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Directors Private Liability Under Nigerian Law and Remedies


Corporations & Directors

Incidents of corporate failures have continued to increase in spite of public and private initiatives to reduce them. These initiatives are important because where a corporation fails, it affects not only the shareholders and employees of that corporation but also the clients of the corporation. An example is a pension fund company in the United Kingdom , which is presently under threat of insolvency.

Legislations' have always been available to arrest some of these human problems. Unfortunately, the Directors and Shareholders of most companies, especially the private ones, where inappropriate behaviour, which leads to corporate failure, occurs, are reluctant to seek to enforce their legal rights and investments, against erring Directors.

This Newsletter is a minor contribution to sharing some enlightening literature on the Law regulating Directors, their duties and penalties for breaching those duties.

Directors & Their Duties?

Section 244 of the Companies & Allied Matters Act, 1990 (‘CAMA') provides that the Directors of a company are appointed by the company to direct and manage the business of the company. All underlinings in this paper are made by the Author unless stated otherwise.

Fiduciary Duty

Section 279 of CAMA provides that ‘a Director of a company stands in a fiduciary relationship towards the company and shall observe the utmost good faith towards the company in any transaction with it or on its benefit'.

Section 279 (3) of CAMA provides that “a Director shall act at all times in what he believes to be the best interest of the company as a whole so as to preserve its assets, further its business and promote the purposes for which it was formed, and in such manner as a faithful, diligent, careful and ordinarily skilful Director will act in the circumstances”.

Thus it was held in the case of OKEOWO v. MIGLIORE [1979] NSCC 210 @ 263 that the Directors' fiduciary duty is not for any individual Director's advantage but for the advantage of the company. Also see the Supreme Court decision in ASTRA INDUSTRIES v. NBCI [1998] 3 SC 98 @ 119 where it was held that “ In the case in hand, the Directors of the Defendant Bank therefore alert to their responsibilities, could not have exercised their discretion in favour of the Plaintiff, the proper effect of which would be to further dilute the Defendant's security when the Plaintiff was already in breach of its previous undertaking” .

Section 279 (9) of CAMA makes any duty imposed on a Director under Section 279 enforceable against the Director by the company and not its shareholders. This provision follows the rule in FOSS v. HARBOTTLE [1843] 2. Hare. 461, which states that the proper Plaintiff in an action in respect of a wrong allegedly done to a company is the company itself, and not its shareholders. The exceptions to this rule are stated later on in this Newsletter.

Secret Profits By Directors

Section 280 (1) of CAMA provides that the personal interest of a Director shall not conflict with his duties as a Director in a company. Section 280 (2) goes on to provide that “A Director shall not:

  1. In the course of management of affairs of the company; or
  2. In the utilisation of the company's property make any secret profit or achieve other unnecessary benefits ”.

Section 280 (3) of CAMA goes on to state that where any secret profit is made or unnecessary benefit is derived, the Director shall be accountable to the company and liable for the secret profits. The exception is if he disclosed his interest to the company before entering into such a “secret” transaction.

A Director is also restrained by Law from misusing his company's confidential information upon his ceasing to be a Director of the company. See Section 280 (5) of CAMA. Where a breach occurs, the company has the right to obtain a restraining injunction, against the Director, so that the information is not misused by virtue of the Director's previous position. This rule was followed to the letter in the matter of NASR v. BEIRUT-RIYAD NIGERIA [1968] 5 NSCC 218 where it was held that a Director must not negotiate a contract with his employer company as would put him in a position to profit at the expense of the company. Should he do so, the company can maintain an action for damages and or restitution.

Duty of Care & Skill

It is a known principle that persons who stand in a fiduciary relationship to another must exercise a duty of care when managing that relationship. Section 282 (1) of CAMA therefore provides that “Every Director of a company shall exercise the powers and discharge the duties of his office honestly , in good faith and in the best interest of the company , and shall exercise that degree of care, diligence and skill which a reasonably prudent Director would exercise in comparable circumstances”.

Section 282 (2) goes further to provide that a “failure to take reasonable care in accordance with the provisions of Section 282 of this Act shall be ground for an action for negligence and breach of duty ”.

Subsection 3 of the above Section makes each and every Director of a Board, individually and collectively liable for actions of the Board save where the Director can for example justify his absence at a Board meeting at which the alleged decision was reached.


The Blacks Law Dictionary defines a Trustee as “One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary”.

Section 283 of CAMA also makes the Directors of a company, whether a private company or a public company, Trustees of the company. Subsection 1 of Section 283 says “Directors are Trustees of the company's moneys and their powers and as such must account for all moneys over which they exercise control and must refund any moneys improperly paid away, and they must also exercise their powers honestly in the interest of the company and all the shareholders and not in their own or sectional interest”.

Secret Benetifs

The Nigerian government continues to propagate the need to fight incidents of bribery and corruption. The Companies and Allied Matters Act already has this corporate governance problem within its contemplation, as it abhors bribery and corruption in whatever form or guise.

Section 287 of CAMA provides that a “Director shall not accept a bribe , a gift , or a commission either in cash or kind from any person or a share in the profit of that person in respect of any transaction involving his company in order to introduce his company to deal with such a person”.

