Pension scheme is not new in Nigeria, it had started since 1950s. But the enactment of the new act that the Pension Fund Reform Act of 2004 made it to wear a new looks. The new pension scheme in Nigeria is a contributory defined one that are managed by the pension fund Administrators with the pension fund custodians. Unlike other industries, Pension funds industry face different types of risk which called for an effective and efficient risk management process. Risk management being a process of planning, organizing, leading and controlling of activities and resources is to minimize the impacts of all risks. The paper takes a critical look into the different types of risks that are peculiar to pension funds industry. Before 2004, Pension scheme were left out in the financial reform in Nigeria. The failure of the Administrators to pay contributions after retirement had been a major set back that discourage contributors' employees, employers and government. With the Reform Act 2004, the risk has been mitigated by the Act, directing where Administrations should invest their assets.


The Pension Reform Act 2004, a compulsory contributory pension scheme has been established for all categories of workers in, federal Public service, Federal Capital Territory, and in private sector. The scheme is a marked departure from pay-as-you-go defined benefit scheme that existed in the public sector and improves the pension situation in both private and public sector by making full funding all schemes compulsory.

The Act provides for certain categories of existing schemes to apply to the National Pension Commission (Pencom) for continuation although they are still required to be managed in accordance with the Act. The new scheme is a defined contribution scheme in which monthly funded contributions are made by employee and employer. The funded contributions are held by a pension fund custodian (PFC) and managed and administered on the contributor's behalf by a pension fund Administrator (PFA) of the employee's choice.

Essentially, the major differences between the new scheme and previous pension arrangements include- under the contributory pension scheme (CPS),, employer and employees make funded contributions in to a Retirement Savings Account (RSA) for the exclusive benefit of the employee or his legal beneficiaries, while previous Defined Benefit scheme in the public sector were largely unfounded, or were they were funded in the private sector or in parastatals, the management of such funds were most times not handled professionally sometimes resulting in defaults in payments of retirement benefits especially in the public sector.

Ogunlade (2001:5) defined risk as the possibility of suffering some form of loss or damage. Risk refers to a set of unique consequences for a given decision which can be assigned probabilities. It can also describe as the probabilities that some unfavourable events will occur such that the financial position or cash flow of the business organisation is adversely affected. However, risk is a concept generally understood but hardly measure.

Risk management is concerned with the application of professional management principles to the identification, measurement and control of personal and/or corporate loss exposures. The scientific approach to dealing with pure risk by anticipating possible accidental losses and designing and implementing procedure that minimize the occurrence of loss or the financial impact of the losses that occur is also a risk management. The ability of individual managers in pension fund Administration to identify and managed the risk will determine the effectiveness and efficient operations of the funds.

Theoretical/Conceptual Framework

The issue of pension had received significant attention in many countries over the recent past decades. There are changes in the way pension assets are managed and benefits distributed to beneficiaries due to the difficulty attributed with the pension schemes existing in these countries. Many countries have opted for different form of contributory pension scheme, in which employees and their employers are expected to pay a certain percentage of the employees' monthly earnings to a Retirements Saving Account (RSA), from which they would be drawing their pension benefits after retirement (Ahmad, 2006).

Jane (2000:300) described pension as a method where by an individual pays into a pension scheme a proportion of his earnings during his working life. The contributions provide an income (pension) on retirement that is treated as earned income and is taxed at the investors' marginal rate of income tax.

Miles (1996: 100) analysed Pension Fund to represent savings for payment of employee retirement benefit. Pension Funds differ in the vesting period. An employee who leaves employment before the required vesting period losses all retirement benefits some plans are immediately vested some require a period of five or ten years before vesting occurs.

Pension scheme can be divided into two basic plans Defined contribution plans and Defined Benefits plans.

In a defined benefit plan, the retirement benefit is stipulated usually as a percentage of final average salary, but the contribution will vary according to percentage of the average compensation a participant receives during his or her three earning years under the plan.

