Finance experts and some stakeholders in the pension sector have observed that high inflation rate and declining value of the Naira has diminished the present capital base of Pension fund operators and therefore called for fresh recapitalisation and consolidation exercise in the pension sector.
Currently the minimum capital for Pension Fund Administrators (PFAs), stands at N5 billion.The pension sector witnessed its last recapitalisation exercise in April 2021 during which operating capital for PFAs was raised from N1 billion to the current N5 billion.
The financial experts' submission confirms the opinion expressed by one of the major players in the industry shortly after the 2021 exercise. The then Managing Director Sigma Pension, Mr Dave Uduanu, who is currently the Managing Director, Access Pensions, had told THISDAY in an exclusive interview that there would be more consolidation in the pension industry.
According to him, a close look at the industry portrays a picture of fragmentation with one company controlling 40 per cent of the market. This being the case, Uduanu insisted that there would be more consolidations among PFAs.
Aside fragmentation problem, Uduanu said with the entry of banks like GTB, FCMB and Access Bank among others into pension sector, it is expected that they would bring more capital into the sector and would spark off competition with the sector's number one player.
Industry experts said consolidation in any sector of the economy is often brought about by recapitalisation which will make operators who are unable to stand alone join together to be able to meet the minimum capital requirement.
As at the time the Access Pension boss was suggesting more consolidation in the industry, the recapitalisation exercise conducted by the regulator, the National Pension Commission(PenCom) had through consolidation in form of mergers and acquisition compressed the number of operating PFAs from the initial 26 to 20 firms.
At that time the inflation rate in the country was at 5.72 per cent while official exchange rate of Naira to dollar was N435.00
Currently inflation rate stands at double digit of 28.37 per cent as at October 2024 while Naira exchange rate today stands at N1,713.
Experts' view
Against this backdrop, finance experts have raised the question on whether the prevailing N5 billion minimum capital for PFAs is still adequate and reasonable.
The experts raised the question on whether the existing N5 billion capital will still be sufficient enough for the operators to expand their operations in the area of more branch network, technology, better service delivery to customers.
Already, PenCom had stipulated minimum requirement for branches to serve customers, saying for every 10,000 funded accounts a PFA has, it is required to set up a branch.
Apparently with the transfer window now in operation, PFAs which don't satisfy their contributors especially with regards to return on investment will definitely lose such customers.
The experts said though it has not been long recapitalisation and consolidation took place in the industry, the economic situation in the country has suggested the need for fresh recapitalisation in the industry .
At a forum organised by one of the PFAs in Lagos recently, the questions on the lips of every contributor was how the fund managers would increase their monthly pay given the inflation rate which has resulted in high cost of goods and services.
No explanation given to them by the firm managers on the need for them to increase their contributions if they need higher benefits pacified them as they insisted that the managers should look at ways of giving them more returns in form of higher monthly benefit.This made it obvious that there is the need for operators to have more money in order to expand their operations and make more returns to fund owners.
Pension industry Recapitalisation
Recapitalisation in the pension industry has remained a continuous exercise since the advent of Contributory Pension Scheme in the country.
PenCom had in earnest search for ways of improving the operations of the PFAs in order to serve contributors better in April, 2021 raised the capital base of PFAs for its second time since the inception of the CPS in 2004.
Before this second time, the commission had raised the operating capital of PFAs from N150 million to N1 billion in 2011. PenCom had 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, it increased the minimum capital saying there was need to improve the capacity of PFAs in terms of operational efficiency, effectiveness, as well as service delivery.
After this, 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 one billion Naira to Five billion Naira. In doing this, PenCom authorities said the increase was necessitated by the need to improve the capacity of PFAs in terms of operational efficiency and effectiveness, as well as service delivery.
The board also approved a 12-month transition period, effective 27 April 2021, within which PFAs were required to meet the new minimum capital requirement.
PenCom said the reforms in the Pension industry through recapitalisation was intended to improve the capacity of PFAs in terms of operational efficiency, effectiveness, as well as service delivery.
