PenCom’s New $20 Billion Capital Rule May Undermine PFA Growth, Warns Renaissance Capital
The National Pension Commission (PenCom) has issued a new circular mandating significantly higher minimum capital requirements for Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs). While PenCom justifies the reform as necessary for enhanced financial stability and operational efficiency, a report by Renaissance Capital Africa cautions that the new rules could lead to over-capitalisation and actively discourage growth among top-performing PFAs.
The New Capital Requirements (Effective Dec. 31, 2026)
The reforms introduce a tiered capital structure, a major change from the previous N5 billion minimum set in 2021:
Existing operators have until December 31, 2026, to comply with the revised thresholds.
Why the Recapitalisation is Justified (PenCom’s View)
Renaissance Capital acknowledges the rationale behind strengthening capital buffers, noting that the pension industry has undergone significant growth and increased risk exposure since the last review:
AUM Growth: Total Assets Under Management (AUM) has grown at a 16% Compound Annual Growth Rate (CAGR) since 2021, boosted by strong returns and the devaluation of the Naira, which revalued foreign assets.
Increased Risk Exposure: Recent regulatory changes now allow PFAs to invest in higher-risk assets like securities lending, repos, infrastructure, and private equity. These new asset classes require stronger capital reserves to mitigate greater operational and counterparty risks.
The Flaw: Misaligned Incentives for Large PFAs
The core concern raised by Renaissance Capital lies in the variable capital requirement for PFAs with AUM above N500 billion:
Disincentive to Grow: The variable rule effectively forces PFAs to commit a significant portion of their revenue (which is typically a 1% fee on AUM) into non-earning capital buffers for every billion in excess AUM.
Over-Capitalisation: PFAs primarily bear operational risk (risk of error or fraud), not market risk (risk of investment loss, which is borne by the contributors). The new rule is deemed misaligned with this low-risk operational model.
Profit Retention: The exclusion of statutory reserves from qualifying capital further exacerbates the issue, potentially leading to indefinite profit retention, making the business less attractive to shareholders and investors.
Renaissance Capital recommends a shift back to a fixed capital requirement model, arguing the current “tiering of PFAs… ultimately serves as a disincentive and skews the market.”
Expected Outcome: A New Consolidation Wave
The report projects that the new thresholds will force a fresh wave of industry consolidation, similar to the one that followed the 2021 review:
Funding Shortfall: PFAs will need to raise an estimated N275.7 billion collectively, with larger players bearing the brunt of the shortfall.
M&A Activity: Smaller PFAs, unable to meet the new capital base, are likely targets for mergers and acquisitions. This process has already reduced the number of PFAs from 22 to 17 and is expected to further reshape the industry’s “Big Five” structure.
PFCs: Custodians (PFCs) face an estimated N28.9 billion shortfall, but their strong affiliation with large banking groups (like First, Zenith, and UBA) is expected to ease their compliance.
Dividend Impact: Both PFAs and PFCs are likely to prioritize profit retention over dividend payouts in the short term to bridge the capital gaps.
Join Our Social Media Channels:
WhatsApp: NaijaEyes
Facebook: NaijaEyes
Twitter: NaijaEyes
Instagram: NaijaEyes
TikTok: NaijaEyes
