How PenCom Is Safeguarding N14.2trn Pension Fund Assets From Economic Vulnerabilities

An employee who has worked for an organization for some years is entitled to some benefits which could be in form of gratuity and pension payable to such employee by its employer at the time of retirement.

Pension is viewed as a sum of money paid regularly to a person who no longer work because of old age, disability or retirement or to his widowed or dependent children by the state, former employers or from Pension Fund Administrators to which he and his employer both contributed.

The pension system prior to 2004 was characterized with many problems which make the payment of the retirement benefit a failure in Nigeria. The major weaknesses of pension scheme were lack of adequate and timely budgetary provision coupled with rising life expectancy, increasing number of employers, poor implementation of pension scheme in the private sector due to inadequate supervision and regulation of the system and too many private sector employees were not even covered by the form of pension scheme.

These problems associated with payment of pension in Nigeria necessitated the government during the administration of former President Olusegun Obasanjo to carry out a reform which gave birth to the pension reform Act of 2004. The 2004 Pension Reform Act established a uniform contributory; private sector managed and fully funded pension system for both the public and private sector of the country.

The Pension Reform Act 2004 was also established to address the manifested loopholes in the old defined benefit pension scheme and provide adequate resources to retirees after retirement from the service.

The minimum rate of contribution is 18 per cent of the employee’s monthly emoluments where 10 per cent is contributed by the employer and 8 per cent is contributed by the employee. However, the employer may decide to bear the full responsibility of the contribution provided it is not less than 18 per cent of the monthly emolument of the employee.

An employee may decide to make additional contributions above the minimum eight per cent provided the employee’s total contribution and other deductions do not exceed one-third of his/her total monthly emoluments.

To warehouse the fund, a Retirement Savings Account must be opened by an employee with a PFA of his/her choice, into which all pension contributions are remitted and thereafter invested for the purpose of paying retirement/terminal benefits.

The PFA is a company licensed by the National Pension Commission (PenCom) for the sole purpose of managing and administering pension and other retirement benefit schemes’ assets. Some of the PFAs are licensed to manage and administer retirement benefit schemes for staff of organizations that had existing pension schemes prior to the commencement of the CPS in 2004.

These companies are called Closed Pension Fund Administrators (CPFAs). Apart from the PFA, there are another category of companies that are known as Pension Fund Custodians.

A PFC is a company licensed by PenCom for the sole purpose of holding all pension funds and assets on trust for employees as well as beneficiaries of the RSA and other retirement benefit schemes.

As of the end of June this year, the Assets under the Contributory Pension Scheme rose by N842.73bn to hit N14.27tn. According to PenCom, the total number of RSA holders stood at 9,795,957 during the period under review.

But who receives the monthly pension contributions? The employer deducts and remits both the employee and employer portions of pension contributions to the PFC. The PFC notifies the PFA immediately upon receipt of the contributions.

As a regulator, the National Pension Commission supervises all pension matters in Nigeria in order to safeguard Pension Fund Assets. It licenses all pension operators; issues regulations and guidelines; and ensures effective administration of all pension schemes in Nigeria.

The investments of pension contributions is the sole responsibility of the PFAs and they are guided by the provisions of the Pension Reforms Act 2014 and the Regulation on Investment of Pension Fund Assets (Investment Regulation) issued by PenCom.

According to the Pension Act, PFAs can only invest in the following instruments: equities; federal government securities; state/local government bonds; corporate debt securities; money market instruments; open/closed-end funds; infrastructure bonds & funds; private equity funds; and any securities/instruments that may be approved by PenCom, from time to time.

Based on the provisions of the Act, PFAs can only invest in instruments that satisfy quality requirements stipulated in the Investment Regulation, such as minimum risk rating, ability of a listed company to make profit and/or pay dividend. In addition, the Investment Regulation provides investment limits on each allowable instrument to ensure diversification of all investments made by PFAs.

To ensure the safety of the Pension Fund Assets, the investment decisions are made by the Pension Fund Administrators. However, the RSA Multi-Fund Structure introduced by PenCom allows a contributor to choose the Fund through which his/her pension contributions would be invested.

The RSA Multi-Fund Structure is designed for investing pension contributions based on the age and risk profiles of RSA holders.

There are four distinct funds, which differ from one another based on age classification, namely, Fund I (less than 50 years, but based on request); Fund II (default fund for all contributors less than 50 years); Fund III (50 years and above); Fund IV (strictly for retirees).

In addition, there are two special funds, Fund V for participants in the Micro Pension Plan and Fund VI for those interested in having their contributions invested in non-interest financial instruments.

In order to know the Fund through which a pension contribution will be invested under the RSA Multi-Fund Structure, Contributors who are 49 years and below are in Fund II by default. But they can choose to move to Fund I. While contributors who are 50 years are in Fund III by default, but can choose to move to Fund II.

However, contributors on Funds IV and VI are not allowed to move to any other Fund, while contributors on Fund V can move to either Funds II and III if they secure formal employment.

While movements between the respective Funds are free once a year, the guidelines stipulated that any subsequent request for movement is liable to nominal fees to be prescribed by PenCom.

In terms of return on investment, the rates of return on pension fund investments vary from year to year, depending on prevailing economic conditions and performance of the Nigerian financial markets, as well as the investment strategies of the various PFAs. However, the Commission monitors the PFAs to ensure that returns are competitive and fair.

The Commission also ensures that income generated from investing pension contributions is fully distributed into the RSAs of contributors based on the proportion of the assets in the individual RSAs.

PenCom also ensures that pension contributions are safe and this is achieved through the separation of the investment and custody functions between Pension Fund Administrators and Pension Fund Custodians.

Furthermore, there is effective monitoring and supervision through daily monitoring of the investment decisions made by the PFAs in order to ensure compliance with the PRA 2014 and the Investment Regulation.

Moreover, there are stringent provisions in the Regulations for the Investment of Pension Fund Assets that ensure the ring fencing of the assets and allowing investments only in instruments with minimal risks.

There is also a sealed guarantee such that in case of any infraction, the PFC or its parent company will pay any amount that may be lost due to the infraction.

Similarly, adequate safeguards have been put in place to protect the pension assets of retirees from the negative impact of adverse investment conditions. For instance, a Pension Protection Fund was established by the PRA 2014 to among others, compensate eligible retirees for shortfall or financial losses that may arise from investment activities of the PFAs.