PFAs are limited liability companies duly licensed by Pencom as special purpose vehicles to carry out pension business only. The PFAs open retirement savings account for employees, manage the person fund as the commission may from time to time prescribe, maintain books of accounts on all transactions relating to the pension fund under their management.
Pension fund custodians (PFCs)
PFCs are appointed by PFAs. They are responsible for the warehousing of the pension fund assets. The employer sends the contributions directly to the custodian, who notifies the PFA of the receipt of the contribution and the PFA subsequently credits the Retirement Savings Account of the employee. The custodian would execute transactions and undertake activities relating to the administration of pension fund investments upon instructions by the PFA.
Closed pension funds administration (CPFAs)
In addition to the approval for continuation of the existing schemes, organizations who would like to manage their existing schemes shall apply to National Pension Commission for license to operate as CFPA. The asset of the pension fund must be at least N500 000,000. In case the assets of the scheme are less than N500 000,000, such scheme should be managed by a PFA.
Challenges of the new scheme
Limited investment opportunities: The new systems of definedcontribution individual accounts were expected to supply new investment capital that would spur the development of domestic capital markets. However, one of the biggest obstacles that the new pension funds have had to face is a limited array of potential investments in local capital markets. Pension fund investments are generally limited to investment-grade instruments, which are in short supply in emerging capital markets.
Inadequate coverage: A large proportion of the population remains inadequately covered by the contributory system. Notwithstanding the seemingly laudable benefits of the Nigerian DC scheme, it has been characterised by several challenges. While the initial reluctance and skepticism of workers to register with PFAs have reduced, there is a large proportion of the working population, especially, in the informal market of the private sector outside of the scheme. Several years after the take-off, the scheme is still bedeviled by general misconceptions and knowledge gap. The most significant challenge is the lack of confidence in the scheme by potential contributors, arising from failures of previous policies on pension management. In addition, there is the fear of continuity and sustainability of the scheme by successive governments, since change in governments sometimes leads to the jettisoning of previous programmes.
Mismanagement of funds: Another challenge is the mismanagement and misappropriation of amounts, earmarked for employees’ pensions, especially, in the public sector. Recently, there have been revelations of multi-billion Naira pension fund scandals at the Pensions Unit of the Office of the Head of Civil Service of the Federation and the Nigeria Police pensions.
Risk management: The scheme also entails the transfer of investment risks of retirement funds to the employees, whereby the employee determines who manages his/her retirement savings account and therefore assumes full responsibilities for the risks involved.
Coverage: The reform has failed to contribute to basic social security in old age for the majority of Nigerians employed in the informal sector.
The appropriateness of the institutional design of the reformed pension system is highly questionable. Among countries with funded pension systems, Nigeria has by far the lowest GDP per capita in the world. In addition, high degrees of financial instability and lack of appropriate investment outlets for pension savings cast doubt on the basic utility of the system.
Fourth, in terms of the actual management of the current system the Nigerian Pension Commission (PenCom) as the regulator has been weak in enforcing regulatory compliance. For example, PenCom failed to enforce regulations stating that PFAs must report in a timely manner about the value of their retirement Savings Accounts (RSAs). As a result, the regime of ‘competition’ between PFAs is meaningless as pension savers are unable to evaluate the pros and cons of investing with different PFAs.