A breach of this statutory duty entitles the company to recover the actual gift from the Directors, sue him and the giver of the gift, jointly and severally, for damages sustained without any deduction in respect of what the Directors has returned. See Section 287 (2). Also the plea that the company benefited or that the gift was accepted in good faith shall not be a defence. See Section 287 (3).

Loans & Advances With Intent to Defraud

This subject is related to the above on bribery and corruption. The Law does not allow the Directors of a company to obtain loans or other forms of advances with the motive to defraud the company or the giver of the loan or advance. Section 290 of

CAMA provides that if a company receives money by way of an advance payment and with the intent to defraud, fails to apply the money or other property for the purpose for which it was received, every Director or other Officer of the company shall be personally liable to the party from whom the money or property was received.

Other Duties & Liabilities

The Directors of a company can be held personally liable for their executive actions where such actions are not in conformity (i.e. ultra vires) with the company's charter or its objects as set out in its Memorandum and Articles of Association. Also, Directors are personally liable for executive actions aimed at a particular group of shareholders where those actions are fraudulent or illegal.

Traditionally, the liability of Directors and Shareholders of a company are limited. Conversely, a company can by its Memorandum And Articles of Association make the liability of its Directors unlimited from the time of the registration of the company. See Section 288 (1) of CAMA.

Following from the last paragraph above, where a company is already registered, it can by special resolution amend its Articles of Association to make the liability of its Directors unlimited subject to such unlimited liability becoming extinguished on the dissolution of the company.

A Company’s Remedies for Breach of Duty

A Company, and not its Shareholders, have numerous remedies open to it where a Director's breach of duty occurs. They include:

  1. An order of injunction. This is primarily employed against a threatened breach of duty or a continuing breach of statutory duty.
  2. Compensation and or damages. This is appropriate where a breach has occurred and compensation in the form of restitution is made.
  3. Rescission of the contract. This is possible where the company is able to show that the alleged contract was ultra vires its objects and it cannot be ratified to the prior knowledge of the third party.
  4. Restoration of the company's property.
  5. An order for the Director to render an account of the profits made.
  6. Summary dismissal of the Director as has been done in some recent cases in Nigeria; some of these cases are presently in Court.

Who Can Challenge A Breach Of Duty?

The general Company Law rule is that it is only the company itself and not its Directors or Shareholders that can contest a wrong done to the company or ratify an irregular conduct. This is known as the rule in FOSS v. HARBOTTLE, which has found statutory enshrinement in Section 299 of CAMA .

Some exceptions to this rule, which entitles Shareholders to commence an action in a Court of Law, are provided for in Section 300 of CAMA. They include:

  1. Entering into illegal or ultra vires transactions.
  2. Purporting to do by ordinary resolution any act, which by its Articles/Charter or CAMA is required to be done by special resolution.
  3. Any act or omission affecting the Shareholder's individual rights as a member of the company.
  4. Committing fraud on either the company or its minority Shareholders.
  5. Where a company meeting cannot be called on time to be of practical use in redressing a wrong done to the company or to its minority Shareholders.
  6. Where the Directors are likely to derive a profit or benefit, or have profited or benefited from the negligence or from their breach of duty.


Shareholders and Directors must be alert to their statutory and corporate responsibilities by ensuring that their companies have in existence a corporate governance policy, in addition to their Articles/Charter and the due processes stated therein are followed. Where this is not done, challenges must be raised and followed to their conclusion to protect the investment of the Shareholders.

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Foreign Companies Doing Business in Nigeria
Foreign Companies Doing Business in Nigeria
Last Newsletter
My last Newsletter on Directors Private Liability elicited some exciting responses. It is important to add that there are many civil and criminal provisions regulating the duties of Directors. Some of the criminal provisions are contained in Chapter 40 of the Criminal Code, which deals with Directors and officers of corporations or companies fraudulently appropriating property or keeping fraudulent accounts, or falsifying books of accounts". There is also the old common Law rule referred to as criminal breach of trust.
Foreign Companies Doing Business In Nigeria
A major concern of international businessmen is subjecting themselves to the Laws of the foreign country where they intend to trade. Their reluctance stems from a variety of reasons most of which are primarily from their incomprehension or ignorance of the rules, ethic and cultures by which their business would be governed by their host country.
A common inquire I receive from foreign companies intending to come to Nigeria to trade is whether they are obliged to be registered under Nigeria Law and the attendant tax liabilities that they may likely incur from such trade.
Nigerian Law requires that any group of people doing business in Nigeria must register their business venture under Nigerian Law.
Section 54 of the Companies & Allied Matters Act (CAMA) expressly prohibits foreign companies not registered under this Act of parliament, from doing business in Nigeria . Thus, these companies must not carry on any business in Nigeria nor exercise any of the powers of a registered company nor have a place of business or an address for service of documents or processes in Nigeria until they are registered as a corporate entity.
Exceptions To The Registration Rule
The above rule is not an absolute one as there are exceptions to it. Some of them are: -
Foreign companies invited by the Nigerian government or by donor countries or the United Nations, European Union etc to execute projects in Nigeria need no registration under CAMA. However, in some instances, an application is required to be made to the Nigerian National Council of Ministers for approval to carry on business without registration.Any company exempted under any treaty to which Nigeria is a signatory.A foreign company could have an address for receiving documents in Nigeria as a preliminary matter to its registration.Foreign companies carrying on business in the Export Free-Trade zones. These companies, in the free trade zones, also enjoy many tax incentives some of which include exemption from payment of corporate tax, export and import duties, no expatriate quota requirements for the expatriates employed by the companies, etc.
Implication & Penalties for Non-Registration
Section 54 subsection 2 of CAMA provides that any contract, entered into by any foreign company that contravenes the above provision concerning re-registration in Nigeria , shall be void and of no effect.
Also, any foreign company in contravention shall be guilty of an offence and liable on conviction to a fine of not less than N 2,500. Further, every Officer or agent of the foreign company in contravention, who knowingly and willingly authorises or permits the default is also liable to a fine of not less than N 250 and where it is a continuing offence, to a further fine of N 25 for every day during which the default continues.^ Return to top
DISCLAIMER: This Newsletter is a free educational material, for general information ONLY. Recipients are adviced to seek legal counselling to specific situations when they arise. Comments, criticisms, suggestions, ideas, etc are always welcomed. This Newsletter may be shared with other parties (third parties) provided the author is acknowledged as the originator of the article contained herein and the disclaimer notice is attached.
April, 2004.

