Post on 17-May-2015
ADOPTING MICRO INSURANCE MODELS IN PROVISION OF PENSION BENEFITS TO NIGERIAN RURAL
DWELLERS. SUNDAY C. NWITE.
DEPARTMENT OF BANKING AND FINANCE EBONYI STATE UNIVERSITY - ABAKALIKI
PHONE NO:080-37743134E-mail: nwitewhite2006@yahoo.com
ABSTRACT
Provision of retirement pension scheme is the prayer of every worker. One looks up to the time of retirement and what will life be like. People engage in building houses, to enable them collect rents at old age, shops, stores. Those in civil or public service also in one way or the other make provisions for pension scheme. The Nigerian government in 2004, introduced contributory pension scheme where employer contributes 71/2% and employee 71/2 percent minimum to enable them provide retirement benefits at old age. On retirement, 50% of the money will be paid as a lump sum and the remaining 50% will be used to provide regular retirement benefits. The money remaining (50%) can be used to buy savings account or annuity contract. The problems of those in the rural areas is that most of them do not have regular paid income and also the income they make is very low. This paper x-rays the expected impact micro insurance scheme will help in providing retirement benefits to the rural dwellers.It was discovered that micro Insurance scheme will help to provide retirement benefits through collection of savings and invest them to be paid to the rural dwellers on retirement.Conclusion was drawn that micro insurance scheme is the best way of provision of pension benefits to the rural dwellers on retirement.Recommendation was made that Nigerian government should encourage micro insurance pension to the rural dwellers mostly the artisans.Advertisement, seminars, conferences, workshops to enable
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people be ware of the importance of pension retirement in Nigeria.KEYWORDSPension benefits, rural dwellers, artisans, retirement benefits..
INTRODUCTION
Pension scheme in Nigeria is an old history. During the
colonial regime, there was provision of pension benefits.
These were among the things inherited from the white men.
The introduction of pension was to help workers on
retirement to be able to take care of themselves till death.
But this type of benefits is only for those who are working in
public and civil service.
The rural dwellers who are mere artisans, farmers will do
well when they are young, but at old age, you see them not
doing well again, most of them are always exposed to
serious poverty that can result to death. The introduction of
micro insurance scheme whereby the rural dwellers
contribute money and out of the contributions on retirement,
a lump sum will be paid to them say 50% and the remaining
50% will be used to provide regular pension till death. This
micro insurance scheme are designed fort low income
earners.
This work therefore tries to know the possibility of the
operation and the expected impact to the rural dwellers.
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THE CONCEPT OF MICRO INSURANCE
Micro insurance means different things for different people.
It is seen as an insurance which involves small amount of
money.
It can be defined as the insurance used in protection of low
income household against special perils in exchange for
regular premium payment proportionate to the likelihood
and cost can use micro finance insurance, where it is
available, as one of several tools to manage their risks
(Barrientos and Hulme, 2008).
It can be explained in different ways such as a risk pooling
instruments for protection of low income rural dwellers,
insurance with small benefits, insurance involving low levels
of premium, insurance for persons working in the informal
economy etc (Ranoldink, 2009).
It can also be seen as a community based financing
arrangement including community health funds, mutual
health organization, rural health insurance revolving drugs
fund and community involvement in user-free management.
It is used to determine the economic level of a society
(Mnwette, 2008).
However, for the purpose of this research work, micro
insurance is defined as insurance that is accessed by low
income population, provided by a variety of different
entitles, but run in accordance with generally acceptable
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insurance practices which should include the insurance core
principles. This means that micro insurance policy is being
managed based on insurance principles and funded by
premiums. It does not include government social welfare,
emergency assistance provided by government in respect of
natural disaster, flood disaster etc, because benefits are not
paid out of the pool, funds that are managed based on
insurance and risk principles.
HISTORICAL DEVELOPMENT OF MICRO INSURANCE
Micro insurance is not a new phenomenon in most markets,
including emerging markets, one finds a variety of micro
insurance scheme, for example mutual health care schemes
or funeral association may have started many years ago but
many have remained informal.