Finance experts said presently PFAs were aware that given the economic situation in the country the present N5 billion minimum capital has become grossly inadequate for operators to meet their operational expenses such as increased workers' salaries in the face of high inflation rate which has resulted in high cost of food and other consumer goods and high cost of transport due to fuel subsidy removal, acquire modern technology as well as meet other areas of capacity building among PFAs and operational efficiency.
Fresh Recapitalization
Speaking on this fresh call for recapitalisation in the pension sector, Actuarial scientist, chartered insurer and Chairman /CEO Anchor Actuarial Services Limited, Dr Pius Apere, said there were several main reasons why companies recapitalise either voluntarily or being forced by regulator to do so.
He highlighted these reasons as follow: "first if the company's stock price falls dramatically recapitalisation would be needed to prevent a further decline in the stock price of the company." Secondly, to reduce the financial burden, Apere said the excess of debt over equity can result in high interest payments for the company and eventually place a significant financial burden on it.
According to Apere, recapitalisation can be done to prevent a hostile takeover as it can be used as a strategy to prevent a hostile takeover by another company. The management of the target company may issue additional debt to make the company less attractive to potential acquirers.
He further said recapitalisation could serve as a company's reorganisation strategy during bankruptcy or threat of bankruptcy.
On the other hand, he said a regulator might consider a recapitalisation of an entire industry having reviewed the financial strength of the companies operating in the industry over period of time, he however said this decision was not easily taken on yearly basis.
Apere, acknowledging high inflation and high exchange rate problems in the country; however, he said the above two economic indicators mentioned were not the only factors considered in the recapitalisation of an industry.
He said the last recapitalisation in the pension industry took place in April 2021, "So, the timing of this new proposition may not be appropriate for the shareholders who would be called upon to inject additional funds into their companies, having completed similar exercise few years ago."
Efforts to elicit comments on this from core industry operators like the Chief Executive Officer Pension Operators Association of Nigeria (PenOp) the umbrella body of pension fund administrators, Mr Oguche Agudah yielded not much result as he declined comments saying he choose to be neutral on the issue.
Similarly pension expert and a lawyer who contributed in the drafting of PRA2004, Ivor Takor when contacted on this declined comment saying he was only interested in talking about pension administration and law, his area of specialisation rather than talking about economic matters in pension.
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Industry analysts said operators considering the short period between 2021 when the last exercise was conducted and the present time might not see the reason for the fresh call for recapitalisation .
They however said what the operators should be looking at is the present value of Naira and cost of operations rather than timing.
THISDAY notes that one peculiar thing about Nigerian Pension industry is that the larger chunk of the available business is in the hands of very few operators especially Stanbic IBTC Pension Managers and very few others. Also there are fragmentations in the sector.
Operating firms
Currently, there are18 licensed PFAs operating in the system and four Pension Fund Custodians. The PFAs are Access ARM Pensions Ltd, Crusader Sterling Pensions Limited, FCMB Pensions Limited, Fidelity Pension Managers Limited, Guaranty Trust Pension Managers Ltd, Leadway Pensure PFA Ltd, Nigerian University Pension Management Company(NUPENCO), NLPC Pension Fund Administrators Limited, Norrenberger Pensions Ltd, NPF Pension Managers Ltd, OAK Pensions Ltd, Pension Alliance Limited, Premium Pension Ltd,Radix Pension Managers Limited, Stannic IBTC Pension Managers Limited, Tangerine APTPensions Limited, TrustFund Pensions Ltd and Veritas Granville's Pensions Limited.
The pension fund custodians are First Pension custodian Nigeria Ltd,UBA Pension Custodian Limited,Zenith Pensions Custodian Limited. The closed pension fund administrators are Nestle Nigeria Trust CPFA Limited, Progress Trust CPFA Limited,Shell Nigeria Closed Pension Fund Administrators Limited, Total Energies CPFA Limited.
They play the role of undertaking the responsibility for keeping safe custody of pension assets on trust on behalf of contributors. The main functions of PFCs are to receive pension contributions on behalf of PFAs; settle transactions and undertake activities relating to the administration of pension fund investments on behalf of PFAs and to notify the PFA within 24 hours of the receipt of pension contributions from employers.
The value of the naira and high inflation rate, finance experts have called for upward review of minimum capital of Pension Fund Administrators for Operational Efficiencies, writes Ebere Nwoji.
