Globally, pensions and social security arrangements are mostly structured to accommodate only workers in formal employment excluding workers in the informal sector made up of billions of people, located mostly in developing countries.

Informal sector workers do not retire as in the case of employees in the formal sector, however there is still a need for them to prepare for the reduction in earnings capacity that accompanies old age. It is also crucial to provide a pension arrangement peculiar to their economic profile due to their low and irregular incomes.

With increasing life expectancy, inadequate/no- savings for old age (as depicted by the table below) and breakdown of family support amongst others, most of them are susceptible to fall into old age poverty. To avert this, there have been innovations by Governments globally on ways to incorporate the informal sector into a pension scheme. Thus, the establishment of an inclusive retirement savings plan - The Micro Pensions.

Source: (Demirgüç-Kunt, Klapper and Panos, 2016 using weighted averages from Global Findex (2015) data)
  • Nigeria has the largest informal sector in Africa, accounting for nearly 70% of its workforce with over 59 million workers structured into the semi-formal, organized and unorganized informal sector.
  • The International Monetary Fund (IMF) estimates that it contributes about 60% to the entire Nigerian economy. This represents about $240bn.
  • The informal economy has also grown faster in size at an annual average rate of about 8.5% between 2015 and 2017.
  • The contribution of the informal sector to economic growth is quite significant; contributing to both output and employment with the Agricultural sector having the highest share by activity and contribution to GDP (see the chart).
  • To ensure financial inclusion and pension savings amongst this sector, the Commission launched the Micro Pension Scheme.
  • Nigeria has the right indices for the implementation of the scheme having established a well-developed financial services system, a high internet and mobile penetration rate of approximately 81% - the highest in West Africa and an effective mobile payment system.

The Nigerian Informal Sector may be categorized into the following sub-sectors:

Semi-formal Informal Organized Informal Unorganized Informal
Made up of Micro, Small and Medium Enterprises (MSME) with a steady flow of income.

More financially informed than the other sub-sectors and belong to organized cooperatives and/or unions.

They are mostly sole proprietors which employ more than 3 people.

They would easily understand the concept of pension but may be unwilling to come under the scheme or register their staff due to cost implications.

Mostly self employed workers with relatively less stable flow of income.

Belong to organized cooperatives and/or unions.

Their business generally have low start-up costs and sometimes short life-spans, however, they do require some specialist skills.

The self-employed workers will understand the concept of pension but may procrastinate making contributions due to current income conditions.

Employed by the other informal sub-sectors as well as the formal sector.

Characterized by very low and unstable income.

Most do not belong to organized cooperatives/unions.

They are generally uneducated and will need sustained educational campaigns to understand the concept of pension.

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  • The Nigerian pension fund has grown and the number of contributors has risen tremendously since the inception of the CPS, the huge “untapped” informal sector population shows that a lot of growth potential exist in the pension industry.
  • When this population subscribes to the plan, it is expected to help boost pension contributions and membership, increase the size of investible pension funds, increase wealth creation and welfare for pension contributors.
  • The chart explains further with the following assumptions made:

- Assuming about 30 million informal sector workers subscribe to the plan; with

- Contributions of N300 weekly;

- Contributions invested at a real rate of return of 8%p.a.; and

- Increase in coverage of  about 0.7%p.a

  • The Micro Pension industry will be worth about N1.65 trillion in 2020 and escalate to about N3 trillion in 2022.