Pension Reform Act and danger of investing in stock market

Assets of Pension Funds Administrators (PFAs) have dropped significantly due to negative earnings following the crash of the capital market. A stockbroker who craved anonymity put the losses at over N900 billion since investments turned anaemic from the last quarter of 2014.

 

 

A pension scheme contributor to the Stanbic IBTC Pensions, whose contributions value dropped significantly, said he was told that the reason arose from losses in equities investments.

 

The contributor, who did not want to be named, disclosed that his contributions which amounted to about N900,000 had his total pension fund value dropped to a little above N800,000.

 

The Pension Reform Act 2014 increased percentage investment in equity assets of PFAs without consideraing risk of exposure to a fragile market that has no hedge.

 

The Act, which repealed that of 2004, also reviews upwards minimum rate of contribution, and gives access to 25 per cent of contribution before age 50.

 

It provides access to mortgage, punishment for defaulting employers, and subjects to taxation voluntary withdrawal of contributions within five years from the date contributions were made.

 

Below are five issued in the Act that may impact a retirement savings account (RSA) holder.

 

 

Rise in minimum rate of contribution

Section 4 (1) of the Act reviews upwards, the minimum rate of pension contribution from 15 per cent to 18 per cent of monthly emoluments; 8 per cent is to be contributed by employee and 10 per cent by the employer.

 

Much as this provides additional benefits and improvement in the pension benefits to employees at retirement, employers have to be compelled to implement the review.

 

Over the years, some employers have deliberately failed to comply with the contribution or shortchanged workers by contributing less.

 
Access to contributions before age 50

Section 7 (2). An individual who voluntarily retires, resigns or is disengaged from employment to withdraw up to 25 per cent of his/her retirement savings account balance if he/she is unable to secure another job within a period of four months.

 

This is a significant departure from what obtained under the PRA 2004 in which only individuals involuntarily disengaged from employment were entitled to access 25 per cent of their benefits after remaining unemployed for six months.

 

 

Tax on voluntary contribution withdrawals

Section 10 (4). Only the income earned on voluntary contributions will be subject to tax at the point of withdrawal within five years from the date contributions were made.

 

However, contribution withdrawn after five years from the date contribution was made will still be tax free.

 

 

Access to mortgage

Section 89 (2). A PFA may, subject to guidelines issued by the National Pension Commission (PenCom), apply a percentage of the pension assets in an RSA to pay equity contribution for a residential mortgage by the account holder.

 

We, however, await issuance of the guidelines.

 

 

Punishment for defaulting employers

Section 11 (6). An employer who fails to deduct or remit the contributions of employees within seven working days from the date salary is paid, in addition to making the remittance already due, is liable to a penalty to be stipulated by PENCOM.

 

Section 105 (1 & 2). Empowers PenCom, subject to the fiat of the federal attorney general, to institute criminal proceedings against employers who persistently fail to deduct and/or remit pension contributions of employees.

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