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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