Personal Income Tax

In This Issue

  1. Reactions to the Last Newsletter.
  2. This Issue: Personal Income Tax & taxable perks.
  3. Conclusion

Introduction to Personal Income Tax

A number of employees, upon receiving increases in their wages, have complained about high deductions from their monthly income as tax, which is called in Nigeria PAYE (pay as you earn tax). My advice to them to inquire from their employers the method used to arrive at the sum deducted, which usually varies, have being met with a concern of not “rocking the boat” in some cases and in others, by an uncooperative attitude of the employers to provide the tax information.

The Newsletter attempts to provide general information on what PAYE is about in the expectation that this will create greater understanding between employers and employees.

General Principles Of Taxation & PAYE

  1. A cardinal principle of taxation is that all income derived from, accruing in, brought into or received in Nigeria are liable to tax.
  2. Profits or gains in the form of salaries, wages, fees, allowances, gratuities, compensation, bonuses, premiums, benefits or other likes are liable to tax in Nigeria .
  3. Employers in Nigeria are required to deduct PAYE tax at source and remit the amounts deducted to the tax authorities within 14 days.
  4. Increases in salaries under various names, which are also called in some cases, perks of an employment, and are subject to tax. These are usually called in taxation Law benefits-in-kind.
  5. Examples of benefits-in-kind, which are liable to tax payment, include: -
    1. Motor vehicle or transport allowance where the amount is above N 20,000. The excess amount in subject to personal income tax payment.
    2. Residential accommodation with a limit of N 150,000 for residents in Lagos and the Federal Capital Territory Abuja (FCT) and N 100,000 for residents outside Lagos and FCT. Benefits above these are liable to tax.
    3. Allowances for domestic help, wash-man, education, furniture, tea, bonus, and the like are liable to personal income tax.
  6. Not all benefits-in-kind are taxed by the government for after all, employees must be encouraged. Thus, the following items are like tax exempt up to the limits set:
    •  The provision of canteen food in the employer's premises;
    • Uniforms, medical & dental expenses;
    • Cost of passage from one station to another;
    • Compensation for loss of employment;
    • Rents not exceeding N 150,000 per annum (P/A);
    • Maximum annual expense of N 20,000 for motor vehicle maintenance on vehicle used in the course of an employment;
    • Meal subsidy or allowance not exceeding N 5,000 (P/A);
    • Utility allowance not exceeding N 10,000 P/A;
    • Entertainment allowance not exceeding N 6,000 P/A;
    • Leave allowance not exceeding 10% of annual basic salary P/A;
    • Personal allowance in the sum of N 5,000 plus 20% earned basic income;
    • Dependent relative allowance (maximum of 2 persons) = N 2,000 P/A, child allowance with a maximum of 4 children at N 2,500 per child P/A;
    • Life insurance and pension scheme which earns the employee the full benefit of actual premium paid and contributed to pension scheme;
    • Annual membership dues paid to recognised professional institutes are tax exempt;
    • Interest on actual mortgage payments;
    • Disable person allowance is allowed for a disable employee in the sum of N 3,000 P/A or 20% of earned income, whichever is higher;
    • A special incentive for donations to research centres, dividends from companies engaged in agricultural production in Nigeria , petrochemicals and liquefied natural gas companies, etc.
    • From the above, the total income of an employee is the earned (i.e. Basic salary) and unearned (i.e. benefits-in kind) income.
  7. From the above, the total income of an employee is the earned (i.e. Basic salary) and unearned (i.e. benefits-in kind) income.

