The National Pension Commission (PENCOM) in a quest to recapitalize the pension industry in Nigeria, reviewed and increased the minimum share capital requirement for all Pension Fund Administrators (PFAs) doing business in Nigeria in April 2021. Subsequently, key stakeholders in the sector have been exploring a range of options to help them meet the recapitalization requirements.
In light of the foregoing, the players had explored some of the financing options, which include right issue, private investment by current and new investors, stock exchange, and mergers and acquisitions (M & A),[1] which, of course, have made it an attractive option for affected Pension Fund Administrators (PFA’s).
The concept of Recapitalization
Recapitalization is a form of corporate reorganization that involves making substantial changes to a company’s capital structure. It is one of the strategies employed by companies in improving their financial stability. A company may achieve this by adding more debt, more equity, or both to its capital. The decision to recapitalize may be taken by the company voluntarily, but sometimes a company undertakes compulsory recapitalization in compliance with a regulatory directive.
In the latter sense, recapitalization has proven to be a useful tool in the hands of the Nigerian government for sectoral reformation, to sustain adequate economic growth and development. To meet compulsory recapitalization requirements, companies have had to raise additional funds or go through mergers and acquisitions.[2]
Development of Pension Administration In Nigeria and Reforms.
Prior to the enactment of the Pension Reform Act 2004 (PRA), pension schemes in Nigeria had been plagued with a myriad of challenges. The public service operated an unfunded Defined Benefits Scheme and the payment of retirement benefits was budgeted annually.[3] In the light of resource constraints, the annual budgetary allocation for pensions was often one of the most vulnerable items in budget implementation. In many cases, even where budgetary provisions were made, inadequate and untimely release of funds resulted in delays and the accumulation of arrears of payment of pension rights. It was obvious, therefore, that the Defined Benefits Scheme could not be sustained.[4]
On the other hand, 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.[5]
The above scenario necessitated a re-evaluation of the pension administration in Nigeria during 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.[6] The outcome of such reforms was the enactment into law of the Pension Reform Act 2004.[7]
The PRA of 2004 then introduced the Contributory Pension Scheme (CPS, or the Scheme) regime in Nigeria. The CPS places the management of the pension fund in the care of private organisations called Pension Fund Administrators (PFAs).
Subsequently, the PRA 2014 introduced a tripartite system in a bid to minimize the possibility of misappropriation of pension funds by setting up three autonomous players to wit:
- The Regulator;
- The Administrator; and
- The Custodian.
The National Pension Commission (PenCom) is the body that regulates, supervises, and ensures the effective administration of pension matters in Nigeria. The Commission further mandates Employers and employees in both the private and public sectors to contribute jointly towards the employee’s retirement benefits which are managed by the PFA’s, who in turn invest in various investment portfolios based on the risk appetite of the fund category.
The investment buckets include fixed securities instruments, equities, money market instruments, etc. Pension custodians are institutions that play the role of undertaking the responsibility of keeping safe custody of pension assets on behalf of contributors. They receive pension contributions on behalf of PFAs, settle the transactions, and undertake activities relating to the administration of pension fund investments.[8]
Ever since, the Nigerian Pension industry has grown significantly, with pension contributions amounting to over 9.5 million, alongside a 14% pension penetration rate as of December 2021. The industry’s assets under management gained significantly as it stood at ₦13.42 trillion as at December 2021 compared to ₦12.30 trillion, and ₦13 trillion recorded in December 2020 and September 2021, respectively. This growth was mainly due to pension contributions received and market valuation of the Federal Government of Nigeria, FGN bonds and equities.
Following the significant growth recorded in the industry, PenCom launched the transfer window in November 2020, which allows pension contributors to switch their PFAs. As of 2021, 51,342 pension contributors have changed their pension administrator since the transfer window opened. The transfer window has now enhanced the level of competition in the industry, as it has forced PFAs to improve their services, user experience and returns.[9]
Brief History of Recapitalisation In the Pension Industry
The Nigerian Pension Industry has been faced with different challenges in its efforts to serve the needs of pensioners. As a result, the Nigerian Pension Commission (PENCOM), the body responsible for the regulation of the industry, has over time devised different means to achieve perfection.
The 27th of April, 2021 marked the second time the regulator was raising the capital base of PFAs since the inception of the CPS in 2004, as it raised the operating capital of PFAs from ₦150 million to ₦1 billion in 2011. PenCom argued that the PFAs oversight function had shown that the required minimum capital, was no longer adequate to meet the operational expenses of the PFA business. Based on this, the increase in the minimum regulatory capital lies in the need to improve the capacity of PFAs in terms of operational efficiency, effectiveness, as well as service delivery.[10]
Further to the above, the Board of the Commission, at its 48th Meeting on April 27, 2021, approved the increase of the Minimum Regulatory Capital (Shareholders’ Fund) requirement for PFAs, from the current One Billion Naira (N1,000,000,000) to Five Billion Naira (N5,000,000,000), unimpaired by losses. The increase in the minimum regulatory capital is necessitated by the need to improve the capacity of PFAs in terms of operational efficiency and effectiveness, as well as service delivery.[11]
The Board also approved a 12-month transition period, effective 27 April 2021, within which PFAs are to meet the new minimum capital requirement.[12]
It is worthy of note that the ongoing reforms in the Pension industry through the process of recapitalization are intended to improve the capacity of PFAs in terms of operational efficiency, effectiveness, as well as service delivery.
In 2021, PENCOM released a new circular titled “Revised Minimum Share Capital Requirement for Licensed Pension Funds Administrators” (the Circular). By the provisions of this circular, all licensed PFAs are required to increase their minimum share capital from One (1) Billion Naira to Five (5) Billion Naira.[13]
Furthermore, the circular comes into effect immediately and existing PFAs companies are required to fully comply with the New Minimum Share Capital Requirement by no later than April 27, 2022.
Impact of the Circular on the Sector
Despite the slow-paced performance of the sector so far, we regard the introduction of the new minimum capital requirement as a welcome development, and expect it to help or improve the capacity of PFAs in terms of operational efficiency and effectiveness, as well as service delivery to shape the future and development of the Pension industry.
Consequently, the banking industry and asset managers have begun acquiring PFAs to deepen and further integrate the financial services of the sector. However, seeing banks adopting this whole structure and acquiring pension businesses as well as asset management companies, we look towards the end of the deadline (27th April, 2022), to see more acquisitions from the banking or insurance industry.[14]
On acquisition, the PenCom had already granted “no objection” approval to Guaranty Trust Holding Company, to acquire 100 per cent of the shareholding of Investment One Pension Managers Limited. It has also granted “no objection” approval to FCMB Pensions Limited for the next phase of acquiring a 60 per cent shareholding of AIICO Pension Managers Limited, while AXA Mansard Pensions has also been bought over by the Verod Capital Alliance, and has been renamed Tangerine Pensions Limited.[15]
CONCLUSION
It is expected that not all pension companies will be able to meet the April 27, 2022 deadline as mandated by PENCOM, and this will invariably lead to the mergers and/or acquisitions of pension companies for compliance purposes.