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PenCom: As the New Administration Takes Off

02 Jan 2013

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PenOp President, Mr. Dave Uduanu


Following the tenure expiration of the pioneer management in the National Pension Commission (PenCom), Nnamdi Duru writes on the need for the new regime to bring workers in the informal sector into the contributory pension scheme and secure government guarantee to help channel pension funds into infrastructural development

The Pension Reform Act, 2004 provided that every worker in an organisation employing five people or more must contribute 7.5 per cent of his or her salary to a Pension Fund Administrator (PFA).

The employer under the law is expected to contribute 7.5 per cent of the individual salary of workers to their respective Retirement Savings Accounts (RSA) resident with their chosen PFAs.


At the last count, about 5.3 million workers and retirees have registered under the contributory pension scheme with accumulated pension assets rising from N265 billion and 1.4 per cent of country’s Gross Domestic Product (GDP) in 2006 to N2.74 billion or almost 1 per cent of GDP in 2012.

Under the scheme, the number of retirees drawing monthly pension has risen to 54,558 retirees from both public and private sectors under the scheme as at September 2012. These have collectively received over N151.52 billion of their accumulated pension savings as lump sum and were receiving about N1.77 billion monthly as pension as at the same date.

Having come this far, there are still some areas that the regulator needs to expedite action with a view to making the scheme more meaningful to Nigerians, including the need to fine-tune different investment regulations with a view to securing the retirement savings of the working people and the need to design and secure the type guarantee acceptable to the operators to enable pension funds to be channelled towards infrastructural development.

Reinforcing Security for Investments in Shares
There is need for the pension regulator to establish more stringent rules for investments in stocks quoted on the Nigerian Stock Exchange (NSE) this year. This is in view of the prediction that pension fund managers might be shifting their attention towards this investment outlet.


The Renaissance Capital, in its recent report, predicted that PFAs are likely to invest more money in shares of companies quoted on the Nigerian Stock Exchange (NSE) from this year, saying the continuous increase in private sector debt would engender the trend.
It also predicted that, going by regulatory limitations, PFAs would invest not more than N400 billion in shares in the short run.

“What we assume is that pension funds will now begin to turn more to equities. The most important long-term reason in our view is of course that private sector debt in Nigeria has tremendous room to rise and the economy has decades of strong growth ahead of it. Both suggest that a higher allocation to equities makes sense.

“In the short term, we still assume that lower bond yield. The 10-year local yield is down from 17 per cent to 12 per cent in the past few months, will encourage banks to start lending, as investing in local securities offer less yield.

“There is a limit in the ability of pension funds to make the switch. They cannot invest more than 25 per cent in domestic ordinary shares, so we estimate no more than N400 billion could switch in the short term.  In 2011, the regulators raised the cap from 20 per cent to 30 per cent, evidently in a bid to boost interest in this asset class,” Renaissance Capital stressed.

The scheme provides long term fund and in order to attract the N400 billion projected by Renaissance Capital, the stock exchange must strive to meet the conditions of the operators and ensure long run safety of funds invested in the market.

Having in mind the level of losses naive Nigerians suffered during the last capital market crash in the country, the pension regulator should tighten the noose around fund managers wishing to invest pension assets in stocks on the exchange.

Investment in Infrastructural Devt
While every Nigerian sees the wisdom in the investment of pension fund for the development of infrastructure across the country, operators still disagree on the modalities for such investments.


While Nigerians generally want accumulated pension funds to be used to fix roads, electricity and other infrastructure, pension operators want them to tarry a while and ponder on the level of security needed to ensure that owners of the money have access to it as at when they retire and subsequently.

The umbrella organisation for operators in the pension industry in the country, the Association of Pension Fund Operators (PenOp) gave conditions for its member-companies to channels pension assets into infrastructural development. The association insisted that government must guarantee in full, every kobo invested in this regard.

“There are pre-conditions that must be met before pension funds can be used for infrastructure. If those conditions are not in place the fund cannot be used for infrastructure. Why it is required that the projects must be guaranteed by the federal government is because we know that one government can give someone a concession and another government would come and revoke it. We want an irrevocable guarantee from the federal government so that the funded projects cannot be changed.

