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Adopting micro insurance models in provision of pension ben

  1. 1. 1ADOPTING 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:080-37743134 E-mail: ABSTRACTProvision of retirement pension scheme is the prayer of everyworker. One looks up to the time of retirement and what will life belike. People engage in building houses, to enable them collect rentsat old age, shops, stores. Those in civil or public service also in oneway or the other make provisions for pension scheme. The Nigeriangovernment in 2004, introduced contributory pension scheme where 1 1employer contributes 7 /2% and employee 7 /2 percent minimum toenable 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 moneyremaining (50%) can be used to buy savings account or annuitycontract. The problems of those in the rural areas is that most ofthem do not have regular paid income and also the income theymake is very low. This paper x-rays the expected impact microinsurance scheme will help in providing retirement benefits to the
  2. 2. 2rural dwellers.It was discovered that micro Insurance scheme will help to provideretirement benefits through collection of savings and invest them tobe paid to the rural dwellers on retirement.Conclusion was drawn that micro insurance scheme is the best wayof provision of pension benefits to the rural dwellers on retirement.Recommendation was made that Nigerian government shouldencourage micro insurance pension to the rural dwellers mostly theartisans.Advertisement, seminars, conferences, workshops to enable peoplebe ware of the importance of pension retirement in Nigeria.KEYWORDSPension benefits, rural dwellers, artisans, retirement benefits.. INTRODUCTIONPension scheme in Nigeria is an old history. During the colonialregime, there was provision of pension benefits. These were amongthe things inherited from the white men.The introduction of pension was to help workers on retirement to beable to take care of themselves till death. But this type of benefits is
  3. 3. 3only for those who are working in public and civil service.The rural dwellers who are mere artisans, farmers will do well whenthey 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 todeath. The introduction of micro insurance scheme whereby the ruraldwellers contribute money and out of the contributions on retirement,a lump sum will be paid to them say 50% and the remaining 50% willbe used to provide regular pension till death. This micro insurancescheme are designed fort low income earners.This work therefore tries to know the possibility of the operation andthe expected impact to the rural dwellers.THE CONCEPT OF MICRO INSURANCEMicro insurance means different things for different people. It is seenas an insurance which involves small amount of money.It can be defined as the insurance used in protection of low incomehousehold against special perils in exchange for regular premiumpayment proportionate to the likelihood and cost can use micro
  4. 4. 4finance insurance, where it is available, as one of several tools tomanage their risks (Barrientos and Hulme, 2008).It can be explained in different ways such as a risk poolinginstruments for protection of low income rural dwellers, insurance withsmall benefits, insurance involving low levels of premium, insurancefor persons working in the informal economy etc (Ranoldink, 2009).It can also be seen as a community based financing arrangementincluding community health funds, mutual health organization, ruralhealth insurance revolving drugs fund and community involvement inuser-free management. It is used to determine the economic level ofa society (Mnwette, 2008).However, for the purpose of this research work, micro insurance isdefined as insurance that is accessed by low income population,provided by a variety of different entitles, but run in accordance withgenerally acceptable insurance practices which should include theinsurance core principles. This means that micro insurance policy isbeing managed based on insurance principles and funded bypremiums. It does not include government social welfare, emergency
  5. 5. 5assistance provided by government in respect of natural disaster,flood disaster etc, because benefits are not paid out of the pool, fundsthat are managed based on insurance and risk principles.HISTORICAL DEVELOPMENT OF MICRO INSURANCEMicro insurance is not a new phenomenon in most markets, includingemerging markets, one finds a variety of micro insurance scheme, forexample mutual health care schemes or funeral association mayhave started many years ago but many have remained informal.Formal insurance was founded on the idea of protecting specifiedsegments of the society against their major risks. The first groups tobe covered were salaried workers. Some of the most prominent oftoday’s large insurance companies began in Europe and NorthAmerica in the 1800s as protection schemes among factory workersand farmers. Over the years, however, efforts to prevent fraud andmisuse have resulted in issues on regulation and supervision of rulesand requirements that might not be effective or appropriate for thelow income household. On some cases, effects to maximize
  6. 6. 6shareholder returns have led insurers away from their originalclientele in search of more profitable customers (Sebstad, 2003).Most recently, micro insurance has expanded through communitybased and other local initiatives, some promoted by donors.Bilateral and multi lateral donors are helpful in providing technical andfinancial assistance to micro-insurers and have promoted, theconceptual discussion on micro insurance. The donor communitycannot yet rely much on lessons of effective micro insurancepromotion and therefore is still studying effective ways (Do’s anddon’ts) to promote micro insurance. However, some valuable lessonscan be drawn from micro insurance, which has a loner history and abroader global reach (McCord, 2006).The growth and success of micro insurance which was originally seenas the provision of savings, transactions (including remittances) andcredit services to low-income households and micro enterprisesbefore the inclusion of micro insurance has been responsible forcreating a delivery channel to help regulate insurers target of the lowincome segment in an efficient manner (McCord, 2006).
