How PENCOM Multi-Fund Structure VI will Boost Investments in Non-Interest Finance

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Friday, November 05, 2021 / 11:20 AM / By Bukola Akinyele-Yisau for WebTV / Header Image Credit: WebTV


The multi-fund structure VI recently issued by the National Pension Commission, PENCOM, will boost investments in the non-interest finance market, deepen financial inclusion and stimulate voluntary contribution by a retirement savings account, RSA holders.


Dr. Adam Abubakar, Lead Consultant on Islamic Finance, ANUTI Ethical Consulting Limited, said this in a discussion on "Islamic Finance and the Nigerian Pension Industry."


The Islamic finance expert believed other opportunities for the non-interest fund VI providers are rapid development in the country, stimulation of state contributory pension schemes, particularly in the northern parts and more employment opportunities in the Islamic finance sector. 


Giving an overview of the pension system in Nigeria from 2004, Dr. Abubakar explained that the industry reflected unsustainable pension liabilities, lack of adequate and timely budgetary provision, an increased number of employees, amongst others.


The challenges necessitated the reform of the Nigerian pension sector, and this brought about the Reform Act 2004, which was copied from the Republic of Chile, and this led to the establishment of a uniform contributory private sector managed and fully funded pension system for both public and private sector in the country.


He said the pension reform act of 2014 as amended provides that pension funds should be managed and invested by registered fund pension administrators. The registered pension fund custodians should warehouse the money under the regulator, the Nigerian Pension Commission (Pencom) supervision.


The system has three tiers: The regulator (Pencom), The administrators (PFAs), about 22 registered under Pencom, and the Custodian (PFC), who warehouse the fund. 


He added that the system provides both the employees and employers in public and private sector the opportunity to contribute a minimum of 8 and 10%, respectively, i.e.  8% by the employee and 10% by the employer from their basic salary. Also, the PRA provides that pension funds should be invested through some instruments of investment, registered and recognized by the Act, including bonds, treasury bills, the benchers, shares and other debt instruments issued by registered corporate entities.


According to him, all these systems established the contributory scheme, and it ensured the migration from the then "Defined Benefit" to the current "Defined Contribution". Currently, there are 22 Pension Funds Administrators (PFA), over 5 registered fund custodians with a total asset value of more than N11trn.


Speaking on the management of pension funds in the last two decades of the reforms, he said the regulator Pencom since 2004,  has done remarkable work of transforming the pension industry. One of the significant achievements recorded by Pencom is to ensure the actual transition and migration from DB to the current DC. Also, the regulator has tried to establish a robust legal and regulatory framework for the industry; in 2018, the commission also introduced the multi-fund structure and has many benefits introducing the ethical fund VI non-interest fund, also released the guideline management for all the regulation fund VI, micro pension system. 


Speaking further on the benefit of the multi-fund structure, Dr. Adam highlighted the following;

  • It enhances the safety of pension assets through adequate portfolio diversification
  • It allows RSA holders to have more control over how their pension funds are invested based on the risk tolerance
  • It gives room to accommodate demand by the RSA holders for the opportunity to invest their retirement savings in the non-interest ethical instrument. 

According to him, the multi-fund structure enabled the new development in the industry, which is Fund VI.

Explaining the multi-funds structure from I-VI, he said Fund I is for the contributors that are below 50 years old. If they do not want to be in default, they can be in fund II; fund III is the default for contributors that are 50 years. Above those still in the active services, fund IV is reserved for retirees, fund V is for the micro pension plans, and fund VI is for the ethical non-interest fund.


On how the non-interest fund VI will contribute to deepening penetration in the pension industry, Dr. Abubakar said in 2019 that the National Pension Commission issued a regulation on investment on pension fund assets. In June, the operational guidelines for the non-interest framework were issued.  According to him, the issue of fraud to the RSA holders is under control by the commission as they checkmate all transactions.


Dr. Abubakar, in his conclusion on the opportunities the introduction of the non-Interest finance fund will have on the economy, said Nigeria has one of the most robust legal frameworks in Islamic finance, such as the provisions from regulators like CBN, SEC, NAICOM and PENCOM, who all have comprehensive legal frameworks for non-interest finance in the country.


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