Formal insurance was founded on the idea of protecting
specified segments of the society against their major risks.
The first groups to be covered were salaried workers. Some
of the most prominent of today’s large insurance companies
began in Europe and North America in the 1800s as
protection schemes among factory workers and farmers.
Over the years, however, efforts to prevent fraud and misuse
have resulted in issues on regulation and supervision of rules
and requirements that might not be effective or appropriate
for the low income household. On some cases, effects to
maximize shareholder returns have led insurers away from
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their original clientele in search of more profitable customers
(Sebstad, 2003).
Most recently, micro insurance has expanded through
community based and other local initiatives, some promoted
by donors.
Bilateral and multi lateral donors are helpful in providing
technical and financial assistance to micro-insurers and have
promoted, the conceptual discussion on micro insurance.
The donor community cannot yet rely much on lessons of
effective micro insurance promotion and therefore is still
studying effective ways (Do’s and don’ts) to promote micro
insurance. However, some valuable lessons can be drawn
from micro insurance, which has a loner history and a
broader global reach (McCord, 2006).
The growth and success of micro insurance which was
originally seen as the provision of savings, transactions
(including remittances) and credit services to low-income
households and micro enterprises before the inclusion of
micro insurance has been responsible for creating a delivery
channel to help regulate insurers target of the low income
segment in an efficient manner (McCord, 2006).
REASONS FOR MICRO INSURANCE SCHEME.
The reasons for micro insurance scheme are listed below
according to Nwite (2008).
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1. To provide protection for people or rural dwellers in the
informal economy and their families who live in a risky
environment which are exposed to perils.
2. TO provide insurance policy for the rural dwellers
against illness, accidental death, disability, loss of
property due to theft, fire, agricultural losses etc.
3. To help the low-income households to manage their
risk that is beyond their capacity.
4. Micro finance also assist to maintain a sense of
financial confidence even in the face of significant
vulnerability.
5. To provide source of livelihood for the members of the
family after the death of the breadwinner of such
family. At the death of the breadwinner if the
breadwinner has obtained micro insurance policy, the
members of the family will not suffer at the death of
the breadwinner.
6. To be able to encourage the rural dwellers and low-
income households to save and provide credit services
to themselves.
7. To get the rural dwellers educated about the need for
insurance: Micro insurance can also be used to educate
the rural dwellers about the importance of insurance.
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THE EXPECTED IMPACT OF MICRO INSURANCE IN
PROVISION OF PENSION BENEFITS TO THE RURAL
DWELLERS.
Micro insurance will serve a lot of purpose in the provision of
pension. Some of the roles are:
1. It helps to cater for old age: It encourages the rural
dwellers to make provision before retirement from
service thereby making them to plan for their old age.
(Mmbor, 2003)
2. It encourages them to imbibe the habit of savings: It
educates them on how to save their money against any
unforeseen circumstances.
3. To protect families from financial hardship they may
run into after retirement from service (Payne, 1993).
4. It reduces the dependent on government: When one’s
old age has been secured, it reduces the dependent or
burden on the government. Rather than waiting for the
government to help the insurance company would have
come in to help the person.
5. It reduces the level of poverty in the country: Since
one’s old age has been catered for, the poverty level in
the economy will be reduced. Ueda, 1998)
6. Since the pension benefit is being done by the micro
insurance, it will be affordable for the rural dwellers
compared to any other insurance company (Kwast,
1996).
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THE CONCEPT OF PENSION
Pension scheme is the arrangement of setting out the rights
and obligations of all parties, the fund is a separated from
assets set aside to provide collateral for the promised
benefit. Pension is important in providing retirement income
to the economy in general and the financial system in
particular.