Tax Rates Under PAYE 

The portions of the income of an employee liable to tax, after all the benefits stated above are removed, is graduated from 5% to 25% as follows: -

  • The 1 st N 20,000 of income is liable to 5% tax payment;
  • The next N 20,000 of income is liable to 10% tax;
  • The next N 40,000 of income is liable to 15%;
  • The next N 40,000 0f income is liable to 20%.
  • Income above N 120,000 is liable to tax at the rate of 25%.

Other Taxes in Nigeria

The rate of other taxes in Nigeria are for Companies Income Tax 30%, Capital Gains tax is 10%, Petroleum Profit Tax is 85% (but 65.75% for the first five years of operations), Value Added Tax rate is 5%, Education Tax of 2% on all assessable profits of a registered company.

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New Civil Rules to Dispute Resolution

Reactions to Last Newsletter

I received the largest number of responses to my last Newsletter, which was on Personal Income Tax. A sampling of these responses include:

  1. On mortgages, a tax colleague with BAT responded that he was of the view that only interest on funds, in an owner-developed house, was exempted from tax and not on all types of mortgages.
  2. Another colleague responded by saying that the Joint Tax Board was considering increasing the amounts on the allowable expenses under the PAYE system.
  3. A very senior Practitioner and Mentor responded that, "The information in the Newsletter was factual and everyone should know it”. Issues of the attitude of employers and employees to tax compliance and remittance, government use of the taxes collected, tax administration, etc were not addressed.

My first response is that my Newsletters are for general information and call to action by the recipients. Recipients are advised to seek professional advice to specific situations as my Newsletter(s) are meant to assist them in appreciating the professional advice sought and obtained. Secondly, it is acknowledged globally that issues on taxation are often very complex and controversial. It is therefore essential to consult a legal tax expert when in doubt.

What is New?

On political, social and economic issues, the month of July 2004 was an exciting month. Apart from it being the end of the legal year (for Legal Practitioners) and the beginning of the summer season, the Central Bank of Nigeria increased the capital base of Banks from N 2Billion to N 25Billion, effective end of December 2005. This has caused a lot of concern and debate. There may be a lot of opportunity in this new government direction.

Also, in the month of July 2004, the United States government extended to the end of year 2015, the tenure of the United States “African Growth & Opportunities Act” (AGOA). This legislation allows for the export to the United State , duty free, some selected African products manufactured in Africa . To qualify, the African country must meet some criteria amongst which is having a democratically elected government. This legislation, from reports, have increased trade between the selected African countries and the United States . Nigeria was recently admitted as one of the African benefiting countries.

In Lagos State , the New High Court of Lagos State (Civil Procedure) Rules , 2004 (“New Rules”) came into effect. These new Rules govern and direct the procedure of civil cases in contrast to criminal cases in our Courts of Law.

The excitement with the above-mentioned New Rules of Court is that it contains a lot of innovations for civil cases management in Nigeria as it is expected that with the co-operation of all stakeholders, it will assist in the quick dispensation of cases. Some of the innovations in these new Rules include: -

  • All civil litigations commenced by a writ of summons must be accompanied by: -
    1. A statement of claim stating the facts of the case and the relief(s) that the litigant seeks from the Court;
    2. A list of the witnesses that the litigant intends to call at the trial;
    3. Written statements on oath (depositions) of the witnesses;
    4. Copies of every document that the litigant intends to rely upon at the trial of the case;
    5. In a majority of the cases, written briefs of arguments in support of the claim filed.
  • Pre-trial conferencing with the trial Judge so that the issues in the case are identified before full-scale litigation and if possible, a settlement is reached early instead of further time and expense in a protracted litigation.
  • The appointment of Special Marshals (e.g. Law Chambers, Courier companies, etc), in addition to the existing Sheriffs and Bailiffs, as Process Servers, to assist in the delivery of Court papers.
  • Pre-trial conferences and scheduling which enables the trial Judge to (a) dispose of all preliminary matters; (b) give directions on the future conduct of the case and importantly, (c) promote amicable settlement of the case or recommend an alternative dispute resolution mechanism. Pre-trial and scheduling conferences must be completed within three months of its commencement.

A failure to comply with any of the above requirements means that a prospective litigant's court papers will not be accepted for filing at the Lagos High Court Registry. In the event that it is accepted in error, the Court will declare them a nullity until the new requirements, stated above, are complied with.


Commentators have referred to the above innovations in the new Rules as the “front loading” of litigation. This means that the era of commencing frivolous litigations should be coming to an end as all the parties must, at an early stage, place all their “cards” and armoury on the table as it were, and the ones with bad cards will either not commence or continue the litigation, or reach out for an amicable out-of-court settlement.

I therefore recommend that you be prepared with all the materials of your case before you brief a Solicitor/Barrister to commence any litigation or seek legal counsel.

Enjoy the summer holiday!

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Detailed Analysis of New Pension Reforms Act, 2004


The collection of retirement benefits in Nigeria have continued to cause a lot of suffering to retirees (and their respective next-of-kin) especially the retirees in the public sector of the economy. There are reports of many beneficiaries who died in retirement benefit queues after waiting for days, without food or water, to collect their benefits. To remedy some of these problems, the Nigerian government recently passed into law the Pension Reform Act, 2004 (“the Pension Act”).

