The Role of PENCOM in the Contributory Pension Scheme

Background

Prior to the pension reform that culminated in the enactment of the Pension Reform Act 2004, which took effect from 25th June, 2004 (repealed and replaced with the Pension Reform Act 2014 with effect from 1st July, 2014), the public service’s defined benefits scheme was administered under the Pension Act 1990. The scheme suffered from weak supervision and inefficient management. It also lacked regulatory control. Private sector schemes were not covered by law and also lacked regulatory control. The Nigerian Social Insurance Trust Fund (NSITF) that was mandatory for the private sector also lacked regulatory control.

Establishment of PENCOM

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The National Pension Commission, which we will subsequently be referring to as either PENCOM or the Commission, was established under section 17 of the Pension Reform Act 2014. Section 18 of the Act provides the objectives of the Commission as follows: to enforce and administer the provisions of the Act; co-ordinate and enforce all other laws on pension and retirement benefits; and regulate, supervise and ensure the effective administration of pension matters and retirement benefits in Nigeria.

Section 23 states the functions of the Commission to include: regulate and supervise the Scheme established under the Act and other pension schemes in Nigeria; issue guidelines, rules and regulations for the investment and administration of pension funds; approve, license, regulate and supervise pension fund administrators, custodians and other institutions relating to pension matters as the Commission may, from time to time, determine.

Others include, to establish standards, benchmarks, guidelines, procedures, rules and regulations for the management of pension funds under the Act; ensure the maintenance of a national data bank on pension matters; carry out public awareness, enlightenment and education on the establishment, operations and management of the Scheme; promote capacity building and institutional strengthening of Pension Administrators and Pension Fund Custodians; receive, investigate and mitigate complaints of impropriety made against any pension fund administrator, custodian, employer, staff and agent; and promote and offer technical assistance in the application of the Contributory Pension Scheme by states and local government councils in accordance with the objectives of the Act; and perform such other duties which, in the opinion of the Commission, are necessary or expedient for the discharge of its functions under the Act.

Management of PENCOM

The Commission operates under a Board of Directors (The Board) headed by a part-time Chairman with the Director General as the Chief Executive Officer. The Board is made up of representatives of critical stakeholders, such as the Head of Civil Service of the Federation; Federal Ministry of Finance; Nigeria Labour Congress; Trade Union Congress of Nigeria; Nigeria Union of Pensioners; Nigeria Employers Consultative Association; Central Bank of Nigeria; Securities and Exchange Commission; Nigerian Stock Exchange; and National Insurance Commission.

The day-to-day running of PENCOM is handled by the Executive Committee, which comprises of the Director General and four Executive Commissioners who are also members of the Board. Each Commissioner heads a Division that is made up of Departments and Units, that are headed by Heads of Departments and Units. The Commission has zonal officers situated in the six geopolitical zones of the country for easy accessibility and coverage. They are located as follows: North-West Zonal Office in Kano, Kano State; South-South Zonal Office in Calabar, Cross River State; South-West Zonal Office in Lagos, Lagos State; North-East Zonal Office, Gombe, Gombe State; North-Central Zonal Office, in Ilorin, Kwara State; and South-East Zonal Office in Awka, Anambra State.

Staff of PENCOM

The Commission’s staff are professionals in diverse disciplines, including but not limited to administration, economics, investment managers, accountants, risk managers, lawyers, who are expedient and necessary for the proper and efficient performance of the functions of the Commission. The terms and conditions of staff are determined by the Commission from time to time, taking into consideration the fact that they are regulators in an industry within the financial sector, whose staff salaries and conditions of service are very competitive, in order to attract and retain experienced and competent staff and should therefore be above the industry’s benchmark.

Roles Played by PENCOM as Regulator

The Commission as a regulator of the pension industry plays several roles. We will look at the Commission’s supervisory, compliance and risk management roles.

Supervisory role

Pension supervision involves the oversight of pension institutions, in this case, Pension Fund Administrators (PFAs), Closed Pension Fund Administrators (CPFAs), and Pension Fund Custodians (PFCs); enforcement of and promotion of adherence to compliance with regulations relating to the structure and operation of the Contributory Pension Scheme (CPS), which is the Scheme established under the Act. This is with the goal of promoting a well-functioning pension industry. To achieve this, the Commission interfaces with pension operators, financial institutions, employers and employees/beneficiaries of the Scheme.

The main objective of the Commission’s supervisory role is to promote safety, stability, security and good governance of the CPS and to protect the interest of the Scheme’s members and beneficiaries.

Compliance role

Compliance ensures that operators, employers and employees conform to the law, guidelines, rules and regulations issued for the effective administration of the CPS. The Commission employs various supervisory approaches to ensure compliance and enforcement. They include: consultative, preventive, protective and punitive approaches.

Consultative approach

The Commission holds monthly consultative forum with licensed pension operators, PFAs and PFCs; it has regular consultations with the Pension Operators Association (PenOp), which is the umbrella body of pension operators; the Commission exposes draft guidelines to operators for input before finalising them, these guidelines are periodically reviewed; and holds consultations with the Nigeria Labour Congress (NLC) and the Trade Union Congress of Nigeria (TUC), the two Labour centres in the country.

Operator preventive approach

The Commission conducts pre-licensing inspection and issues license to only organisations that have met the requirements for operation in the industry as sections 54 and 58 provides that only organisations licensed by the Commission can operate as PFAs and PFCs respectively; the Commission conducts a fit and proper checks on persons who are to be Board members or hold top management positions in pension organisations; conduct on-site and off-site supervision; and issues guidelines.

Operators’ protective approach

In playing this role, the Commission had to remove the Boards and Management of two PFAs and disqualified a number of individuals who failed the fit and proper person test from holding Board and Management positions in pension organisations.

Operators’ punitive approach

In order to ensure compliance, there are regimes of sanctions for non-compliance. They range from letters of advice, warnings, fines and revocation of licence.

Risk management

PENCOM’s principal aim is to prevent problems from developing and where possible, provide support and advice to PFAs where potential problems are identified. It also has at its disposal a number of powers or regulatory tools that may be used in circumstances where serious internal control failings occur.

The Commission gathers information about the pension industry in many different ways, such as regulatory surveys of corporate governance behaviours of PFAs and review of risk management and internal controls of PFAs.

Interface with other regulators

The pension industry has value chain with other sub-sectors within the financial sector of the economy. Therefore, the Commission interfaces with other regulators within the sector. They include the Central Bank of Nigeria (CBN); Pension Fund Custodians who warehouse pension funds as well as major banks in the country.

Therefore the Commission consults with the CBN on regulations and other issues that concern the PFCs. Other regulators are the Securities and Exchange Commission, which regulates the capital market; and the Nigerian Insurance Commission (NICOM), which regulates insurance companies.

One of the methods of paying retirement benefits is through annuity. Section 7(1)(c) permits a retiree to purchase annuity for life from a life insurance company licensed by NAICOM with monthly or quarterly payments in line with guidelines jointly issued by the Commission and NAICOM. Moreover, section 4(5) of the Act makes it mandatory for employers to maintain a group life insurance policy in favour of each employee. The policy is purchased from life insurance companies.

Conclusion

PENCOM has so effectively played its regulatory role of supervision; ensuring compliance; and risk management, to the extent of  successfully building a 10.80 trillion naira industry from scratch, with the industry impacting positively on other sectors of the economy; bringing transparency into pension administration; and protecting the rights of contributors and beneficiaries.

For comments and reactions, readers can reach the author via: Email: takorivor@gmail.com; WhatsApp: 2348037861900

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