REGULATION OF KEY PLAYERS IN THE NIGERIAN PENSION INDUSTRY: AN APPRAISAL OF SECTION 77 OF THE PENSION REFORM ACT 2014

REGULATION OF KEY PLAYERS IN THE NIGERIAN PENSION INDUSTRY: AN APPRAISAL OF SECTION 77 OF THE PENSION REFORM ACT 2014

Introduction

The Nigerian pension industry stands as a critical pillar in the nation\’s socio-economic landscape to ensure the financial security of millions of retired citizens. A key feature of the Nigerian Contributory Pension Scheme (“CPS”) that has aroused commendation is the bifurcation of the management and custody of pension funds between licensed Pension Funds Administrators (“PFAs”) and Pension Fund Custodians (“PFCs”), respectively. The responsibilities and powers of these key players have been clearly spelt out under the Pension Reform Act 2014 (“PRA 2014” or the “Act”), in a bid to foster transparency and accountability within the system. Within this same legislative framework, section 77 emerges as a cornerstone, establishing crucial boundaries for both PFAs and PFCs. Nevertheless, as with any regulatory construct, the efficacy and adaptability of this provision comes under scrutiny.

In this article, we shall appraise the provisions of Section 77 of the PRA 2014 and explore the implications they hold for key players within the Nigerian pension industry. This article also highlights potential areas of refinement and advocates for a balanced approach that fosters industry growth while upholding the goal of preserving pension funds and assets.

A. Section 77(1) – Prevention of PFAs from holding Pension Assets

Section 77(1) explicitly bars PFAs from holding any pension fund or asset. This serves as a fundamental safeguard to restrict PFAs from directly controlling or keeping pension funds, thereby reducing the risk of misappropriation or misuse. This is also premised on the provisions of the PRA 2014 that explicitly assign to licensed PFCs, the exclusive role of holding pension assets, while the PFAs carry out investment and managerial functions.[1]

[1] See sections 55 and 57 of the Act

B. Section 77(2) – Conflict of Interest

Section 77(2) further prohibits a PFA from keeping pension funds or assets in the custody of a PFC with whom it maintains any form of business interest or relationship. This assists in fostering transparency and reducing conflicts of interest within the pension system. Moreso, it promotes independence and impartiality in the custodial functions of PFCs thereby shielding pension funds from misappropriation and undue interference. Although the rationale for this prohibition is understandable, the absence of an exception may stifle collaboration and innovation within the pension ecosystem. There should be exceptions created to relax this prohibition, especially in cases where genuine collaborative arrangements necessitate pension funds or assets to be held by a PFC with whom a PFA maintains a business interest or relationship. Such arrangements should be subject to the supervisory oversight powers of the Commission to authorize investment ventures where the funds are allocated. This could potentially enhance operational efficiency and improve investment outcomes within the pension industry.

On the other hand, the Act remains silent as to whether shareholders of a PFC can obtain a license to set up a PFA as a separate entity or vice-versa. In practice, however, there is often a perceived conflict of interest where shareholders of PFCs approach the Commission to grant a license to set up a PFA, despite having no intention to transact in violation of the section 77(2) of the Act. While the Commission has the power to exercise discretion in certain cases, in a bid to uphold the tenets of the Act, the refusal to grant a license for the operation of PFCs based on Section 77(2) appears that the section is misinterpreted, as the Act does not bar a shareholder of a PFA from owning an interest in another PFC.

C. Section 77(3) – Restriction of transactions with Employees

The third provision of Section 77 extends the regulatory purview to employees of PFAs. Where an employee of a PFA acts as a counterparty in a transaction with the PFA, there is a likelihood of compromise or conflict of interest. Thus, the Act precludes employees of PFAs from engaging in business transactions or trades with their employers as a counterparty or its subsidiaries in relation to pension funds or assets. This aids in curtailing the risk of insider dealings or favouritism by employees of PFAs in transactions or trade of pension funds with investors or third parties. It also reduces the risk of fraudulent activities or unethical behaviour and helps to guarantee that pension funds are impartially managed in the best interests of retirees.

D. Section 77(4) – Provisions preventing Misappropriation or Malfeasance

The final provision of Section 77(4) unequivocally prohibits the diversion or conversion of pension funds, assets, or any associated income by PFAs or PFCs. This clause additionally showcases regulatory efforts to safeguard pension funds against misappropriation or malfeasance. By explicitly prohibiting diversionary practices, the provision reinforces the fiduciary responsibility of key industry players and emphasizes the need to preserve the financial security of pension fund beneficiaries. However, the efficiency of this provision is highly dependent on the Commission’s oversight mechanisms and enforcement capabilities, as well as the availability of adequate regulatory infrastructure to detect and abate potential breaches.

Conclusion

There is no doubt that Section 77 of the Act wields control over the operations of PFCs and PFAs to the advantage of holders of Retirement Savings Accounts (RSA). However, over time, stakeholders have scrutinized the provision to ascertain its intended meaning and its implementation. While the measures prioritize beneficiaries, they should not be misused as an unfair tool of control, contrary to the intendment of the Act. Perhaps, a review of the provisions stating explicitly the extent of involvement of PFCs in PFAs and vice versa would provide the much needed clarity for all concerned stakeholders.

Please do not treat the foregoing as legal advice as it only represents the public commentary views of the authors. All enquiries on this should please be directed at the key contacts.

Get the full article

For further information on the foregoing (none of which is a legal advice) or related matters, please generally contact us at info@ao2law.com, or specifically contact the key contacts.  

Chinemeze Eze
Senior Associate
chinemeze.eze@ao2law.com 

Oghenekaro Isiorho
Associate
oghenekaro.isiorho@ao2law.com

Abdulbaqi Jafaar
Associate
abdulbaqi.jafaar@ao2law.com

Share