contributory system for federal government and private sector workers. The reform is expected to yield substantial benefits but, as a recent IMF study notes, successful implementation will also depend on significant strengthening of regulatory and supervisory capacity.
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Nigeria launched a major reform of its pension system last year that is likely to be closely monitored by other lowincome countries. The new Pensions Act sets up a system that replaces a range of largely unregulated and highly diverse pension arrangements. A recent study by Mauricio Villafuerte (IMF Fiscal Affairs Department) analyzes the implications of the pension reforms and explores challenges that lie ahead. He discussed his findings with Jacqueline Irving of the IMF Survey.
IMF SURVEY: What prompted Nigeria's pension reform?
VILLAFUERTE: For its public sector workers, Nigeria had a general noncontributory, defined-benefit scheme with very generous pensions indexed to wages. For certain workers, including military personnel, judges, and university professors, there were also special plans with still more generous provisions.
These schemes became increasingly costly and unsustainable, leading to accumulated arrears estimated at 1-2 percent of GDP in 2004.Weak financial management and poor administration, including the absence of an integrated personnel and payroll system, contributed to accumulated arrears. These arrears made the system much less generous than it was designed to be.
Private sector workers had either funded occupational schemes set up by their employers or a contributory, defined-benefit scheme managed by a trust fund set up by the federal government. The lack of proper regulation and supervision of firms' pension schemes impeded their effective functioning. In fact, no figures are available regarding their coverage and size. The centrally managed scheme, which was aimed at private sector workers in establishments with at least five employees, was partially funded by employer and employee contributions and provided defined benefits, which posed sustainability problems.
IMF SURVEY: What does the reform aim to do?
VILLAFUERTE: The reform sets up a...
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