Pension Insight: PenCom’s guidelines simplify access to residential mortgages using retirement savings

The Pension Reform Act 2014 (PRA 2014) introduced a crucial innovation by enabling pension contributors to utilise their retirement savings account (RSA) balances for the payment of equity contributions for residential mortgages. This forward-thinking provision acknowledges the substantial housing deficit in Nigeria, particularly impacting the workforce.

Many employees aspire to own homes before retiring, but the hurdle of providing equity for a mortgage often stands in their way. Recognising this challenge, Section 89 (2) of the PRA 2014 paved the way for retirement savings account (RSA) holders to own their homes while in active service.  In line with this provision, the National Pension Commission (PenCom) issued guidelines, outlining the processes for accessing up to a maximum of 25 percent of RSA balances to facilitate equity contributions for residential mortgages.

The implementation of PenCom’s guidelines in 2023 played a pivotal role in enabling numerous workers to achieve their dream of homeownership. From its inception until January 31, 2024, a total of 2,104 RSA holders accessed a substantial amount of N21.81 billion from their RSA balances to contribute towards residential mortgage equity payments. The facilitation of homeownership by employees through this lofty initiative, amply testifies to the soundness of the contributory pension scheme (CPS).

This article explores key highlights of the application process, equity payment approval process and implementation challenges.

ELIGIBILITY AND THE MORTGAGE APPLICATION PROCESS

While the guidelines set out a detailed eligibility criteria for RSA holders seeking to apply, it is important to state some key provisions. First, the RSA must have both employer and employee’s mandatory contributions for a minimum cumulative period of 60 months prior to the application. Furthermore, RSA holders that have less than 3 years to retirement shall not be eligible to access their RSA balances for mortgage equity contribution.

An RSA holder intending to apply must first secure an offer letter for the property from the owner or an approved agent. Subsequently, the applicant would approach a mortgage lender to complete an application form. The Mortgage Lender reviews the application and validates the authenticity of the property offer.

The mortgage lender, typically a commercial bank or a primary mortgage bank licensed by the Central Bank of Nigeria (CBN), conducts due diligence to ensure the genuineness of the offer and the property valuation report. Once confirmed, an applicant approaches the pension fund administrator (PFA) to request his RSA statement, seeking to access 25 percent or less of the RSA balance for the equity contribution.

Subsequently, the PFA issues a duly endorsed RSA statement to the applicant, who forwards it to the mortgage lender. The mortgage lender verifies if the 25 percent RSA balance is sufficient for the equity contribution. If acceptable, a mortgage offer letter is issued. Otherwise, if 25 percent of the RSA balance is insufficient, the mortgage lender is required to request the payment of supplementary equity contribution from the applicant. Upon confirmation of the additional equity contribution payment and meeting other requirements, the mortgage lender shall offer a mortgage loan to the applicant.

Within two working days of issuing the mortgage offer letter, the mortgage lender sends copies of the letter, mortgage application form, and verified property offer letter to the applicant’s PFA. Additionally, the mortgage lender provides necessary information and evidence of payment where 25 percent of RSA falls short.

EQUITY CONTRIBUTION PAYMENT APPROVAL PROCESS

The Applicant approaches the PFA for payment of the equity contribution by obtaining and completing an application form for 25 percent of his RSA balance and providing an indemnity to the PFA. The PFA also computes and validates that the requested amount is not more than 25 percent of the RSA Balance. PFA forwards successful applications to PenCom within two working days.

PenCom reviews all applications for compliance with the extant guidelines prior to granting approval. Applications that do not conform to the requirements are rejected and reasons communicated. Upon approval, the PFA issues a payment instruction to its pension fund custodian (PFC) to remit the approved amount to the mortgage lender within two working days.

IMPLEMENTATION CHALLENGES

Prospective applicants should note that strict adherence to PenCom’s guidelines is crucial for expediting the approval process. In the course of implementation, some issues were noted as described hereunder.

RSA funds accessed for equity contribution cannot be used for refinancing existing mortgages, purchase of non-developed lands, outright property purchases, or building renovations. Additionally, the use of RSA funds for acquiring mortgages for non-residential buildings is not permitted.

Furthermore, if 25 percent of an applicant’s RSA balance falls short of covering the equity contribution, the applicant is required to deposit the shortfall with the mortgage lender before accessing the 25 percent from the RSA balance as equity contribution. Regrettably, instances have arisen where applicants mistakenly paid the supplementary equity contribution directly to the property owner instead of depositing it with the mortgage lender, leading to application rejections.

RSA holders employed in organisations without defined retirement ages must submit attestation letters from their employers to their PFAs, confirming that they have more than three years until retirement, in accordance with the Guidelines.

The commercial bank and primary mortgage banks participating as mortgage lenders must ensure that they possess a valid pension clearance certificate issued by PenCom for a smoother application process.

CONCLUSION
The successful implementation of these guidelines is an indication that the CPS has innovative provisions that address most concerns of the participants. PenCom remains dedicated to the effective regulation and supervision of Nigeria’s pension industry.

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