In defined-contribution plan, a contribution rate is fixed, but the retirement benefit is variable and will depend on the performance of the investment selected. This plan is the one operating in the new pension scheme reform in Nigeria.

Anthory and David (1997:575), ascertained that the two types of the plans create very different investment problems for the plan sponsor. The defined-benefit plan creates a liability patterns that must be anticipated and funded. Sponsor of this type of plan tend to long-term investments so that the defined liability can be met with a high degree of certainty. The defined-contribution plan on the other hand, creates a liability only as large as investments happen to be worth at any point in time. With this kind of plan, it is not necessary to direct investments toward any particular investment. In fact, the investment decision is often left to the worker who benefits from decision and suffers from the consequences.

Nigerian Pension System

In Nigeria as reviewed by Ahmad (2006), the first public sector pension scheme was the pension ordinance of 1951, with retroactive effect from January 1, 1946. The law provided public servants with both pension and gratuity. Pension Decree 102 and 103 of 1979 were enacted, with retroactive effect from April 1974. These decrees remained the operative laws on public service and Military pension in Nigeria till June 2004.

The first private sector pension scheme in Nigeria was set up for the employees of the Nigerian Breweries in 1954; this was followed by United African Company (UAC) in 1957.

National Provident fund (NPF) was the first formal social protection Scheme in Nigeria established in 1961 for the non-pensionable private sector employees.

The Nigeria Social Insurance Trust Fund (NSITF) was established by Decree. No. 73 of 1993 to provide enhances social protection to private sector employees. The NSITF took over the assets of the NPF and commenced operations in July 1994.

Before the enactment of the pension Reform Act 2004, the three regulations in pension industry are: Securities and Exchange Commission (SEC), National Insurance Commission (NAICOM) and the Joint Tax Board (JTB).

The pension Reform Act 2004 is the most recent legislation of the federal Government at reforming the pension system in the country. It established a uniform pension system for both the public and private sectors. Similarly, for the first time in the history of the country, a single authority has been established to regulate all pension matters in the country.

The new pension Scheme is going to be contributory in nature. It requires that each employee covered by the scheme must open a Retirement Savings Account (RSA) in which his/her monthly pension contributions would be credited. Each employee will contribute 7.5% of his/her monthly emoluments (here defined as Basic Salary, Housing and Transport Allowance) and the employer will contribute an equivalent amount. Thus a minimum of 15% of the monthly emoluments would be credited into the RSA of the employee. The scheme shall be fully funded, meaning that, there will always be enough fund to match all pension liabilities, It will be managed by licenced pension Fund Administrators (PFAs) while the custody of the pension fund assets will be provided by licenced Pension Fund Custodians (PFCs). The National Pension Commission Shall provides strict and adequate supervision of the industry.

The National Pension Commission (Penicom)

The Pension Reform Act 2004, has established Penicom, to regulate, supervise and ensure the effective administration of Pension matters in Nigeria. The commission will achieve the above by ensuring that payment and remittance, of contributions are made and beneficiaries of retirement savings accounts are paid as at when due.

Pension Fund Administrators (PFAs)

PFAs are limited liability companies duly licensed by Pencom as special purpose vehicles to carry out pension business only. The PFAs open retirement savings account for employees, manage the person fund as the commission may from time to time prescribe, maintain books of accounts on all transactions relating to the pension fund under there management.

Pension Fund Custodians (PFCs)

PFCs are appointed by PFAs. They are responsible for the warehousing of the pension fund assets. The employer sends the contributions directly to the custodian, who notifies the PFA of the receipt of the contribution and the PFA subsequently credits the Retirement Savings Account of the employee. The custodian would execute transactions and undertake activities relating to the administration of pension fund investments upon instructions by the PFA.

Closed Pension Funds Administration (CPFAs)

In addition to the approval for continuation of the existing schemes, organizations who would like to manage their existing schemes shall apply to National Pension Commission for licence to operate as CFPA. The asset of the pension fund must be at last N500,000000. In case the assets of the scheme are less that N500,000000, such scheme should be managed by a PFA.


