Fiduciary Role of PFAs under Contributory Pension Scheme

The Contributory Pension Scheme (CPS) is often described as fully-funded due to the individual Retirement Savings Accounts (RSAs) where monthly pension contributions are remitted. The individual RSAs opened with a Pension Fund Administrator (PFA) are pooled into a Fund and managed as investments in various allowable instruments.

Pension fund investments seek to ensure timely payment of benefits to employees upon retirement. Consequently, the overriding philosophy guiding investments is the maintenance of safety and fair returns.

The National Pension Commission (PenCom) has issued the Regulation on Investment of Pension Fund Assets (the Investment Regulation) to regulate all pension fund investments. While the PFA is responsible for taking investment decisions and ensuring safety and fair returns for the benefit of contributors, the Pension Fund Custodian (PFC) ensures safe custody of the assets.

Guided by the Investment Regulation, all investment decisions are taken by the PFA on trust, as a fiduciary duty on behalf of pension contributors. The pension funds are also segregated from the assets of a PFA, and all incomes earned are exclusively for the benefit of pension contributors.

Section 86 of the PRA 2014 has outlined the allowable investment outlets for pension fund investments. These include bonds, treasury bills and other securities issued by the Federal Government and State Government Bonds. Pension funds are allowed to be invested in bonds, debentures, redeemable shares and other debt instruments issued by corporate entities and listed on a Stock Exchange under the Investment and Securities Act and ordinary shares of public limited companies listed on a Stock Exchange, under the Investment and Securities Act. In addition, pension funds may also be invested in bank deposits and securities; real estate development investments; specialist investment funds and other financial instruments as enshrined in the Investment Regulation.

The PRA 2014, reinforced by the Investment Regulation, made provisions to guard against conflict of interest in the investment of pension funds. The diligent implementation of the PRA 2014 by PenCom has resulted in the continuous accumulation of pension fund assets to over N17.07 trillion as at 31 July 2023. The large quantum of pension assets clearly shows the huge burden on the PFAs as they conduct this onerous fiduciary responsibility on behalf of contributors.

The provisions of Section 69 (b) of PRA 2014 stipulate that the PFA and PFC shall take reasonable care that the management or custody of the pension funds is carried out in the best interest of the RSA holders. Therefore, all investments made by licensed PFAs in eligible securities and corporate entities are “ring-fenced” and belong to the RSA holders and other pension beneficiaries.

Furthermore, Section 6.1(iii) of the Investment Regulation dealing with conflict of interest stipulates that “The PFA or any of its agents are prohibited from investing Pension Fund Assets in the shares or any other securities, issued through public or private placement arrangements, by related party/person of any shareholder of the PFA”. Related persons/party as defined in Section 1.10 of the Investment Regulation “includes natural persons related by blood, adoption or marriage; legal entities one of which has control or significant influence over the other, or both of which are controlled by some other person or entity; a corporate entity where any of the aforementioned holds 5% or more beneficial interest; and any other relationship that can be reasonably construed as related persons or parties”.

In line with the foregoing, PenCom closely monitors the PFAs to ensure that all investments are in line with the Investment Regulation. The PFAs are required to submit a daily valuation report on pension fund investments through which PenCom ensures strict adherence to the Investment Regulation.