The purpose of pension is to provide retirement income for
each individual in their old age. In industrialized world
pension scheme is very important because they believe that
it gives care and support to the elderly ones. (Nwite, 2004)
The ongoing increase in longetively is making retirement
income a crucial aspect of lifetime revenues for each
individual, while growth of pension assets in household’s net
worth. The growth companies is sponsoring pension scheme
and growing role of pensions as a source of funds make
pension funding a crucial aspect of corporate finance. For
finance institution, the growth of pension is heightening the
challenge of competition for all institution in the field of
asset management and for banks as their traditional role as
intermediaries is replaced by other institution.
REASONS FOR PAYMENT OF PENSION
1. To cater for old age: Pension is being paid to take care
of employees when they retire from service so as to
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take care of them during their old age. Zupan, 2003).
2. To provide regular income for the retiree in form of
guaranteed annuity after retirement from service.
3. To reduce dependent on government pension payment
helps to reduce the dependency on government
without any shortcoming.
4. Propensity to save: It also encourages people to save
against their future, instead of suffering after
retirement. (Kuti, 2003).
5. Reduces social burden: Introduction of pension helps to
reduce the burden on government and allows
government to focus their social responsibilities on the
people. (Macaw-Bins, 1994).
HISTORICAL DEVELOPMENT OF PENSION SCHEME IN
NIGERIA
Pension Scheme in Nigeria dated back to the period of
colonial (British) rule in 1951 when the first pension Act was
enatched, it was subsequently replaced by the Pension
Decree 102 of 1979.
In 1961, the National Provident Fund was established by the
Act of parliament, to provide income loss protection for
employees as required by the International Labour
Organization (ILO) convention of 1952. only private sector
employees were to make monthly contribution of 6% of their
basic salary subject to a maximum of N8.00 to be
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contributed in equal proportion of N4.00 each by the
employer and the employees.
The 1993 Act of parliament also established and mandated
the Nigerian Social Insurance Trust fund (NSITF) to set up
Pension Fund Administrators (NPA) to manage the
accumulated pension funds of NSITF from contributors for a
period of five years.
The Pension Decree 1979 established a scheme that is for all
public servants except those who were on temporary or
contract employment. The office of establishments and
pensions acted as a trustee for the public scheme.
The benefit was a lump sum or gratuity and a regular
payment (pension) for life. Those who retire after ten years
of service are entitled to a gratuity of 100 percent of their
annual salary only. But later amended to five years for
gratuity.
However, with the irregularities occasioned by the scheme
coupled with new socio-economic challenges and
innovations, the need to keep up with modern trend and
changes called for the conception and birth of a new pension
scheme established by the pension reform Act 2004,
introducing the contributing pension scheme that mandated
employers of labour and employees both in the private and
the public sectors to make a contribution of 15% (7.5% each
by the employer and employee) of total monthly emolument
for the period of service. The Act made it known that a
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private organization that employs five or more employees is
meant to participate in the scheme.
There is hope that the new scheme will put smile on the
faces of Nigerian of stakeholders government, employer
(private/public), regulators, financial institutions
(banks/insurance companies), employees, put their hands on
deck.
PROBLEMS OF PENSION SCHEME
1. Illiteracy: This is the major problem facing pension
scheme. Most of the skilled manual workers are
illiterate to the benefits of pension scheme and they
might not like to contribute to the scheme.
2. Inadequate of public awareness: This is also
another problem because the manual workers don’t
know the meaning and existence of pension scheme
and nobody to educate them about what it entails and
the risk therein if they don’t save in it.
3. Inflation: Inflation has really affected pension scheme
in that it has discouraged people in saving for the
retirement planning.
4. Mismanagement of fund: The workers might be
afraid of saving in pension scheme because of fear of
fund not adequately managed by the authority
concerned or misappropriation.
5. Corruption: Most people wont be encouraged to put
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their funds in pension scheme because of fear of
embezzlement of their funds by the mangers of the
fund. A lot of past experiences unveils that.
