By Ivo Takor, mni Esq.

Introduction

The Nigeria pension regulatory landscape evolves and focuses on driving the Contributory Pension Scheme (CPS) on three pillars, namely: adequacy, transparency and sustainability. The adequacy of pensions is measured by: (a) their ability to prevent poverty; and (b) the degree to which they replace income; and (c) the time people spend receiving a pension. Under the CPS, the key elements in pension adequacy are the rates of contributions and the return on investments.

Section 4(1) of the Pension Reform Act (PRA) 2014 provides that “The contribution for any employee to which this Act applies shall be made in the following rates relating to his monthly emoluments: (a) a minimum of ten percent by the employer; and (b) a minimum of eight percent by the employee. Subsection 2 provides that “The rates of contribution mention in subsection (1) of this section may, upon agreement between any employer and employee, be revised upward from time to time, and the Commission shall be notified of such revision.

Section 86 of PRA 2014 provides modes of investment of pension funds, subject to the guidelines issued by the National Pension Commission (PenCom). In line with this provision, PenCom issued Regulation on Investment of pension fund assets. One of the general principles of the Regulation is that Pension Funds Administrators (PFAs) shall invest pension fund assets with the objectives of ensuring safety and maintenance of fair returns.

In continuation of our provision of answers to frequently asked questions on the CPS, we will be providing answers to some frequently asked questions on investment of pension funds under the CPS.

Who invests pension contributions?

Section 55 (b) of PRA 2014 provides that the investment of pension contributions is the sole responsibility of the PFAs.

What guides the investment activities of PFAs?

The investment activities of PFAs are guided by the provisions of the PRA 2014 and the Regulation on Investment of Pension Fund Assets (Investment Regulation) issued by PenCom.

What are the allowable investment instruments?

PFAs can only invest in the following instruments: Equities; Federal Government Securities; State/Local Government Bonds; Corporate Debt Securities; Money Market Instruments; Open/Closed-end Funds; Infrastructure Bonds & Funds; Private Equity Funds; and any securities/instruments that may be approved by PenCom, from time to time.

Do PFAs invest in any of the allowable instruments available in the market?

PFAs can only invest in instruments that satisfy quality requirements stipulated in the Investment Regulation, such as minimum risk rating, ability of a listed company to make profit and/or pay dividend, etc. In addition, the investment Regulation provides investment limits on each allowable instrument to ensure diversification of all investments made by PFAs.

Can I give my PFA instructions on how to invest my contributions?

No. The investment decisions are made by the PFA, however, the RSA Multi-Fund Structure introduced by PenCom allows a contributor to choose the Fund through which his/her pension contributions would be invested.

What is RSA Multi-Fund Structure?

The RSA Multi-Fund Structure is designed for investing pension contributions based on the age and risk profiles of RSA holders.

What are the Funds under the RSA Multi-Fund Structure?

There are four distinct funds, which differ from one another based on age classification, namely, Fund I (less than 50 years, but based on request); Fund II (default fund for all contributors less than 50 years); Fund III (50 years and above); Fund IV (strictly for retirees). In addition, there are two special funds, Fund V for participants in the Micro Pension Plan and Fund VI for those interested in having their contributions invested in non-interest financial instruments.

How can I choose the Fund through which my pension contributions will be invested under the RSA Multi-Fund Structure?

Contributors who are 49 years and below are in Fund II by default, but they can choose to move to Fund I. While contributors who are 50 years are in Fund III by default, but can choose to move to Fund II. However, contributors on Funds IV and VI are not allowed to move to any other Fund, while contributors on Fund V can move to either Funds II and III if they secure formal employment. Movements between the respective Funds are free once a year. Any subsequent request for movement is liable to nominal fees to be prescribed by PenCom.

What is the rate of return on investment of pension assets?

The rates of return on pension fund investments vary from year to year, depending on prevailing economic conditions and performance of the Nigerian financial markets, as well as the investment strategies of the various PFAs. However, the Commission monitors the PFAs to ensure that returns are competitive and fair.

How is income distributed to RSA holders?

Income generated from investing pension contributions is fully distributed into the RSAs of contributors based on the proportion of the assets in the individual RSAs.

Are PFAs and PFCs paid for their services?

PFAs and PFCs are paid for their services through fees that had been clearly defined in the Regulation on Fees Structure issued by PenCom, which are Administration Fees and Asset/Income Based Fees.

What is Administration Fee?

This is a maximum of N100.00 charged to individual RSAs by PFAs on monthly basis to cover expenses incurred for providing services such as printing and distribution of RSA statements, monthly collection and reconciliation of pension contributions.

What are asset/Income Based Fees?

Asset/Income Based Fees are charges on Pension Funds for services rendered in investing the pension contributions by PFAs, keeping custody of pension assets by PFCs, and regulating the pension industry by PenCom.

Are my pension contributions safe?

PenCom ensures that pension contributions are safe This is achieved through the separation of the investment and custody functions between PFAs and PFCs. Furthermore, there is effective monitoring and supervision through daily monitoring of the investment decisions made by the PFAs in order to ensure compliance with the PRA 2014 and the Investment Regulation. Moreover, there are stringent provisions in the Regulations for the Investment of Pension Fund Assets that ensure the ring fencing of the assets and allowing investments only in instruments with minimal risks. There is also a sealed guarantee such that in case of any infraction, the PFC or its parent company will pay any amount that may be lost due to the infraction.

What are the safeguards put in place to protect the pension assets of retirees from the negative impact of adverse investment conditions?

A Pension Protection Fund was established by the PRA 2014 to among others, compensate eligible retirees for shortfall or financial losses that may arise from investment activities of the PFAs.

Can the funds in an employee’s RSA be used as a collateral for loan by the RSA holder or his employer?

The PRA 2014 prohibits the use of pension fund assets under the management of PFAs to offset or grant loans and credits or as collateral for any loan taken by the contributor or his employer.

Can PFAs invest pension contributions in infrastructure?

PFAs can invest pension contributions in infrastructure through Infrastructure Bonds and Funds provided they meet all the safety and quality requirements stipulated in the Investment Regulation.

Conclusion

In part 4, answers will be provided to some frequently asked questions on transitional arrangements from Defined Benefits Pension Scheme to Contributory Pension Scheme.