The Pension Act repeals all previous legislations regulating the administration of pension benefits in Nigeria . With the virtual collapse of the African welfare system, the new Pension Act attempts to have as its primary objective, the encouragement of savings among employees so that in retirement they are not impoverished and the establishment of a uniform set of rules, regulations and standards in the public and private sectors of the Nigerian economy on matters of pensions.

The explanatory note to the Pension Act captured the purpose of this legislation as it provides as follows: -

“The Act repeals the Pension Act, 1990 and establishes a uniform contribution pension scheme for both the public and private sectors in Nigeria with the features of:

  1. Contribution of funds by both the Employer and the Employee to fund retirement benefits;
  2. Crediting the Employees' retirement savings account with Pension Fund Administrators with funds contributed;
  3. Pension funds assets are to be privately managed and invested by professional Pension Fund Managers;
  4. Strict regulation of Pension Fund Managers under uniform laws and regulations for both private and public sector;
  5. The establishment of the National Pension Commission.”

The first innovation of the Pension Act is that for the first time in Nigeria , a Pension legislation is made to apply to employees in both the public and private sectors of the Nigerian economy.

Sector Applications of The Pension Act

For the provisions of the Pension Act to apply to employees in the private sector, the employer must have 5 or more employees in its employment.

Another new provision of the Pension Act is the requirement that an Employee will only be entitled to make withdrawals from the pension scheme (the scheme) upon the attainment of the age of 50 years or upon an employee being declared medically unfit to continue in an employment and therefore entitled to the payment of pension benefits.

Other Highlights of The Pension Act

Other provisions of the Pension Act, worthy of highlighting, include: -

  1. Every employee to the retirement scheme must have opened for him/her, by the Pension Fund Administrator chosen by the employee, a retirement savings account. The holder of a retirement savings account is allowed, upon attaining 50 years of age or upon being otherwise retired, to utilise the balance of the amount in his account to either (a) receive a monthly or quarterly pension payment; or (b) an annuity for life, purchased from a licensed insurance company, etc.

    On the death of the employee, his named beneficiary in a Will or his/her recorded next-of-kin or Court appointed Administrator would be entitled to the credit balance in the employee's retirement savings account;
  2. Benefits/payments under the Pension Act are not taxable provided that voluntarily contributions are not withdrawn before the end of 5 years from the date the voluntary contributions are made.
  3. Employees with less than three years or who are three years to retirement and contributors to an existing pension scheme are exempted from the new scheme under this Act.
  4. Judicial officers (i.e. Judges and Justices of superior Courts of record) mentioned in Section 291 of the 1999 Constitution are exempted from contributing to the scheme.
  5. Contributions by employers and employees are tax-deductible expenses when computing either Companies Income Tax or Personal Income Tax.
  6. The initial rates, in percentages, of total contributions by employers and employees, to the contributory scheme are as follows: -
    1. Private and public sectors:
      (i) Employer – minimum of seven and a half percent
      (ii) Employee – minimum of seven and a half percent
    2. Military:
      (i) Employer – minimum of twelve and a half percent
      (ii) Employee – minimum of two and a half percent

A magnanimous employer is allowed by the Pension Act to bear the full contribution stated above provided it is not less than the 15% of the employee's total monthly emoluments.

Retirement Account & Remittance of Contributions

An employee is required by the Pension Act to maintain a “Retirement savings Account” in his name with a Pension Fund Administrator (PFA) of his choice. This Law also allows the employee to transfer his retirement savings account from one PFA to another PFA provided the change is not done more than once in a year.

An Achilles heel of the old pension scheme was the problem of the collection and remittance of contributions. Under the new scheme, an attempt at improving the remittance of contributions is made as the employer is required to deduct the employee's contribution simultaneously with the payment of his salary, and within seven working days thereafter remit the sum deducted, together with the employer's contribution, to the Pension Fund Custodian (PFC) specified by the employee PFA.

The penalty for late remittance of contributions under the scheme or non-remittance is subject to the rates to be stipulated by the National Pension Commission (the Pension Commission). Pending when such a penalty stipulation is made, the Pension Act provides for a penalty of not less than 2 percent of the total contribution, which ought to have being remitted.

The Pension Act recognises the modern trend of free movement of labour and therefore allows an employee to maintain the same retirement savings account even when he/she leaves one employment for another.

Retirement Bonds

Outstanding pension benefits for public sector employees are reported to be in excess of over N 2.5Trillion (Two and Half Trillion Naira). To defray this huge deficit, the Pension Act requires the Federal Government to establish a Federal Government Retirement Bond(s) to take care of pension schemes for federal civil servants (which are currently under funded) three years before the commencement of the enforcement of the provisions of the new Pension Act. The Central Bank of Nigeria is the manager of this Bond to which the Federal Government of Nigeria is required to contribute 5% of the total emolument of all federal civil servants.