HOW MICRO INSURANCE WILL HELP IN PROVISION OF
PENSION BENEFITS TO THE RURAL DWELLERS
Micro insurance as it has been rightly explained is n
insurance organized for the low income earners or rural
dwellers. Through micro insurance, insurance was made
affordable for low income earners and they were able to
know the importance and benefits of insurance.
Micro insurance will help in provision of pension benefits to
the rural dwellers through;
1. Telling them the importance of pension benefits:
The micro insurance will make the rural dwellers aware
of what is called pension and the benefits accrued to it.
Thereby, encouraging them to do it.
2. By making the premium affordable: By collecting
low premium from them. It encourages them to save in
pension.
3. Encouraging public awareness: Public awareness
about the importance of pension and how to cater for
their old age so that after retirement from service or
when they attain old age that they wont be able to work
so in order to prevent all this they should be involved in
pension scheme.
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4. Organise training/workshop among the rural dwellers so
as to encourage them to participate in the pension
scheme.
5. Micro insurance can also encourage the rural dwellers
by educating them that pension scheme can build
future confidence in them.
THE PROSPECTS OF THE PROGRAM.
The prospect of the pension scheme are stated below
according to Nwite (2004)
1. Provision of security: With that pension fund
arrangement, rural dwellers are highly secured from
any risk that may occur for not planning for their old
age.
2. Restoration of confidence: This one of the prospects
of effective management of pension scheme that
people/rural dwellers are reassured that saving is
worthwhile and the pension they invest in will be there
when they retire. That is why they have cleared up the
mis-selling scandal and set up a pension protection
fund so pension are preserved even if a company goes
bust.
3. Propensity to save: Adequate arrangement of
pension scheme encourages people to save against
their retirement. This therefore creates good
atmosphere for saving element in individual.
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4. Reduces social burden: Adequate implementation of
pension help to reduce government budgeting in
pension as well as other social responsibility of the
people.
5. Reduction of over dependent on government: It
also help to reduce dependency on the government to
pay pension adequately without shortcoming. When
one’s old age has been catered for, it reduces the
dependency on the government.
6. Reduction of fraud: Adequate implementation of
pension scheme also reduces the fraud element in the
scheme. Pension scheme administrators, custodian and
natural pension commission as well as the pension Act
will help to reduce pension fraud and money can be
easily released when the worker is retired.
THE CHALLENGES OF THE SCHEME
Some of the challenges faced are:
1. Nigerian/rural dwellers are not yet developed for such
practice. All these are the various views of people, even
the discrimination in payment.
2. Poor accounting record management: This is
another challenges facing the activities of pension
scheme. Records are not adequately managed and the
use of computer technology are not adequately in
force.
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3. Corruption: The level of corruption in Nigeria may also
exist in the pension fund administrators and custodians
by volume of the fund may encourage financial moral
hazard.
4. Political instability: The policies of the country have
also challenged pension scheme in the country because
the ruling class came into power by force thereby
creating policy without adequate implementation.
5. Inflation: It affects the saving habit of the retirement
planning thereby creating challenge to pension scheme
in Nigeria.
6. Lack of public awareness: Here, people don’t know
about the potential problems faced by these retiring in
20 or 30 years time and many believe the government
is not doing enough to educate them. People who could
afford to save are not doing so because of it hasn’t
been made and what the risk of failing to save might
be.
CONCLUSIONS
In the course of writing this work, the following conclusions
were made;
1. Pension scheme creates good atmosphere for saving
element of individual.
2. Micro insurance is an important tool to reduce risk for
people with low income, by introducing pension scheme
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at a low premium and affordable price.
3. There are a lot of challenges facing pension scheme in
Nigeria.
4. Inflation adversely affects pension scheme because of
the investment on the fund.
5. With pension scheme the rural dwellers are well
secured after retirement or they attain old age.
RECOMMENDATIONS
1. Government should ensure that the contribution made
by the rural dwellers to the scheme is well secured.
2. Government should also ensure constitutionality of the
pension Act.
3. Government should also ensure that the premium
charged on the rural dwellers is affordable.
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