Prior to the Pension Reform of 2004, which established the Contributory Pension Scheme (CPS), Pension Administration in Nigeria faced numerous challenges, which led to lack of transparency and accountability, amid weak administrative structures.
However, 18 years since the introduction of the CPS, the system has stayed the course, when viewed within the context of the pitfalls that characterised the pension schemes prior to it.
With apprehension about safety of pension funds at the inception of the CPS, pundits are surprised at the relative stability attained, as pension funds under the CPS continue to grow. Here are the key safeguards of the CPS that have ensured transparency and the safety of pension funds.
Strict licensing requirements
The Pension Reform Act 2014 prescribes a strict licensing regime to operate as a Pension Fund Administrator (PFA) or Pension Fund Custodian (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.
Strict regulation of investment of pension funds
The investment of pension funds by PFAs is regulated in accordance with the Investment Regulation issued by The National Pension Commission (PenCom). The regulation prescribes allowable investment outlets and sets limits in percentage of funds that can be invested. This ensures that risks are properly managed to ensure safety of the funds.The PFA’s exclusive responsibility for investment decisions is only limited by compliance to the provisions of the regulation.
Daily monitoring of pension fund investments
PenCom requires PFAs to submit daily valuation reports on pension fund investments 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 could identify any infractions immediately for corrective action. In effect, the safety of the pension funds is monitored by PenCom at all times.
Ring fencing of pension assets through the separation of custody and management of pension funds
The PFA manages the pension funds without having direct access to the funds, as custody is vested in a separate entity, the PFC. In effect, while the PFA makes day to day investment decisions in line with the investment regulations issued by 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.
Segregation of pension funds from the assets of pension operators
There is 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, kept in safe custody by the PFC.Therefore, a pension operator’s insolvency will not negatively impact 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.
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 prevented the depletion of pension funds through non-performing loans taken by the RSA holder or the PFA granting a loan to a third party.
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 N14.27 trillion as of June 30, 2022. Furthermore, 9,795,957 million RSA holders have been registered under the CPS since inception.