Transitional Provisions for The Private Sector

Private pension schemes that were operating before the coming into force of the Pension Act and who have funds and assets in excess of N 500Million (Five Hundred Million

Naira) are described by the Pension Act as “ Closed Pension Fund Administrators ” and are permitted to continue to exist provided they apply to the Pension Commission for an operating licence and such private schemes satisfy the following:

  1. The private scheme is fully funded and the employer undertakes that it will always be fully funded;
  2. The pension funds and assets are fully separated from the funds and assets of the private company;
  3. The pension assets and funds are held by an appointed custodian;
  4. Every employee is given the right to exercise the option of moving his contribution to the new scheme established under the Pension Act;
  5. The employer demonstrates a managerial capacity, for a period of 5 years before the commencement of the Pension Act, to manage pension funds.

A Closed Pension Fund Administrator is required at the end of each financial year to submit its scheme to an actuarial valuation to determine the adequacy of the funds and assets under the scheme.

In addition, all existing pension schemes are required to submit to the Pension Commission, a statement of affairs of their present operating contributory pension scheme; the statement must state the assets, liabilities, list of members and pensionable salaries among others, of all the beneficiaries to that scheme. It is expected that the Pension Commission guidelines, when released, will define the modalities for undertaking an actuarial valuation and who bears the costs of such a valuation.

Transitional Provisions for The Public Sector

For the public sector and as mentioned above, the Pension Act makes provision for the establishment of a “Retirement Benefit Bond Redemption Funds” (the Bond) to be managed by the Central Bank of Nigeria .

A further transactional provision is the establishment of a “Pension Transitional Arrangement Department” consisting of the entire existing pension Boards in the public service. This department is established with the responsibility of assisting the transition to the new scheme by rending monthly returns of the comprehensive list of pensionable staff including the deceased ones and their next-of-kin, to the Pension Commission. The existence of this Department is provided for in Section 38 which says that: “The Department shall cease to exist after the death of the last pensioner or category of employee entitled to retire with pension before the commencement of this Act”.

National Pension Commission

A National Pension Commission (the Pension Commission) is established under the Pension Act and it is the Regulator for this sector, as the Law requires it “to regulate, supervise and ensure the effective administration of pension matters in Nigeria ”. It is a body corporate with perpetual succession and may be sued or sue in its own corporate name.

National Social Insurance Trust Fund

The National Social Insurance Trust Fund is a social insurance scheme for employees in the private sector alone. The rate of contribution to the scheme was 6.5% for employers and 3.5% for employees. The trust fund, unfortunately did not meet the principal objectives under which it was established by statute.

The failure of the National Social Insurance Trust Fund (NSITF) and the public sector pension schemes to effectively administer a social insurance and pension system in Nigeria metamorphosed into a crisis from which the Pension Act is founded. Non-remittance of contributions by employers, non-payment of benefits based on one excuse or the other, bureaucracy, very poor prosecution records of defaulters in our Courts, are but some of the problems associated with previous pension schemes.

The Pension Act has however not jettisoned the NSITF. In its stead, it requires the NSITF to establish an independent company to undertake the business of a PFA on its behalf. In the same vein, the PFA of NSITF must also appoint a PFC, as required by the Pension Act, to hold in trust NSITF funds and assets.

Thus, all pension funds and assets, held and managed by NSITF, before the commencement of the Pension Act are required to be transferred to a Pension Fund Custodian licensed by the Pension Commission. Old contributions to the NSITF are protected, as the NSITF is required to compute their benefits and credit them to each individual contributor's retirement savings account. Participants to the old NSITF scheme are allowed to continue to maintain their contributions through an NSITF appointed PFA.

NSITF is mandated to ensure that from the commencement of the Pension Act, it provides every contributory citizen, social insurance services other than pension and in accordance with the NSITF Act, 1973. What social insurance services means is unclear from the Act.

However, Section 42 of the Pension Act gives the impression that contributors under the NSITF scheme must wait for at least five years after the commencement of the Pension Act (i.e. 2004) before they can select a PTF that is not registered by NSITF. This may not be very equitable as it also gives the impression that government is creating business for NSITF to the disadvantage of other players in this sector of business.

Pension Fund Administrators and Custodians

On the coming into effect of the Pensions Act, all pension funds and assets shall only be managed by Pension Funds Administrators (PFAs) licensed by the Pension Commission.

The functions of the PFAs' under this Law include:

  1. Opening of retirement savings accounts for all employees under the scheme with a personal identity number (PIN) attached;
  2. Investing and managing pensions funds and assets;
  3. Keeping proper books of account of all pension fund transactions managed by it;
  4. Maintaining a data Bank and providing regular information on investment strategy, market returns and other performance indicators, to the Pension Commission;
  5. Providing all strata of customer service support to employees registered under the scheme;
  6. Paying retirement benefits to employees in accordance with the provisions of the Pension Act.

Pension Fund Custodians

Based on the wrong management and non-maximisation of previous pension schemes, the Pension Act separates the administration of the pension funds and assets from the actual custody and or safe keeping of the said funds and assets. This it does by the establishment of Pension Funds Custodians (PFCs) who must be licensed by the Pension Commission.

