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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:080-37743134
E-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
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employer contributes 7 /2% and employee 7 /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

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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 people
be ware of the importance of pension retirement in Nigeria.
KEYWORDS
Pension 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

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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.
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

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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 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

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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

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shareholder returns have led insurers away from 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).

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REASONS FOR MICRO INSURANCE SCHEME.
The reasons for micro insurance scheme are listed below according
to 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

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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 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)

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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 PENSION
Pension scheme is the arrangement of setting out the rights and

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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.

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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 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

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(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 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

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(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 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.

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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 their
funds in pension scheme because of fear of embezzlement of
their funds by the mangers of the fund. A lot of past

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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

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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 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

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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

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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.
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

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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 at a low

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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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