Pension Insight: Contributory pension scheme — the safety of pension funds

Prior to the Pension Reform of 2004, which established the contributory pension scheme (CPS), pension administration in Nigeria was fraught with multifarious challenges and inefficiencies. The resultant effect of these inefficiencies was a lack of accountability and transparency amidst weak administrative structures.

However, 19 years since the advent of the CPS, the new system has succeeded, when viewed within the context of the pitfalls that characterised the pension schemes that preceded the CPS.

With apprehension about the safety of pension funds at the inception of the CPS, pundits are pleasantly surprised at the relative stability attained as funds under management continue to soar.

Here are the key safeguards of the CPS that have ensured transparency and the safety of pension funds.

RING-FENCING OF PENSION ASSETS THROUGH SEPARATION OF CUSTODY AND MANAGEMENT FUNCTIONS

The pension fund administrator (PFA) manages the pension funds without having direct access to the funds, as custody is vested in a separate entity, the pension fund custodian (PFC).

In effect, while the PFA makes day-to-day investment decisions in line with the investment regulations issued by the National Pension Commission (PenCom), it is the responsibility of the PFC to effect payments for the investment and receive any dividends or profits therefrom, on behalf of the PFA.

PenCom ensures that both parties adhere strictly to regulations governing the pension funds. Indeed, the cardinal principle of separation of custody from management and supervision has resulted in a pension scheme with a sound internal mechanism for transparency and accountability.

The ring-fencing of pension fund assets has resulted in the consistent growth in pension assets.

DAILY MONITORING OF PENSION FUND INVESTMENTS

PenCom requires all PFAs to submit daily valuation reports on the pension fund investments. These reports provide the details and value of all investments made with the pension funds as at the end of each trading day.

The implication is that PenCom is able to ensure that investments are in accordance with the investment regulations and can identify any infractions immediately for corrective action.

In effect, therefore, the safety of the pension funds is monitored by PenCom at all times.

SEGREGATION OF PENSION FUNDS FROM THE ASSETS OF PENSION OPERATORS

There is a complete separation between the pension funds and the assets of pension operators. This means that an operator is not allowed to combine its own company funds with the pension funds, which are held in exclusive accounts kept in safe custody by the PFC.

Therefore, a pension operator’s insolvency will not negatively impact the pension funds.

Indeed, where an operator is incapacitated by capital inadequacy for instance, the pension funds will simply be transferred to another solvent operator, under the direction of PenCom. This segregation of pension funds has further assured the transparency of the CPS.

STRICT REGULATION ON INVESTMENT OF PENSION FUNDS

The investment of pension funds by PFAs is strictly regulated in accordance with the investment regulation issued by PenCom.

The regulation prescribes allowable investment outlets and sets limits on the percentage of funds that can be invested.

This ensures that risks are properly managed in order to ensure the safety of the funds. The PFA’s exclusive responsibility for investment decisions is only limited by compliance with the provisions of the regulation.

PROHIBITION OF APPLYING PENSION FUNDS AS LOANS OR AS COLLATERAL FOR LOANS

Pension funds are secured for the sole purpose of providing retirement and terminal benefits for the RSA holders.

Consequently, pension funds are prohibited from being given out as loans or applied as collateral for loans. This has ensured their availability for payment at retirement.

STRICT LICENSING REQUIREMENTS

The Pension Reform Act of 2014 prescribes a strict licensing regime for operating as a PFA or PFC. This includes possessing the professional capacity to manage pension funds and an undertaking not to engage in any other business except that of management of pension funds.

In addition, such applicants must satisfy the condition that they have never mismanaged any fund prior to the application.

EFFECTIVENESS OF THE CPS SAFEGUARDS

While the foregoing safeguards are not exhaustive, their effectiveness is best represented by the consistent accumulation of pension fund assets, which stood at N17.6 trillion as at October 2023.

Furthermore, 10.1 million RSA holders have been registered under the CPS since inception. However, it should be noted that these safeguards have been largely effective due to the strong regulatory and supervisory oversight by PenCom.

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