The primary functions of the PFCs include:

  1. To receive directly from the employers, the total pension contributions on behalf of the PFAs, and to advice the PFAs within twenty four hours, of the receipt of each contribution;
  2. To hold pension funds and assets in safe custody and on trust for the employees and his/her beneficiaries, in a retirement savings account;
  3. To assist the PFAs in the settlement of claims and in the administration of the pension funds' investment including the collection of dividends and other related activities;
  4. To undertake statistical analysis on investments and returns on investments with respect to the pension funds held by it in its custody and to provide data and information to the PFAs and the Pension Commission.

PFAs & PFCs Operating Without License

The Pension Act provides that any individual or corporate body that carries on business as a PFA or a PFC without a licence from the Pension Commission commits a criminal offence. The penalty for an individual is a fine of not less than N 5Million (Five Million Naira) or imprisonment for a term not exceeding 5 years.

For a corporate body, the fine is not less than N 10Million (Ten Million Naira) with a fine of N 2Million (Two Million Naira) for each Director or Officer of the PFA or PFC; the imprisonment term is also a period of not less than 5 years.

Reporting External Auditors

The Pension Act has imputed on external Auditors, appointed by either the PFAs or the PFCs, a reporting obligation directly to the Pension Commission.

The Pension Act requires the external Auditors to immediately advice the Pension Commission of any immediate danger to the funds and assets managed under the pension scheme. Examples of when to make a report include cases of suspected fraud, misappropriation of pension funds and assets, incompetence of the Directors and senior Managers administering the pension funds and assets, etc.

A failure by the external Auditor of a PFA or a PFC to report any of the above events carries with it a criminal liability of a fine of not less than N 10Million or imprisonment to a term of not less than 3 years or to both the fine and the term of imprisonment.

Reporting Staff of PFAs & PFCs

PFAs and PFCs are required by this Law to report to the Pension Commission all members of its staff whose employment were terminated or dismissed on grounds of fraud or misappropriation of funds.

The Pension Commission is also in turn required to maintain a data bank, for circulation to all PFAs and PFCs, of all dismissed or terminated employees on grounds of fraud or funds misappropriation.

The penalty for non-reporting of cases of staff fraud includes a fine of not less than N 1Million and a possible revocation (in the case of a persistent contravention) of the PFA's or PFC's licence to operate a pension scheme business.

Insider Dealings

In addition to expressly prohibiting PFAs from holding any pension funds and assets, PFAs and PFCs are prohibited by the Pension Act from having any cross business interest, shares or any link whatsoever in their separate companies, i.e. PFA and PFC.

The above-mentioned restraint also applies to employees of the PFA or PFC organisations who may intend to do business with their subsidiaries or counter party in relation to pension funds or assets. Further, a PFA must not invest pension funds and assets in shares or other securities issued by its appointed PFC or by one of its shareholders or affiliated companies. Neither is a PFA permitted to sell pension fund assets to itself or to any of its shareholders, directors or employee, spouse or other affiliates.

Further High Points of The New Pension Act

  1. No Chief Executive Officer (CEO) of a PFA company can be appointed without the prior written approval of the Pensions Commission.
  2. Every PFA is statutorily required to employ a Compliance Officer who shall report directly to the CEO of the PFA and act as a contact between the Pension
  3. Commission and the PFA with regard to rules, regulations, statutory compliance issues, etc.
  4. The maintenance of a statutory reserve fund by the PFA as a contingency fund to meet claims. To this fund must be credited annually, 12.5% of the net profit after tax, of the PFA.
  5. All brochures, advertisements, communications, promotional materials and representations by PFAs must be truthful and meet the Pension Commission requirements.
  6. The Pension Act empowers the Pension Commission to remove from office any erring Director and officers of a PFA or a PFC where they violate the licence requirements of the exact business that they can engage in or where they misappropriate pension funds and its assets. This is notwithstanding the provisions of any existing Laws or penalties in Nigeria , to the contrary.
  7. Pension funds and assets are exempted from all liquidation or judgement enforcement proceedings. This means that a judgement of a Court, a winding-up or a liquidation Order shall not apply to dissipate pension funds and assets. Where such an event threatens to occur, the funds and assets of the pension fund are to be transferred to another PFC and the actual assets of the PFA or PFC can then be seized to meet the judgement claim.

Investment Criteria of Pension Funds

The Pension Act reiterates the age long rule in investment business by requiring PFAs to invest pension funds assets strictly within the objectives of safety and fair returns on the amounts or assets invested.

Therefore, subject to the guidelines issued by the Pension Commission from time to time, the Pension Act directs that pension funds and assets should be invested in any of the following investment vehicles: -

  1. Bonds, bills and other securities issued or guaranteed by the Federal Government of Nigeria (FGN) and the Central Bank of Nigeria (CBN).
  2. Bonds, debentures, redeemable preference shares and other instruments issued by corporate entities listed on the Nigerian Stock Exchange (NSE).
  3. Ordinary shares of public limited liability companies listed on the NSE with good track records having declared and paid dividends in the preceding five years.
  4. Bank deposits and securities.
  5. Real estate investment.
  6. Such other investments as the Pension Commission may from time to time prescribe.

The Pension Act allows the Pension Commission to recommend to the President of Nigeria, subject to CBN foreign exchange rules at the time, the investment by PFAs of pension funds and assets outside the territory of Nigeria .

