How PenCom protects N14.2trn pension fund assets from economic vulnerabilities – The Whistler Newspaper
An employee who has worked for an organization for a few years is entitled to certain benefits which could be in the form of a bonus and pension payable to that employee by his employer upon retirement.
The pension is considered as a sum of money regularly paid to a person who no longer works due to old age, invalidity or retirement or to his widows or dependent children by the State, former employers or administrators of pension funds to which he and his employer contributed.
The pension system before 2004 was characterized by many problems that make the payment of pension benefits a failure in Nigeria. The main weaknesses of the pension scheme were the lack of adequate and timely budgetary provisions associated with the increase in life expectancy, the increase in the number of employers, the poor implementation of the pension scheme in the private sector due to inadequate oversight and regulation of the system and too many private sector employees. not even covered by the form of the pension plan.
These problems with the payment of pensions in Nigeria compelled the government under the administration of former President Olusegun Obasanjo to carry out a reform which gave rise to the Pension Reform Act of 2004. The Pension Reform Act of 2004 established a uniform contributory system; privately managed and fully funded pension system for the country’s public and private sectors.
The Pensions Reform Act 2004 was also passed to address the obvious shortcomings of the old defined benefit pension scheme and provide adequate resources to retirees after retirement.
The minimum contribution rate is 18 per cent of the employee’s monthly emoluments, of which 10 per cent is paid by the employer and 8 per cent is paid by the employee. However, the employer may decide to assume full responsibility for the contribution provided that it is not less than 18 per cent of the employee’s monthly salary.
An employee may elect to make additional contributions beyond the eight percent minimum provided that the employee’s total contribution and other deductions do not exceed one-third of his total monthly earnings.
To store the fund, a retirement savings account must be opened by an employee with a PFA of their choice, into which all pension contributions are paid and then invested for the purpose of paying retirement/terminal benefits .
The PFA is a company licensed by the National Pensions Commission (PenCom) for the sole purpose of managing and administering pension and other retirement scheme assets. Some of the PFAs are authorized to manage and administer pension plans for staff of organizations that had pension plans before the launch of the CPS in 2004.
These companies are called Administrators of Closed Pension Funds (CPFA). Besides the PFA, there is another category of companies called pension fund custodians.
A PFC is a company licensed by PenCom for the sole purpose of holding all pension funds and assets in trust for employees as well as beneficiaries of RSA and other pension schemes.
By the end of June this year, assets under the contributory pension scheme increased by N842.73 billion to N14.27 billion. According to PenCom, the total number of RSA holders was 9,795,957 during the period under review.
But who receives the monthly pension contributions? The employer deducts and remits both the employee and employer shares of the pension contributions to the PSC. The PFC notifies the PFA upon receipt of contributions.
As a regulatory body, the National Pensions Commission oversees all pension matters in Nigeria to safeguard pension fund assets. It authorizes all pension operators; issues regulations and guidelines; and ensures efficient administration of all pension schemes in Nigeria.
Investments of pension contributions are the sole responsibility of PFAs and are guided by the provisions of the Pensions Reform Act 2014 and the Investment of Pension Fund Assets (Investment Regulations) Regulations issued by PenCom.
According to the Pensions Act, PFAs can only invest in the following instruments: shares; federal government securities; state/local government obligations; corporate debt securities; money market instruments; open/closed funds; bonds and infrastructure funds; private equity funds; and any securities/instruments that may be approved by PenCom from time to time.
Based on the provisions of the law, PFAs can only invest in instruments that meet the quality requirements stipulated in the investment regulations, such as minimum risk rating, ability of a listed company to make profits and/or pay dividends. In addition, the Investment Regulations provide investment limits for each permitted instrument to ensure diversification of all investments made by PFAs.
In order to ensure the safety of pension fund assets, investment decisions are made by the pension fund administrators. However, the RSA multi-fund structure introduced by PenCom allows a contributor to choose the fund in which their pension contributions would be invested.
The RSA multi-fund structure is designed to invest pension contributions according to the age and risk profile of RSA holders.
There are four separate funds, which differ from each other based on age classification, namely Fund I (under 50, but based on demand); Fund II (default fund for all contributors under 50); Fund III (50 years and over); Fund IV (reserved for retirees).
In addition, there are two special funds, Fund V for Micro Pension Plan participants and Fund VI for those who wish to have their contributions invested in interest-free financial instruments.
In order to know the fund in which a pension contribution will be invested within the framework of the multi-fund structure of the RSA, contributors aged 49 and under are by default in fund II. But they can choose to switch to Fund I. Whereas contributors who are 50 years old are in Fund III by default but can choose to switch to Fund II.
However, contributors to Funds IV and VI are not allowed to switch to another Fund, while contributors to Fund V can switch to Funds II and III if they obtain formal employment.
Although movement between the respective funds is free once a year, the guidelines stipulated that any subsequent movement request is subject to a nominal fee to be prescribed by PenCom.
In terms of return on investment, the rates of return on pension fund investments vary from year to year, depending on economic conditions and the performance of Nigerian financial markets, as well as the investment strategies of different PFAs. . However, the Commission monitors the PFAs to ensure that the returns are competitive and fair.
The Commission also ensures that the income generated by the investment of pension contributions is fully distributed in the contributors’ RSAs according to the proportion of assets in the individual RSAs.
PenCom also ensures that pension contributions are safe, which is achieved through the separation of investment and custody functions between pension fund administrators and pension fund custodians.
In addition, there is effective monitoring and oversight through daily monitoring of investment decisions made by PFAs to ensure compliance with the PRA 2014 and the Investment Regulations.
In addition, there are strict provisions in the Pension Fund Asset Investment Regulation that ensure segregation of assets and allow investment only in instruments with minimal risks.
There is also a warranty sealed so that in the event of a breach, the PFC or its parent company will pay any amount that may be lost due to the breach.
Similarly, adequate safeguards have been put in place to protect the pension assets of retirees from the negative impact of unfavorable investment conditions. For example, a pension protection fund was established by the PRA 2014 to, among other things, compensate eligible pensioners for loss of earnings or financial losses that may arise from the investment activities of PFAs.