Gratuity under the CPS

It is surprising that many enrolees of the Contributory Pension Scheme ( CPS) are still asking for clarification on gratuity payment under the Scheme. Does gratuity exist  under the scheme? The question has been recurring from readers of this column. And  this is despite the genuine and frequent  efforts made by  the National Pension Commission  (PenCom) over the years to enlighten Retirement Savings Account  (RSA) holders on “gratuity” in relation to  the Scheme.

Outside the CPS law, a dictionary definition for gratuity says: “Gratuity is a sum of money paid by an employer to an employee for services rendered in the company (organization). However, gratuity is paid only to employees who complete 5 or more years with the company (organization). It can be understood as a form of tip paid by employer to the employee for services offered in the company (organization).”

Gratuity as defined in the dictionary and practiced for decades by employers for the benefit of employees has taken a different  hue or description, under the Contributory Pension Scheme.  Its variant  will be paid from the saving for pension by the holder  of a RSA.

In one of PenCom’s numerous informational documents,  “Frequently Asked Questions”  it says this on the  question of payment of gratuity under the CPS: “Upon retirement, an employee can draw a lump sum (by whatever name called) from the balance standing to the credit of his/her RSA provided the balance after the withdrawal could provide an annuity or fund monthly payments that would not be less than 50% of his monthly pay as at the date of his retirement.”

It clarifies the issue further: “However, an employer may choose to pay any other severance benefits (by whatever name called) over and above the retirement benefits payable to the employee subject to the terms and conditions of his employment.”

Under the Defined Benefit Pension system,  paying gratuity  (a lump sum) prior to monthly stipend to pensioners, was the norm. It is this old practice that shaped the expectations of retirees under the CPS  to assume that they will be paid gratuity from outside the cash in  their RSAs.  Not so, although the word is mentioned in the Pension Reform Act 2014 (PRA 2014).

Enrollees of the CPS should attend pre-retirement workshops and listen to the presentations. This will certainly help them to discard certain myths and fanciful notions regarding the CPS. They should read  as much about the CPS as possible to make themselves familiar with what really it is, especially the context in which gratuity was mentioned.

Most of the Pension Fund Administrators (PFAs) are forthcoming with information on most of the nuances of the system which  RSA holders should be familiar with.  However, the PFAs have   failed in the timely remittance of  the share of income from investments  due to RSA holders into their accounts  and their unwillingness to  disclose the administrative fees  they  charge the RSAs.

What does the Pension Reform Act 2014 say about gratuity?  The PRA 2014 says under its examption of categories of persons from the CPS at Section 5 (5) that: “Where an officer exempted under this section is retired by his employer as a result of mental or physical incapacity, the officer shall be paid gratuity and pension in accordance with section 46 of this Act.”

Section 46 of the Act provides regarding gratuity as follows: “The Federal Government Pension Transitional Arrangements Directorate and the Federal Capital Territory Transitional Pension Arrangements  Directorate shall determine and cause to be paid gratuity and pension to the pensionable in the category of officers exempted under section 5(1)(b) of this Act, in accordance with the provisions of section 5(2) of this Act and relevant applicable computations under the existing Pay-As-You-Go Pension Scheme of the Public Service of the Federation and Federal Capital Territory.

PRA 2014 has answered the gratuity question.


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