The penalty for non compliance with the investment vehicles above stated is a fine of N 500,000 for each day that the non compliance continues including the forfeiture of the profits that accrued from that investment to the beneficiaries of the scheme. Where a loss occurs, the PFA will make good the loss.

Dispute Resolution Mechanism

Another novel provision in the Pension Reform Act is the settlement of disputes on pension matters through the alternatives dispute resolution mechanism (ADR), which saves time and expense. This is arguably the first time in Nigeria that an ADR process is being introduced directly into a statute.

In the event of a dispute or disagreement arising from a pension matter, it is mandatory to seek ADR resolution before availing oneself of the Courts. The first stage is for the aggrieved employee or beneficiary of a retirement savings account, to formally bring to the notice of his/her PFA, details of his complaint/dissatisfaction. Where he/she is not satisfied with the decision of the PFA, after notice of a complaint, the employee is required to forward the complaint to the Pension Commission for the review of the PFA's decision.

The Pension Commission must give the parties notice of the complaint and a fair hearing. A decision must be arrived at three months after a complaint is referred to the Pension Commission.

Where either the PFA or the employee or beneficiary is dissatisfied with the decision of the Commission, the dispute is required to be referred to arbitration in accordance with the Arbitration and Conciliation Act or to the Investment and Securities Tribunal (the Securities Tribunal). The decision of the Arbitration or Securities Tribunal shall be final and are enforceable by the Federal High Court of Nigeria, which is conferred with exclusive jurisdiction on matters of pensions.

Legal actions against the Pension Commission require a pre-action notice of at least 30 days. A pre-action notice usually states the full details of the complaint and gives the Federal government agency an opportunity to remedy the problem, if possible, without going into protracted litigation.

Comments to The Pension Reform Act, 2004

  1. Organised Labour has rightly argued that the Pension Act contravenes Section 173 of 1999 Constitution, which only empowers the Federal Government to make federal legislation on matters under which it is given exclusive jurisdiction, i.e. federal civil servants pensions. Thus pension matters for the private sector is ultra vires the powers of the Federal Governments.

    This must not however, in my view, distract from the benefits and innovations of the Act as the criticism can be ratified after further consultations with the stakeholders and necessary amendment(s) to the Pension Act.
  2. The Pension Act appears not to make any provision for civil servants employed by the State governments and Local Councils. This will be disastrous as these tiers of government are already under funded (under the revenue distribution formular) and will avoid any additional expenditure especially when it is not obligated by Statute to do so.
  3. No special qualification, apart from a minimum share capital, is required for the licensing of PFAs. Matters like the integrity of the PFA Board of Directors, skills, knowledge and capacity to manage pension funds are not sufficiently elaborated upon in the legislation under review.
  4. No guarantees provided for the pension funds and assets in the event that a PFA or a PFC goes into voluntary liquidation or winding up. A deposit insurance scheme like the one for the banks will be ideal to remedy such an unfortunate event.
  5. This Law does not place sufficient emphasis on integrity and professional competence of the Commissioners to be appointed to manage the Pension Commission. Appointments based on political patronage will ensure that the scheme does not succeed.
  6. The informal sector of the Nigerian economy constitutes over fifty percent (50%) of its work force. Notwithstanding the constitutional restraint mentioned above, their non-inclusion in the Pension Act and the non-enlightenment of preparing for retirement posses a great challenge which need to be remedied.
  7. The administration of pension funds and assets requires significant investment in information technology and systems. As it is estimated that several PFAs and PFCs will be registered, it means that these licensees may operate several individual software systems. It would be preferred if the Pension Commission designates a standard or compatible information system(s) for all PFAs and PFCs which in turn can be monitored by the Pension Commission.
  8. Section 9 (3) of the Pension Act provides that employers shall “maintain life insurance policies in favour of their employees for a minimum of three times the annual total emolument of the employees”. This provision is unclear and liable to different interpretation, as it will mean an addition to the rate of contribution to the pension scheme by employers. Will this not amount to an enlargement of the contributory burden of the employer and stifle employment?
  9. The role of the Pension Fund Custodian, who acts as an intermediary between the contributors and the PFA, is not exhaustively defined in this Law. A PFC acting as a “Banker” for example does not add any thing new to the existing systems as many schemes currently have their own Custodians.
  10. The penalty of 2 percent (2%) for late remittance or non-remittance by an employer to a pension scheme is too nominal, as it will actually encourage non-remittance or late remittances of contributions in view of the fact that the costs of funds and doing business in Nigeria remains high.
  11. There is no detailed provision for voluntary withdrawal and collection of already contributed benefits to the scheme. A withdrawal can be warranted by many factors among which are a relocation of the contributor from Nigeria or a development of an independent alternative pension plan.


A lot of details including Pension regulations (with guidelines?) are expected from the Pension Commission, when it is constituted. It is hoped that the enthusiasm and positive criticisms that have greeted the Pension Act will mark the beginning of a new dawn in pension administration and management in Nigeria .

Further, a Law only works when the stakeholders maintain their respect for that Law and act in good faith concerning it.

I would gladly welcome fresh thoughts and experiences from other jurisdictions on this subject.

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