Recapitalisation for PFAs and the Welfare of Nigerian Pensioners


By Dr. Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
Chairman/CEO Achor Actuarial Services Limited


PenCom’s directive on recapitalization for Pension Fund Administrators (PFAs) in Nigerian Pension Industry was aimed at increasing minimum regulatory capital from one Billion Naira to five Billion in order to improve the capacity of PFAs in terms of operational efficiency, effectiveness as well as service delivery. The recapitalization exercise became necessary when PenCom realized the urgent need for PFAs to increase their operational capacity including the fiduciary responsibilities to manage the increasing number of registered contributors and the sustained exponential growth in value of pension fund’s assets under management (AUM).

The PFAs were given a 12-month transition period, from 27 April 2021 to 27 April 2022, within which to meet the new regulatory minimum capital ((Shareholders’ Fund) requirement. The recapitalization exercise resulted in some mergers and acquisitions of PFAs thereby leading to reduction in the number of PFAs from 22 to 20 at the deadline.

The stakeholders in Nigerian Pension Industry have high expectations on the new recapitalisation framework to timely, efficiently and effectively transform the industry to achieve the main objective of the Contributory Pension Scheme (CPS), to ensure that every pensioner receives his/her retirement benefits as and when due. In addition, they expect to have adequate retirement income that would provide sustainable standard of living (not living in poverty) in retirement. This could be achieved by implementing the guaranteed minimum pension (GMP) as provided in section 84(1) of the Pension Reform Act (PRA) 2014 as amended.

This paper highlights how the recapitalisation would help PFAs in the pension industry to meet the Nigerian pensioners’ expectations.

Challenges of Meeting the Recapitalisation Deadline

It is highly commendable that the recapitalization exercise not only ended successfully within the specified 12-month transition period with deadline on 27th April 2022 without extension but also without litigations to truncate the process despite the efforts of some stakeholders to convince PenCom on the need to extend the deadline in order to save some of PFAs from possible demise. At the end of the exercise, the pension industry has well-capitalized PFAs after PenCom’s approval of some mergers and acquisitions

This great feat of successful recapitalisation exercise by the PFAs during this challenging period of global economic uncertainties and Govid-19 Pandemic would no doubt convince stakeholders of PenCom’s ability to drive policies and strategies to meet the stakeholders’ future expectations.

Efficient Service Delivery

The regulatory recapitalisation of N5 billion is expected to lead to stronger PFAs with improved capacity for more efficient service delivery. In other words, it is likely to create a level playing field in the pension sector where all PFAs would have the necessary funds to deploy adequate technology and embark on human capital development required to achieve efficiency service delivery, e.g. enhancing the transfer window.

Going forward, competition within the industry would mainly be based on efficient service delivery rather than capital. However, the operators will still have different levels of capital and size of assets under management (AUM) which will remain a key competitive tool despite the regulatory recapitalization requirement.

Welfare of RSA holders and Retirees

The greatest challenge facing retirees under the CPS after about 18 years of its introduction is not just to ensure that they receive their benefits as and when due but also their inability to have adequate retirement income to live decent life at old age which is not explicitly defined. Thus, there is an urgent need to bridge the existing gap between the exponential growth in AUM leading to huge dividend incomes being paid to shareholders of PFAs and the poor economic well-being of the generality of RSA holders and the inadequate retirement income for retirees under the CPS.

As the regulatory capital base (shareholders fund) and AUM have increased to N5 billion and N13 trillion as at April 2022 respectively, there is need to revisit the investment returns and expenses allocation structure between the PFAs and RSA holders in order to ensure that the retirees’ expectations are met. In other words, a much higher percentage of the return on investment in pension assets must be allocated to RSA holders to cushion the effect of their retirement benefits being eroded by inflation.

Long Term Investment Opportunities

There is no evidence suggesting that well-capitalised PFAs will invest the pension assets any more efficiently than those with lower capital. In fact, capital alone does not positively motivate the long-term decisions of PFAs on how to invest pension fund assets, given the dearth of investible assets in Nigeria. As the investment risk is borne by the contributors under the CPS, the greater capital requirements on the PFAs do not ensure better pensions in the future. This is because the PFAs would allocate pension fund assets with the objective of minimizing the risk of the shareholder’s capital, instead of optimizing the value of future pensions.

To buttress the above point, the pension industry has faced severe criticisms since the introduction of CPS for not delivering adequate and sustainable pension incomes at retirement for RSA holders because the pension operators have focused on short-term accumulation of pension assets rather than the longer-term goal of securing real returns and adequate retirement income.

On the other hand, the stakeholders expect that with the new increase in the minimum share capital requirement, the investment of funds generated by the PFAs which is determined by the Pension Fund Custodians (PFCs) as stipulated by the laws guiding pension fund investment, should explore other investment opportunities in the foreign investment markets, risky investments such as infrastructure, property, structured products etc. in order to provide real returns to contributors to reduce the effect of rising inflation. However, this is likely to expose the RSA holders to significant investment risks since investment decisions are taken by them.

Risk-Based Supervision (RBS) in CPS

The pension regulator (PenCom) needs to minimize pension risk i.e. the risk of RSA holders receiving pensions different from their expected/target pension e.g. GMP in order to meet pensioners’ expectations. This would require ensuring that investment risks are aligned with the probability of achieving the expected/target pension at retirement age, which could be related to specific replacement rate. Replacement rate can be defined as the percentage (e.g. less than 100%) of a RSA holder’s pre-retirement income that is paid out as retirement income upon retirement, a concept and purpose similar to GMP.

RBS for pension funds can be defined as an approach by which pension regulator directs its scarce resources towards the main risks posed to pension fund members (RSA holders), as opposed to rules or compliance-based supervision currently being adopted by PenCom. RBS is a more useful tool for defined benefit (DB) than Defined contribution (DC) pension funds. This is because solvency ratios (how assets currently held in the fund cover the liabilities) can be calculated for DB funds as there is a concrete promise (pension benefit) that can be quantified. This is not the case for DC funds as there is lack of relationship between capital and future pensions.

Thus, the justification for introducing RBS in CPS would be stronger where the pension regulator needs to take a proactive role in supervising investment risk, with the aim of mitigating pension risk having implemented GMP to reduce the risk of volatility in standard of living in retirement facing the pensioners.


The recapitalisation exercise would no doubt assist the PFAs and PenCom to meet Nigerian Pensioners expectations, particularly by providing adequate retirement income to enable them have sustainable standard of living in retirement.

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