PenCom Insight: Safety of your pension savings under CPS and role of PFCs

The Pension Reform Act (PRA), 2004, which introduced the contributory pension scheme (CPS) for public and private sector employees, was a direct outcome of the efforts to address the challenges that bedevilled the various pension schemes in Nigeria before 2004. These challenges included unsustainable outstanding pension liabilities, weak and inefficient pension administration, and low coverage of workers in the private sector.

Establishing a supervisory and regulatory framework superintended by the National Pension Commission and licensing pension fund administrators (PFAs) and pension fund custodians (PFCs) were essential steps in implementing the CPS. PFCs are mainly responsible for keeping safe custody of pension assets on trust on behalf of contributors. Therefore, PFCs are vital to the safety of pension funds assets. The following are the functions of PFCs under the CPS:

CUSTODIAN OF PENSION FUNDS AND ASSETS

PFCs are solely responsible for keeping the pension funds and assets in safe custody on behalf of the PFAs and the trust of retirement account savings (RSA) holders. At this juncture, it is essential to state that PFCs undergo rigorous licencing requirements issued by PenCom before being licensed as pension custodians.

RECEIVING PENSION CONTRIBUTIONS ON BEHALF OF PFAS

PFCs receive the total monthly contributions that are deducted and remitted by employers for the credit of the RSA of the employee. PFCs are mandated to inform the PFAs of the receipt of such contributions within 24 hours.

SETTLEMENT AND CLEARING ON BEHALF OF THE PFAS

PFCs are responsible for executing investment decisions on behalf of the PFAs. When a PFA decides to invest in a particular asset, it advises the PFC to pay the counterparty. In addition, where a PFA chooses to sell investments to realise a profit, the PFC will receive the consideration on behalf of the PFA. Furthermore, the PFC is also responsible for benefit payments to beneficiaries as advised by the PFA, accompanied by the requisite approval of PenCom.

CORPORATE ACTION ADMINISTRATION AND PROXY VOTING

The PFC is responsible for protecting the interests of the PFA in corporate actions declared by companies in which pension funds are invested. PFCs advise PFAs on annual general meetings of such companies, represent the PFA at such AGMs, and ensure that PFAs’ voting instructions are carried out.

INCOME COLLECTION

The PFC is responsible for collecting all incomes from pension fund investments made by the PFA. The PFCs calculate, collect, and track all outstanding income on behalf of the PFA. Regarding fixed-income investments such as time deposits with banks, FGN and corporate bonds, the PFC ensures that interest and coupon incomes are accrued daily and redeemed as and when due. It also collects dividends when declared.

REPORTING TO PENCOM AND THE PFAS

The PFCs maintain proper books of account and render periodic returns to PenCom, which ensures adequate supervision. In addition, the PFC also renders reports to the PFA on the custodial services it provides. These reports enable a reconciliation to be carried out between the records of both operators.

It is important to note that the PFCs are the only licensed bodies that can perform the functions stated above under the strict supervision and monitoring of PenCom. Three (3) approved pension fund custodians are in the pension industry: first pension custodian, United Bank for Africa pension custodian and Zenith Pension Custodian.

PFCs are licensed by PenCom after satisfying rigorous licensing criteria. It is pertinent to note that a commission considers applications for a license to operate as a PFC from entities that fulfil the requirements enshrined in section 62 of the PRA 2014. The applicant company must be wholly owned by a licensed financial institution with a net worth as may be determined by the commission from time to time. In addition, the parent company must guarantee the total value of pension assets held by the PFC.

In conclusion, the structures put in place is to ensure the safety of pension assets through the PFCs have re-defined Nigeria’s pension landscape. As of February 2023, registered contributors have grown to 9.91 million. Furthermore, the total pension fund assets under the CPS have grown to N15.44 trillion as of February 2023.

PenCom remains committed to regulating and supervising all PFCs in Nigeria effectively.