Pension Reform Act: Protecting Pension Assets And Funds For Investment

By Ivor Takor, Mni Esq

Nigeria has implemented a comprehensive pension reform aimed at enhancing the efficiency of pension administration across the country. The reform encompasses various aspects such as governance, contributions, benefits, and regulatory oversight to ensure that pension funds are managed effectively and transparently.

Key elements of the reform include the establishment of the National Pension Commission (PenCom) to regulate and supervise pension activities, the introduction of the Contributory Pension Scheme (CPS) to ensure regular contributions from both employees and employers thereby creating a pool of pension fund, and the licensing  of Pension Fund Administrators (PFAs) to manage pension assets and payments.

These reforms have brought significant improvements to the pension system in Nigeria, including better accountability, increased coverage for workers including micro pension plan for the informal sector workers and the self employed, portability of pension benefits through the transfer of the Retirement Savings Account (RSA) from one PFA to another, and prudent investment practices for pension funds. Overall, the comprehensive pension reform has contributed to a more robust and sustainable pension system, aiming at providing retirees with greater financial security and confidence in their retirement years.

The CPS has grown significantly in recent years, with substantial assets under management. As of recent data, the CPS assets have been steadily increasing. Here are some provisions of the law regarding pension funds under the CPS.

Section 11(1) provides that “Every employee to whom this Act applies shall maintain an Account, (in this Act referred to as “Retirement Savings Account”) in his name with any Pension Fund Administrator of his choice.” While Section 11(3) provides that the employer shall (a) deduct at source the monthly contribution of the employee; and (b) not later than 7 working days from the day the employee is paid his salary, remit an amount comprising the employee’s contribution under paragraph (a) of this subsection and the employer’s contribution to the Pension Fund Custodian specified by the Pension Fund Administrator of the the employee.”

Section 11(4) provides that “Upon receipt of the contributions remitted under sub-section (3)(b) of this Section, the Pension Fund Custodian shall notify the Pension Fund Administrator who shall cause to be credited the retirement savings account of the employee for whom the employer has made the payment.

The money in the RSA of the employee cannot be withdrawn by any other person or entity except the employee who is the owner of the account. The Act gives conditions under which the employee, the owner of the account can withdraw from it.

Section 7(1) provides that “A holder of a retirement savings account shall, upon retirement or attaining the age of 50 years, whichever is later, utilize the amount credited to his retirement savings account for the following benefits;

Section 16(1) provides that “An employee shall not be entitled to make any withdrawal from his retirement savings account opened under Section 11(1) of this Act, before attaining the age of 50 years.”

Section 16(2) provides that “Notwithstanding the provisions of subsection (1)  of this section, any employee who retires or disengages from employment- (a) on the advice of a suitably qualified physician or a properly constituted medical board certifying that the employee is no longer mentally or physically capable of carrying out the functions of his Office; (b)due to total or permanent disability either of the mind or body; or (c) before the age of 50 years in accordance with Section 7 of this Act.”

Pension funds are held in RSAs of individual contributors and are not consolidated into any single account of a specific organization or entity. Each contributor to the scheme has a dedicated RSA where their contributions, along with employer contributions and investment returns, are accumulated over time.

PFAs manage these RSAs in accordance with regulatory guidelines and investment framework. PFAs are responsible for maintaining accurate records of each contributor’s account balance, investment performance, and retirement benefits entitlement.

It’s important to note that pension funds are held in trust for the benefit of contributors and are distinct from the operational funds of any organization or institution. This segregation ensures that pension assets remain separate and protected, specifically designated for the purpose of providing retirement benefits to contributors when they reach retirement age or meet other qualifying criteria as defined by the Pension Reform Act 2014.

Historically, pension funds in Nigeria have primarily been invested in government securities. This investment strategy has been a common practice due to the perceived safety and stability of government-backed securities, such as treasury bills and bonds. By allocating pension funds to these instruments, PenCom and PFAs aim to generate consistent returns while mitigating risks associated with market fluctuations.

Investing in government securities provides pension funds with relatively predictable income streams, as these securities often offer fixed interest payments and maturity dates. Additionally, government securities are typically considered low-risk investments, aligning with the goal of preserving pension assets and ensuring long-term financial security for retirees.

While government securities have been a cornerstone of pension fund investment portfolios, government securities is not only were pension funds are being invested. There is also growing interest and diversification into other asset classes such as equities, real estate, and infrastructure projects. This diversification strategy aims to enhance portfolio returns while maintaining prudent risk management practices, ultimately benefiting pensioners and contributing to the overall growth and stability of the pension industry in Nigeria.

Investing pension funds in government securities does not equate to the government borrowing pension funds. When pension funds are invested in government securities, it means that the funds are being used to purchase financial instruments issued by the government, such as treasury bills and bonds.

These investments are made with the understanding that the government will honor its obligations to repay the principal amount invested along with any accrued interest, according to the terms of the securities. The investment itself does not imply that the government has access to or can use the pension funds for its own expenditures or borrowing needs.

For some time, there have been persistent rumors about the borrowing of pension funds even in quarters that ought to know better. This rumor is not helpful especially to employees the owners of the fund. It is therefore crucial to clarify that such claims are false. The CPS is being operated in compliance with the provisions of the Pension Reform Act 2014 and under strict regulatory frameworks overseen by PenCom. These regulations explicitly prohibit the borrowing of pension funds for any purpose other than approved investments. Pension funds are legally safeguarded and cannot be accessed or borrowed by any entity outside the prescribed investment guidelines.

Despite the fact that some of the rumors may be deliberate misinformation for various reasons, it remains imperative for PenCom and Pension Fund Operators to maintain regular and clear communication with the public regarding the CPS and related matters.

The spread of false information can lead to confusion and mistrust among stakeholders, potentially harming the integrity of the pension system. By consistently providing accurate and transparent information through various channels and educational campaigns, PenCom can counteract misinformation and ensure that the public is well-informed about the regulations, safeguards, and benefits of the CPS.

This proactive approach will foster trust, promotes compliance, and strengthens the overall credibility of the pension system in Nigeria.