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 NationalPension Commission, PENCOM, will boost investments in the non-interest financemarket, deepen financial inclusion and stimulate voluntarycontribution 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 Financeand the Nigerian Pension Industry."

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

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

The challenges necessitatedthe reform of the Nigerian pension sector, and this brought about the ReformAct 2004, which was copied from the Republic of Chile, and this led to theestablishment of a uniform contributory private sector managed and fully fundedpension system for both public and private sector in the country.

He said the pension reformact of 2014 as amended provides that pension funds should be managed andinvested by registered fund pension administrators. The registered pension fundcustodians should warehouse the money under the regulator, the Nigerian PensionCommission (Pencom) supervision.

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

He added that the systemprovides both the employees and employers in public and private sector theopportunity 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 PRAprovides that pension funds should be invested through some instruments ofinvestment, registered and recognized by the Act, including bonds, treasurybills, the benchers, shares and other debt instruments issued by registeredcorporate entities.

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

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

Speaking further on the benefit of the multi-fundstructure, 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 thenew development in the industry, which is Fund VI.

Explaining the multi-funds structure from I-VI, hesaid Fund I is for the contributors that are below 50 years old. If they do notwant to be in default, they can be in fund II; fund III is the default forcontributors that are 50 years. Above those still in the active services, fundIV is reserved for retirees, fund V is for the micro pension plans, and fund VIis for the ethical non-interest fund.

On how the non-interest fundVI will contribute to deepening penetrationin the pension industry, Dr. Abubakar said in 2019 that the National PensionCommission 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 thecommission as they checkmate all transactions.

Dr. Abubakar, in his conclusion on the opportunitiesthe 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, whoall have comprehensive legal frameworks for non-interest finance in thecountry.

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