It has become evident that Nigeria’s mandatory Contributory Pension Scheme (CPS) established under the Pension Reform Act (PRA) 2014 (as amended) has not consistently delivered adequate and sustainable retirement income for over two decades of implementation. This is largely attributable to prevailing economic conditions facing the country and the absence of a substantial lump-sum benefit at retirement. These shortcomings have triggered persistent concerns and growing agitation among stakeholders for reform or exit from the CPS. Policy responses have included the introduction of the Enhanced Pension (EP) for only retirees under Programmed Withdrawal (PW), excluding Life Annuity retirees who felt aggrieved and the approval of additional benefit structures alongside the CPS.

Although the PRA 2014 does not allow a complete transition away from the CPS for most employers, it does permit the continuation of pre-existing gratuity or severance arrangements. In line with this provision, the National Pension Commission (PenCom) issued the 2017 Guidelines on Gratuity Benefits, enabling private sector employers to operate defined benefit (DB) gratuity schemes alongside the CPS, subject to annual actuarial valuation to ensure adequate funding. Furthermore, PenCom issued a framework on 13th September 2023 for the establishment of Additional Benefits Schemes (ABS) under the CPS, pursuant to Section 4(4)(a) of the PRA 2014. This framework effectively facilitates a transition toward a hybrid pension model, allowing employers to introduce supplementary benefits, either defined benefit or defined contribution, on a fully funded basis.

A hybrid pension scheme combines elements of both defined contribution (DC) and defined benefit (DB) systems. Under a DC scheme such as the CPS, investment and longevity risks are largely borne by employees. In contrast, DB schemes place these risks on employers. A hybrid arrangement shares these risks between both parties.

The recent initiatives by PenCom, including the reintroduction of gratuity for federal civil servants (equivalent to 100% of annual emolument for those with at least ten years of service, effective January 2026); the PenCare healthcare scheme for low-income retirees; and plans to implement the GMP, have signaled a practical and commendable transition toward a hybrid pension model. This development is significant, timely and commendable.

This article examines potential funding approaches for these defined benefit components and their implications for stakeholders.

Gratuity is a defined benefit paid as a one-time lump sumto an employee upon retirement or exit after a minimum period of continuous service. The funding approach for the newly approved Federal Government gratuity scheme has yet to be clearly defined. Typically, such schemes are non-contributory, with funding provided solely by the employer based on actuarial valuation of liabilities.

In practice, two primary funding models exist: Pay-As-You-Go (PAYG) and fully funded system. A clear understanding of these approaches along with Nigeria’s historical experience of pension schemes administration prior to the 2004 is essential in determining the most suitable modelfor reintroducing gratuity to Federal civil servants.Historically, Nigeria operated a PAYG system. While this model allows flexibility and immediate payment of benefits, it is highly vulnerable to demographic pressures, economic instability, and political interference. Factors such as an aging population, increasing life expectancy, and fluctuating workforce contributions often result in funding imbalances, leading to deficits and delayed payments. In contrast, fully funded systems accumulate and invest contributions during employees’ working years to finance future benefits. These systems offer greater long-term sustainability but depend heavily on investment performance, robust governance, and transparency. They are also exposed risks including market volatility, fund mismanagement, and manipulation of actuarial assumptions to present a more favorable financial picture.

Nigeria’s past reliance on largely unfunded (PAYG) defined benefit schemes resulted in substantial pension liabilities and arrears, prompting the introduction of the CPS. However, challenges persist under the CPS, including inadequate funding of accrued pension rights for pre-2004 employees, irregular remittance of contributions, and failure by some State Governments to implement pension laws in compliance with the PRA 2014.

Selecting a sustainable funding model for gratuity requires careful consideration of the issues discussed above. The reintroduction of gratuity within the CPS must be supported by legislative amendments to the PRA 2014 to prevent duplication of lump-sum benefits.

In March 2026, PenCom launched the Pension Industry Healthcare Initiative (PHI), known as PenCare. This initiative aims to provide affordable and quality healthcare coverage for low-income retirees under the CPS, many of whom lose employer-sponsored health insurance upon retirement. PenCom is expected to develop a comprehensive framework for accrediting healthcare providers, supervising Health Management Organizations (HMOs), and providing free or subsidized health insurance for the low-income retirees.  

PenCare is structured as a corporate social responsibility (CSR) initiative funded by PenCom and Pension Fund Administrators (PFAs), rather than directly from pension assets or Retirement Savings Accounts (RSAs). However, since PFAs and PenCom derive revenue from fees on assets under management (AUM), the initiative could indirectly result in higher fees or new charges, potentially reducing contributors’ retirement savings. This means current contributors could effectively subsidize retiree healthcare costs. Additionally, not all contributors may benefit from PenCare, raising equity concerns.

There is also a risk of overlap with the National Health Insurance Authority (NHIA), which already has a mandate to provide healthcare access, including for CPS retirees. Without effective coordination, PenCare could duplicate existing functions, leading to inefficiencies and increased healthcare system-wide costs.

The GMP, provided for under Section 84(1) of the PRA 2014, is a key mechanism for ensuring income adequacy in retirement. It serves as a safety net by guaranteeing a minimum benefit level within the CPS, thereby protecting retirees against poor investment returns and economic volatility.

The GMP functions as an “underpin” within the defined contribution framework (CPS), ensuring that benefits do not fall below a specified threshold (GMP), typically linked to a percentage of final salary at retirement date. Its implementation requires careful actuarial assessment to ensure cost-effectiveness and sustainability.

The Pension Protection Fund (PPF), established under Section 82 of the PRA 2014, is intended to finance the GMP and compensate for investment-related losses. It is funded through contributions from the Federal Government, PenCom, and pension operators, as well as investment income.

However, implementation of the GMP has been delayed, likely due to ongoing efforts by the Federal Government to settle accrued pension liabilities under the CPS. While initial funding of ₦107 billion for the PPF commenced in February 2025, additional resources are required for full implementation. Encouraging voluntary contributions and strengthening complementary welfare initiatives could reduce reliance on the GMP and ease pressure on the PPF over time.

Nigeria is already undergoing a gradual transition from a purely contributory pension system to a hybrid model, both in policy and practice. The introduction of gratuity schemes, healthcare support, and minimum pension guarantees reflects recognition that the CPS alone cannot fully meet retirees’ needs.

For this transition to be effective, State and Local Governments must also adopt similar reforms. In particular, the reintroduction of gratuity schemes across all tiers of government is essential to achieving a uniform and equitable pension system, as envisaged under Section 1(a) of the PRA 2014. Thus, a well-designed hybrid model would offer the best prospect for delivering sustainable and adequate retirement income for Nigerian workers.

Dr Pius Apere is an (Actuarial Scientist and Chartered Insurer), Chairman/CEO, Achor Actuarial Services Limited

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