Pension is the payroll obligation Nigerian SMEs most often get wrong, usually by paying late or not starting at all. PenCom has become much more active in enforcement, so here's what the law requires and how to stay compliant.
Who must operate the pension scheme?
Under the Pension Reform Act 2014 (PRA 2014), the Contributory Pension Scheme (CPS) applies to employers in the private sector with 3 or more employees. Employers with fewer staff can join voluntarily.
How much is contributed?
| Contribution | Rate | Paid by |
|---|---|---|
| Employee | 8% of monthly emoluments | Deducted from salary |
| Employer | 10% of monthly emoluments | Paid by the company on top of salary |
| Total | 18% | Into the employee's Retirement Savings Account |
Monthly emoluments for pension purposes means basic salary + housing allowance + transport allowance. Other allowances aren't included unless your pay policy says otherwise.
Example: Basic ₦250,000 + housing ₦100,000 + transport ₦50,000 = ₦400,000 emoluments. Employee pension: ₦32,000. Employer pension: ₦40,000. Total remitted: ₦72,000.
What is an RSA and a PFA?
- RSA (Retirement Savings Account): each employee's personal pension account, identified by an RSA PIN. The employee owns it, and it moves with them from job to job.
- PFA (Pension Fund Administrator): the licensed company, chosen by the employee, that manages their RSA. Each employee can have a different PFA.
When you hire, collect the employee's RSA PIN and PFA. If they don't have one, they must open an RSA with a PFA of their choice.
When must pension be remitted?
Within 7 working days from the day salaries are paid. Contributions go to each employee's PFA through the Pension Fund Custodian, with a schedule showing each employee's RSA PIN and amounts.
What else does the Act require?
- Group life insurance: a policy for each employee of at least three times their annual total emoluments, kept in force.
- Records: contribution schedules and proof of remittance for every month.
- Compliance certificate: PenCom issues a certificate of compliance, often required for government contracts.
What happens if I don't comply?
- A penalty of at least 2% of the unremitted contribution for each month of default, which belongs to the employee.
- Recovery agents appointed by PenCom to audit your records and recover arrears.
- No PenCom compliance certificate, which blocks government tenders.
PenCom has fined employers for late remittance, so this isn't theoretical.
A simple monthly routine
- Run payroll and pay salaries.
- Prepare the pension schedule (employee, RSA PIN, PFA, 8% + 10%).
- Remit within 7 working days.
- File the remittance evidence with that month's payroll.
BizBooks payroll calculates 8% and 10% for each staff member, records RSA PINs and PFAs, shows the total to remit and the deadline on your pay run, and adds it to your tax calendar. See payroll.
Frequently asked questions
Is pension compulsory for small businesses in Nigeria?
Yes, for employers with 3 or more employees under the Pension Reform Act 2014. Smaller employers may join voluntarily.
What is the employer pension rate in Nigeria?
10% of the employee's monthly emoluments (basic, housing and transport). The employee contributes 8%.
When should pension contributions be remitted?
Within 7 working days of paying salaries, to each employee's Pension Fund Administrator.
What is the penalty for not remitting pension?
At least 2% of the outstanding contribution for every month of default, plus possible recovery action by PenCom.
Is group life insurance compulsory?
Yes. Employers under the scheme must maintain group life insurance of at least three times each employee's annual total emoluments.