  7. 7. 7REASONS FOR MICRO INSURANCE SCHEME.The reasons for micro insurance scheme are listed below accordingto Nwite (2008). 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
  8. 8. 8 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.THE EXPECTED IMPACT OF MICRO INSURANCE INPROVISION OF PENSION BENEFITS TO THE RURALDWELLERS.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)
  9. 9. 9 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).THE CONCEPT OF PENSIONPension scheme is the arrangement of setting out the rights and
  10. 10. 10obligations of all parties, the fund is a separated from assets setaside to provide collateral for the promised benefit. Pension isimportant in providing retirement income to the economy in generaland the financial system in particular.The purpose of pension is to provide retirement income for eachindividual in their old age. In industrialized world pension scheme isvery important because they believe that it gives care and support tothe elderly ones. (Nwite, 2004)The ongoing increase in longetively is making retirement income acrucial aspect of lifetime revenues for each individual, while growth ofpension assets in household’s net worth. The growth companies issponsoring pension scheme and growing role of pensions as asource of funds make pension funding a crucial aspect of corporatefinance. For finance institution, the growth of pension is heighteningthe challenge of competition for all institution in the field of assetmanagement and for banks as their traditional role as intermediariesis replaced by other institution.
  11. 11. 11REASONS 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 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 INNIGERIAPension Scheme in Nigeria dated back to the period of colonial
  12. 12. 12(British) rule in 1951 when the first pension Act was enatched, it wassubsequently replaced by the Pension Decree 102 of 1979.In 1961, the National Provident Fund was established by the Act ofparliament, to provide income loss protection for employees asrequired by the International Labour Organization (ILO) convention of1952. only private sector employees were to make monthlycontribution of 6% of their basic salary subject to a maximum ofN8.00 to be contributed in equal proportion of N4.00 each by theemployer and the employees.The 1993 Act of parliament also established and mandated theNigerian Social Insurance Trust fund (NSITF) to set up Pension FundAdministrators (NPA) to manage the accumulated pension funds ofNSITF from contributors for a period of five years.The Pension Decree 1979 established a scheme that is for all publicservants except those who were on temporary or contractemployment. The office of establishments and pensions acted as atrustee for the public scheme.The benefit was a lump sum or gratuity and a regular payment
  13. 13. 13(pension) for life. Those who retire after ten years of service areentitled to a gratuity of 100 percent of their annual salary only. Butlater amended to five years for gratuity.However, with the irregularities occasioned by the scheme coupledwith new socio-economic challenges and innovations, the need tokeep up with modern trend and changes called for the conceptionand birth of a new pension scheme established by the pension reformAct 2004, introducing the contributing pension scheme that mandatedemployers of labour and employees both in the private and the publicsectors to make a contribution of 15% (7.5% each by the employerand employee) of total monthly emolument for the period of service.The Act made it known that a private organization that employs fiveor more employees is meant to participate in the scheme.There is hope that the new scheme will put smile on the faces ofNigerian of stakeholders government, employer (private/public),regulators, financial institutions (banks/insurance companies),employees, put their hands on deck.
  14. 14. 14PROBLEMS 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 their funds in pension scheme because of fear of embezzlement of their funds by the mangers of the fund. A lot of past
  15. 15. 15 experiences unveils that.HOW MICRO INSURANCE WILL HELP IN PROVISION OFPENSION BENEFITS TO THE RURAL DWELLERSMicro insurance as it has been rightly explained is n insuranceorganized for the low income earners or rural dwellers. Through microinsurance, insurance was made affordable for low income earnersand they were able to know the importance and benefits of insurance.Micro insurance will help in provision of pension benefits to the ruraldwellers 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
  16. 16. 16 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. 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 toNwite (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
  17. 17. 17 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.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
  18. 18. 18 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 SCHEMESome 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.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
  19. 19. 19 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. CONCLUSIONSIn 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 at a low
  20. 20. 20 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. REFERENCESADB (2009) Repost on Technical Assistance to the Democratic Socialist Republic of Sri Lanka: Micro insurance Sector Development Manila, Philippains; Asian Development
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