The Director General of the National Pension Commission (PenCom), Mr. Muhammad Kabir Ahmad is a leader who rarely grants interviews but would rather allow the performances of the agency to speak on their efforts in ensuring prompt payments of retirement benefits and to promote a sustainable pension industry that would positively impact on the economic development of Nigeria. In this interview granted to the Economic Confidential magazine, Ahmad talks on the recent development in the sector. Excerpts:
Can you briefly tell us the reason behind the establishment of Pencom?
I thank you for starting with that question. Prior to the enactment of the Pension Reform Act 2004, pension schemes in Nigeria had been bedevilled by many problems. The Public Service operated an unfunded Defined Benefits Scheme and the payment of retirement benefits were budgeted annually. The annual budgetary allocation for pension was often one of the most vulnerable items in budget implementation in the light of resource constraints. In many cases, even where budgetary provisions were made, inadequate and untimely release of funds resulted in delays and accumulation of arrears of payment of pension rights. It was obvious therefore that the Defined Benefits Scheme could not be sustained.
What was the situation in the private sector?
You should know that in the private sector, many employees were not covered by the pension schemes put in place by their employers and many of these schemes were not funded. Besides, where the schemes were funded, the management of the pension funds was full of malpractices between the fund managers and the Trustees of the pension funds.
Were these the major scenarios that propelled the establishment of the commission?
Yes to some extent. In fact the scenario necessitated a re-think of pension administration in Nigeria by the administration of President Olusegun Obasanjo. Accordingly, the administration initiated a pension reform in order to address and eliminate the problems associated with pension schemes in the country. The outcome of the reform was the enactment into law of the Pension Reform Act 2004.
What are the major objectives of PENCOM?
The main objectives and features of the Pension Reform Act 2004 are to ensure that every person who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as and when due and to assist individuals by ensuring that they save to cater for their livelihood during old age and thereby reducing old age poverty. The Commission is also to ensure that pensioners are not subjected to untold suffering due to inefficient and cumbersome process of pension payment. For those reasons we are to establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the Public Service of the Federation, Federal Capital Territory and the Private Sector. Lastly the Commission is to stem the growth of outstanding pension liabilities.
The current development from your commission is on the new capital requirement for PFAs. What is the requirement?
The PenCom raises the capital requirement for Pension Fund Administrators (PFAs) from 150 Million Naira to one Billion Naira shareholders fund unimpaired by losses.
Why do you raise the requirement?
The Commission, through its oversight function observed that the minimum paid up share capital of N150 million was no longer adequate to meet the operational expenses of Pension Fund Administrator’s business given its intense IT nature and long gestation period. The increase in the capital requirement would also encourage healthy mergers or acquisitions and promote stability in the industry. It is expected that the improved financial conditions of the PFAs after the implementation of the reviewed capital requirement would lead to improved service delivery and product development, improved capacity building and employment of qualified personnel and development of adequate IT infrastructure for improved business process.
How soon wills the requirement comes to effect?
The new minimum share capital requirement will become effective from 30 June 2012 and be monitored squarely by the commission on an annual basis at the financial year end of each PFA and any shortfall shall be made-up within ninety days.
We are also aware that you have issue new requirement in respect of appointment to board. What is that about?
We should know that the significant growth in the size of pension assets and the changing dynamics of pension business has necessitated the need for the Commission to issue another circular in respect of appointment to Board and Top Management Positions as well as new requirements for PFAs with funds under management of N100 billion and above. In addition, the control of a significant portion of Nigerian Pension business by a few Pension Fund Administrators has made it necessary to strengthen their operations.
What is the reason for the circular?
The circular is intended to intimate PFAs about the Commission’s decision on the new requirements for PFAs that have funds under management of N100 billion & above and appointment to Board and Top Management positions of all PFAs.
Can you give us idea about the new requirements?
For instance requirements for PFAs with Funds Under Management of N100 billion and above, such an organization should create at least eleven departments including that on Contributions/Collections, Investment, Benefit Administration, Business Development/Relationship Management, Finance, Information Technology, Compliance, Risk Management, Internal Audit, Administration/Human Resources and Legal/Company Secretary with various respective responsibilities. There should be the office of the Managing Director and 2 Executive Directors (EDs) with the latter overseeing Departments and not Units. Additionally, the MD/CEO should have only the following Departments reporting to him directly Legal/Company Secretary, Internal Audit and Compliance. All core operational Departments should report to the MD through Executive Directors. The core operational Departments for this purpose are the ones I mentioned. Where a PFA has RSA Funds size of N100 billion and above, it must have two separate Investment Departments one each for the RSA Fund and other funds and the appointment of a Chartered Financial Analyst to head each of the Investment Departments.
Have you stipulated the requirement for appointment into top management positions for PFA?
Yes we did. For position of Managing Director the candidate have 20 years post qualification experience or 15 years financial sector experience of having 10 years of top management position. The Executive Director’s requirement is two years less of that of MD. The new requirements would however not affect the existing approved Board and Top management staff of affected PFAs.
Are you providing guidelines for opening branches?
Where a PFA has 10,000 or more RSAs in a State, the PFA must open a branch in that State which must meet some requirements specified in the Commission’s Circular for Branch Opening as well as have a Benefit Administration function. They include Service requirements; Human Resource Requirements; and ICT Requirements.
Let’s go to the issue of pension asset. How are they being invested?
About 8 per cent of pension assets have been invested in real estate which are indeed legacy assets. They were assets that had been invested before at the pension reform took off. The assets can only be invested in intermediary assets; in order words we cannot invest directly on housing development or any other commercial real estate development. We restrict ourselves to real estate investment trust or mortgage bank securities because we believe that the market is not fully developed. If the Federal Government implements the recommendations of the World Bank document for financial system strategy 2020 fully it would help the Pencom to invest sensible aspects of pension assets. You should know that the fixed income market is quite challenging, especially the corporate governance and corporate bonds. As at today, only 3 per cent of the pension assets are invested in corporate bonds. You may know that the commission has 35 per cent allocation for corporate bonds; only 3 per cent had been taken up by pensioners.
In conclusion, what should the public expect from your commission?
Our mission is to be an effective regulator as well as supervisor that ensures the safety of pension assets and fair return on investment utilizing appropriate technology, with highly skilled and motivated staff. We are striving towards ensuring just that for the benefit of pensioners and economic development in Nigeria.