Safeguards under the Contributory Pension Scheme

There are still many skeptics when it comes to embracing the Pension Reform Act and the Contributory Pension Scheme (CPS) in Nigeria. While the regulators – National Pension Commission (PenCom) and the operators – Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs) have done very well in birthing the new scheme and operating it efficiently and effectively, a number of potential contributors and some employees have concerns about the efficacy of the scheme relying on their past experiences with pension schemes and other government sponsored initiatives. To allay their fears and concerns, it is useful to discuss some of the safeguards inherent in the CPS in Nigeria.

Separation of Custody from Administration

One of the major risks associated with pension schemes is co-mingling of funds whereby pension assets are managed within the same pool of resources as other funds belonging to the organization (sponsor) or the fund manager or even other non-pension clients. In Nigeria prior to the PRA 2004 and its successor PRA 2014, virement of pension funds occurred wherein organizations used pension funds to settle other liabilities, obligations and operational expenses with the hope that such funds will be returned. In many cases the funds were not returned, and pensioners suffered. In other cases, fund managers and insurance companies did not separate pension funds from other funds that they managed and where investment losses occurred, pension funds suffered.

Under this new scheme pension assets are completely separated from the organizations in the first instance, and there is also a separation of the responsibilities of pension fund management and payment (PFA) and pension fund custody (PFC) with strict guidelines about the conduct and relationship between these entities that protect the pension funds and the retirement benefits ultimately. Also, where PFAs or PFCs may be mismanaged and fail, the separation of custody and management and the prudent investment guidelines that we will discuss shortly sterilize your pension funds and protect them from distress. If and when PFAs or PFCs are distressed, PenCom will take over the sterilized assets and account information and transfer to another licensed and sound PFA and/or PFC.

Prudent Investment Guidelines

In addition to the separation of custody from management, the new pension scheme is run with very prudent investment guidelines that ensure the safety, security, liquidity and long term growth of pension funds. The delicate balancing act of ensuring all of these is made possible by the provisions of the PRA 2014 itself as well as the proactive and evolving regulations issued by PenCom in this regard. For example, there are limits to the maximum investments that PFAs can make with pension funds in the volatile capital markets as well as other riskier investment classes like Real estate securities or private equity funds. 

There is also a separate Retiree Fund where pension funds of those who have retired are transferred and managed with even less exposure to riskier asset classes. The adherence to the investment guidelines is checked at various levels – by the Investment Committee of the PFAs, the Risk Management Committee of the PFAs, the Compliance

Officers of the PFAs, the PFCs who execute and settle transactions on behalf of the PFAs and ultimately by PenCom through its daily tracking of pension fund investments and portfolios.

Unlike in other regulatory climes prior to the PRA 2004, PenCom has applied a risk-based, proactive and consultative regulatory approach. Through constant engagement with the PFAs and PFCs through their umbrella body – the Pension Industry Operators Forum (PENOP), PenCom releases exposure drafts of new regulations to the industry, gets their comments and input on such proposals and engages with operators properly before issuance.  Some of the regulations issued by PenCom include prescriptions of the minimum operational standards of PFAs and PFCs; regulations that guide the investment of pension funds, payment of retirement benefits, valuation of pension funds, auditing of pension funds and minimum disclosure to be made by operators, amongst others.

Also, PFAs are required to render periodic returns on their investment activities and other activities to PenCom. There are a number of technology based interfaces that PFAs, PFCS, and PenCom use to interact that also ensure transparency in their reporting and relationship.

Finally, PFAs are required through PenCom’s regulations to provide RSA holders with on-line access to their account information and details as well as provide detailed account statements on a quarterly basis. Full disclosure is required for all fees and charges, and the guidelines for withdrawals from RSAs require PenCom’s authorization before pension funds can be withdrawn.

Sanctions

The PRA 2014 and the regulations issued by PenCom give PenCom the right not just to “bark” but also to “bite”. Contraventions of the Act by employers, RSA holders, PFAS, PFCs, or any other parties related to the management and administration of pension funds will be sanctioned by a combination of administrative penalties, fines and even jail sentences, based on the outcome of criminal proceedings arising from these contraventions. The regime of sanctions acts as a deterrent to potential violators and ensures the soundness of the scheme and protection of the entire system.

Portability and Individual Ownership

One of the biggest structural safeguards in the Nigerian Pension Scheme is the fact that RSAs are owned by the individuals, their employers are not allowed to direct where the RSAs are domiciled, i.e. individuals choose their own PFAs, and RSAs are portable – you can move from one job to another across geographies while retaining your RSA with the PFA of your choice. The portability and individual ownership of RSAs protects RSA holders by ensuring that employers have absolutely no access to retirement benefits and cannot garnish or seize retirement benefits or constrain the retirement benefits of employees in any manner.

Other Structural Safeguards

Under this pension scheme, there are a variety of other structural safeguards like the minimum pension guarantee that every Nigerian worker participating under the scheme has, that will be stipulated by PenCom and will ensure that no matter what happens there is a basic level of retirement benefits that contributors must receive. There is also a Pension Protection Fund, funded by the Government and an annual levy that PenCom imposes on operators that will be used to ensure the minimum pension guarantee as well as any shortfalls in investment income to RSAs due to widespread losses in the financial markets. Also PFAs are required to set aside 12.5 percent of the Net Profit after tax to a Statutory Reserve Fund which PenCom can use to protect the retirement benefits of RSA holders.

Overall, the CPS in Nigeria has a number of important safeguards that ensure that every Nigerian worker who participates in the scheme receives their retirement benefits as and when due and that we can develop a culture of savings that ensures our sustenance in our old age in line with the requirements of the Act.