Pension Insight: The building blocks of pension assets safety under the CPS

Before the introduction of the contributory pension scheme (CPS), the landscape of pension administration in Nigeria was riddled with numerous challenges. These challenges, ranging from lack of accountability and transparency to weak administrative structures, plagued the system. However, two decades since the inception of the CPS, the scheme has shown resilience, particularly when compared to the shortcomings of the old defined benefits scheme (DBS).

Initially met with scepticism regarding the security of pension funds, the CPS has defied expectations, demonstrating notable stability as pension funds under its purview continue to grow. The efficacy of the safeguards embedded within the CPS is evident in the consistent accumulation of pension fund assets, which reached N18.36 trillion as of December 31, 2023 — an impressive increase from the approximately N2 trillion deficit witnessed prior to the scheme’s introduction. Moreover, the CPS has successfully registered over 10 million retirement savings account (RSA) holders since its inception.

In this piece, we delve into the core safeguards of the CPS that have underpinned the steady growth and security of pension funds.

RING-FENCING OF PENSION ASSETS THROUGH THE SEPARATION OF CUSTODY, 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, while 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 and regulatory non-interference has resulted in the consistent growth in a large pool of 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 at the end of each day. The implication is that PenCom is able to ensure that investments are in accordance with the investment regulations and could 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 company funds with the pension funds, which are held in exclusive accounts, and kept in safe custody by the PFC. In effect, therefore, a pension operator’s insolvency will not impact negatively on 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 by the investment regulation, issued by PenCom. The regulation prescribes allowable investment outlets and sets upper 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

The 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 prevented the depletion of pension funds through non-performing loans taken by the RSA holder or the PFA granting a direct loan to a third party.

STRICT LICENSING REQUIREMENTS

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

In addition, such applicants must satisfy that they have never managed or administered any fund that has been in distress prior to the application.

THE EFFECTIVENESS OF THE CPS SAFEGUARDS

The CPS safeguards have proven highly effective in ensuring the security of pension funds in Nigeria. These safeguards have significantly enhanced transparency, accountability, and overall efficiency within the CPS.

Key indicators such as the substantial increase in pension fund assets and CPS membership attest to the success of these measures. However, these safeguards have been largely effective due to the strong regulatory and supervisory oversight by PenCom.

CONCLUSION

The transition from the DBS to the CPS represents a significant evolution in pension administration. The CPS, characterised by robust safeguards and careful management, has effectively tackled longstanding issues of accountability, transparency, and administrative weaknesses.

These safeguards, including asset ring-fencing, regular investment monitoring, stringent fund management regulations, and prohibition of misuse, have not only protected retirees’ interests but also bolstered confidence among stakeholders.

Overall, the CPS has ushered in a period of resilience and progress, ensuring the growth and stability of pension funds while fostering trust in the system.

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