“Also, we want a principal guarantee; that is ensuring that the money would go into infrastructural projects guaranteed by the federal government. Therefore, the only two ways pension funds can go into infrastructure is either through a bond, a dedicated infrastructure bond that is tied to a specific project,” PenOp President, Mr. Dave Uduanu, stressed.
Therefore, now is the time for the pension regulator to liaise with government to ensure that necessary guarantees are put in place to enable pension funds to be channelled into infrastructural development.

Amendment of Pension Act
The last administration in the commission initiated moves to amend the Pension Reform Act, 2004, to reflect modern day development in the pension industry. Before now, PenCom held a joint workshop with the National Assembly about three years ago and wide consultation was done and the views and opinions of other stakeholders streamlined.

The initial draft of the amended law was about being finalised before the last administration bowed out. The new administration should continue work on the proposal and ensure that some of the areas that need to be fine-tuned in the law before it are passed.

The former Director-General of PenCom, Mr. Muhammad Ahmad, pointed out some of the areas that need to be fine-tuned, including the need for employers to open temporary Retirement Savings Account (RSA) and lodge deductions from employers’ salaries where they are yet to open one, three months after starting work.

Another area, according to him, is the need to make pension savings tax-free and making it mandatory for every employer to register its workers. Also, the contribution by the Federal Government should be made more mandatory, at least the accrued pension, so that in the event of default, the Accountant-General can take appropriate actions to address the problem.

Informal Sector
Managing the informal sector and bringing workers therein into the scheme has been a major challenge to the eight-year old contributory pension scheme in the country. PenCom had before now started work on a proposal for bringing such workers into the scheme and based on that, experts predicted that PFAs would be investing more pension assets in corporate bonds in the near future.


The pension regulator should expedite action on this proposal to ensure that all the necessary structures are put in place to ensure that workers in the informal sector also retire into comfort and not abject poverty.

This proposal would also enable the country to pool together more investible funds for its developmental projects and to grow the economy in the right direction.

Further Consolidation
Last year, PenCom concluded the first phase of the recapitalisation programme in the industry, an exercise which saw the reduction in PFAs from 23 to 18.


However, the President of the Association of Pension Fund Operators (PenOp), Mr. Dave Uduanu, hinted that there is likely to be further consolidation among pension operators in the form of mergers and acquisitions in the years to come.

“There would be merger and acquisitions over the next one or two years; that would not be induced by regulation but by competition. People would decide that rather than being alone, they merge with one or two PFAs to make them bigger and stronger,” he said.

With this insight coming from the operators themselves, the regulators should anticipate and facilitate further consolidation in the industry and ensure that they are seamless. All necessary structures should be put in place to make this happen for the benefit of the industry in particular and the economy in general.

Awareness Campaign
Contributory pension has gained acceptance in the country as all the big and medium companies have joined the scheme and are willingly contributing. The federal government is committed to it and many states have embraced it while a few are still reluctant to join the scheme.

The processes have been simplified as workers have nothing to do with their employers when they retire. It is also a fully-funded scheme and money is being set aside; it is not when you retire that your employer would start running around to get money to pay your pension.

Also the level of corruption that we have in the government would be eliminated because you have your own account, it is not a pool. Every contributor is responsible for his or her account and monitors it.

Now what is left is for the nation to consolidate on the gains of the past, particularly through a well-thought-out public awareness campaign. The new administration needs to ensure that the ongoing campaign progammes championed by various stakeholders are sustained with a view to getting total buy-in by every relevant section of the society.

Pointing the way forward, Ahmad harped on the need for publicity and creation of awareness.  “Public education and enlightenment is something that we must continue to ensure that at least people understand. As an industry, we decided to focus on educating and enlightening Nigerians to have their buy-in, because we believe with buy-in, we will have voluntary compliance,” he said.

Tags: Nigeria, Featured, Business, NAICOM, PENCOM

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