PenCom Insight: Pension fund management, custody: Understanding roles of PFAs, PFCs

The successes attained since the advent of the Contributory Pension Scheme (CPS) in Nigeria are often ascribed to the fundamental structures upon which the scheme was built. A key feature is the separation of management and custody of pension funds. While Pension Fund Administrators (PFAs) are saddled with the responsibility of managing pension funds, Pension Fund Custodians (PFCs) are responsible for the custody of the funds. These Pension Fund Operators (PFOs) are licensed, supervised, and regulated by the National Pension Commission (PenCom). Therefore, understanding their roles will provide further insight into the workings of the CPS.

The following are the roles of PFAs under the CPS:

Registration of Contributors

The PFA is responsible for opening a Retirement Savings Account (RSA) for an employee and issuing a Personal Identification Number (PIN) to the employee. This is done after the employee has completed the RSA registration forms and provided other necessary documentation. It is noteworthy to state that the selection of a PFA is the exclusive right of an employee.

Crediting of Individual RSAs

PFAs are responsible for crediting RSAs with monthly pension contributions. The monthly pension contributions are deducted by the employer and remitted to the PFC with an accompanying schedule that contains the names, RSA PINs, and amount and period of remittance. The PFC in turn advises the PFA upon receiving the schedules.

Taking Investment Decisions

The pension contributions in individual RSAs are pooled together by the PFA into a Fund that is invested in various allowable asset classes. The PFA is responsible for taking investment decisions as a fiduciary duty to ensure safety and fair returns for the benefit of contributors. These investment decisions must be in accordance with the Investment Regulations issued by PenCom. All incomes earned are exclusively for the benefit of contributors.

Payment of Retirement Benefits

The main objective of the CPS is to ensure the payment of retirement benefits as and when due. The PFA is therefore responsible for processing the retirement benefits of a retiree under the CPS. This includes ensuring the retiree provides all required documentation at least six months prior to retirement. The PFA is also responsible for obtaining necessary approvals from PenCom and issuance of instructions to the PFC for payment of retirement benefits.

Customer Support to RSA Holders

The PFAs provide customer support services to the RSA holders, including issuing RSA statements at least once every quarter. In carrying out this function, PenCom ensures that PFAs have adequate number of branches to serve locations where they have significant number of registered RSAs under their management. In addition, PFAs are also expected to have the necessary technology that widens access to their services for RSA holders.

Rendering Returns to PenCom

PFAs are mandated to maintain proper books of account and render off-site returns to PenCom. The off-site returns assist PenCom to adequately supervise the PFAs. The returns include the daily valuation reports on investment, monthly and quarterly returns on various aspects of PFAs’ operations, amongst others. In addition to the off-site reviews, PenCom conducts routine on-site examinations annually and special examinations whenever the need arises.

Appointment of Pension Fund Custodian

As noted earlier, the management and custody of pension funds are carried out by the PFA and PFC, respectively. It is therefore, the PFA’s responsibility to appoint a Licensed PFC to provide custody and safekeeping for the pension funds under its management.

The following are the roles of PFCs:

Collection of Pension Contributions

The monthly pension contributions are deducted by the employer and remitted to the PFC, accompanied with schedules that contain the names, RSA PINs, PFA name and other details of the employees. It is the PFC’s responsibility to advise the PFA upon receipt of the contributions, which in turn credits individual RSAs with the respective amounts.

Safekeeping Services

Ensuring the safety of pension assets is a key principle of the CPS. The PFC registers the assets in the PFA’s name and keeps physical securities in the vault or central depositories. In essence, the ownership documents of all pension fund assets acquired by the PFA during its management function, are kept safely by the PFC, to the exclusive order of the PFA, on behalf of individual pension contributors. The pension fund assets held by the PFC are fully separated from its company funds and that of its parent company.

Settlement and Clearing

The PFC is responsible for executing investment decisions on behalf of the PFA. Once a PFA decides to invest in a particular security, it advises the PFC, which effects payment for the securities to the counterparties. Where a PFA decides to sell some investments to realise profit, the PFC will receive the consideration paid on behalf of the PFA. Furthermore, the PFC is also responsible for benefit payments to beneficiaries as advised by the PFA and accompanied by requisite approval by PenCom.

In conclusion, PFAs and PFCs satisfy rigorous licensing criteria. Currently, there are 19 PFAs managing pension fund assets on behalf of RSA holders and 3 PFCs. PenCom is committed to effective regulation and supervision of the pension industry to ensure that retirement benefits are paid as and when due.

Based on information by the National Pension Commission (PenCom).