The birth of the Pension Reform Act (PRA), 2004, which introduced the Contributory Pension Scheme (CPS) for both the Public and Private Sector employees, was a direct outcome of the efforts to address the challenges that bedevilled the various pension schemes in Nigeria before 2004. These challenges included unsustainable outstanding pension liabilities, weak and inefficient pension administration, and low coverage of workers in the private sector.
Establishing a supervisory and regulatory framework superintended by the National Pension Commission and licensing Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs) were essential steps in implementing the CPS. The main functions of the PFA are to open Retirement Savings Accounts (RSA) for employees, invest and manage pension fund assets, payment of retirement benefits and accounting for all transactions relating to the pension funds under their management. The PFCs, on the other hand, are responsible for keeping safe custody of pension assets on trust on behalf of contributors.
It follows therefore, that PFCs are essential to the safety of pension funds assets. In this article, we take a look at the function of PFCs under the CPS:
- Custodian of Pension Funds and Assets- PFCS are solely responsible for keeping the pension funds and assets in safe custody on behalf of the PFAs and the trust of Retirement Account Savings (RSA) holders. At this juncture, it is essential to state that PFCs undergo rigorous licencing requirements issued by PenCom before they are licenced as custodians.
- Receiving Pension Contributions on behalf of PFAs- PFCs receive the total monthly contributions that are deducted and remitted by employers for the credit of the RSA of the employee. PFCs are mandated to inform the PFA of the receipt of such contributions within 24 hours.
- Settlement and Clearing on behalf of the PFAs- PFCs are responsible for executing investment decisions on behalf of the PFAs. When a PFA decides to invest in a particular asset, it advises the PFC to make payment to the counterparty. In addition, where a PFA chooses to sell investments to realise a profit, the PFC will receive the consideration on behalf of the PFA. Furthermore, the PFC is also responsible for benefit payments to beneficiaries as advised by the PFA, accompanied by the requisite approval of PenCom.
- Corporate Action Administration and Proxy Voting: The PFC is responsible for protecting the interests of the PFA in corporate actions declared by companies in which pension funds are invested. PFCs advise PFAs on Annual General meetings of such companies, represent the PFA at such AGMs, and ensure that PFAs’ voting instructions are carried out.
- Income Collection: The PFC is responsible for collecting all incomes from pension fund investments made by the PFA. The PFC is expected to calculate, collect and track all outstanding income on behalf of the PFA. Regarding fixed-income investments such as time deposits with banks, FGN and Corporate bonds, the PFC ensures that interest and coupon incomes are accrued daily and redeemed as and when due. It also collects dividends when declared.
- Reporting to PenCom and the PFAs: The PFCs maintain proper books of account and render periodic returns to PenCom, which ensures adequate supervision. In addition, the PFC also renders reports to the PFA on the custodial services it provides. These reports enable a reconciliation to be carried out between the records of both operators.
It is important to note that the PFCs are the only licensed bodies that can perform the functions stated above under the strict supervision and monitoring of PenCom. Currently, there are three (3) licenced Pension Fund Custodians in the pension industry: First Pension Custodian, United Bank for Africa Pension Custodian and Zenith Pension Custodian.
The structures put in place to ensure the safety of pension assets through the PFCs have re-defined Nigeria’s pension landscape. As of 31 August 2022, registered contributors have grown to 9.76 million. Furthermore, the total pension fund assets under the CPS have grown to N14.42 Trillion.