Emmett and Therese (2003:2) Opined that the notion of an indeterminate outcome is implicit in all definitions of risk; the outcome must be in question when risk is said to exist there must always be at least two possible outcomes. If we know certain that a loss will occur, there is no risk. Risk as a condition of the real world in which there is an exposure to adversity. More specifically, Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hopes for.

Luka (2006:35) defined risks as the uncertain future events that influence the achievement of a company objective. This could include strategic, operational, financial and compliance objectives. Some risks must be taken in pursuing opportunity, but a company should be protected against avoidable loses.

Types Of Risk

  1. Financial and Non-Financial:- In its broad context, the term risk includes all situations in which there is an exposure of adversity. In some cases this adversity involves financial loss, while in others it does not.
  2. Static and Dynamic Risk:- Dynamic risk are those resulting from changes in the economy. While static risk involves those loses that would occur even if there were no changes in economy.
  3. Fundamental and Particular Risk:- Fundamental risk involved losses that are impersonal in origin and consequences. They are group risks, caused for the part by economic, social, political phenomena; they were also known as systematic risk. While Particular risk involve losses that arise out of individual event and are felt by individual company rather than by the entire group of companies or industry, they are also known as unsystematic risk

Risk Management

Emmeth and Therese (2003:12) defined Risk management as a scientific approach to the problem of pure risk, which has as its objective the reduction or elimination of pure risk facing the firm or organization.

Management is the process of planning, organizing, leading and controlling the work of organizational members and of using all available organizational resources to reach stated organizational goals (James, Edward and Daniel 2002:7).

Enterprise is the undertaking of risk for reward. A thorough understanding of the risk accepted by a company in the pursuance of its objectives, together with the strategies employed to mitigate those risk, to thus essential for a proper appreciation of the company's affairs by the board and stakeholders.

Corporate governance can, to some extent, be viewed as a company's strategic response to the need to assume prudent risks, appropriately mitigated, in exchange for measurable rewards.

Luka (2006:35) wrote: Risk management can be defined as the identification and evaluation of actual and potential risk areas as they pertain to the company as a total entity, followed by a process of either termination, transfer, acceptance (tolerance) or mitigation of each risk. Risk management process entails the planning, arranging and controlling of activities and resources to minimize the impacts of all risks to levels that can be tolerated by shareholders and other stakeholders whom the board has identified as relevant to the business of the company.

Risk management process can be divided into a series of individual steps that must be accomplished in managing risks. The Six steps in Risk management process are: Determination of objectives, identification of risk, Evaluation of risk, consideration of alterative/selection, implementation of decision and Evaluation and review.

Risk Identification In Pension Management

The fundamental principle of risk management providing on underlying framework for managing risks suggests that risk management is an ongoing process, not a single event. The model above dictates that the process starts with risk identification as a prelude to risk control and finally provides financially for the consequences of risk.

A systematic approach to risk identification can be achieved by first considering what risks the organization faces on a micro- and macro front. Macro-Identification is the identification of major peril and their consequences, which may have a significant negative financial impact on the organization. While micro-identification is aiming to identify sub-risks within the major risk class such activity being pivotal to the risk control objectives.

The three basic pillars of risks management in pension management that all identifiable risks are anchored upon;

Luka (2006:37) identified business risk, investment risks and Clients/Membership risk in any financial institution. However, the risk identified in pension business includes, Liquidity, Political & Regulatory, Demographic/Funding, Business & Financial, Management and people's risk. Others are structural, marketing & Intermediation, Assets concentration and porfolio selection, interest rate and capital adequacy Business plan risks. Information, Technological and operational Risks are also included in the pension management risk.

Risk Mitigants And Its Management In Pension


The approach to managing risks in pension business is purely integrated risk management. This covers all activities, decisions and events, internal and external to the business, that impact on the operation of the organization. The process of risk management process in any risk management architecture starts with risk identification and is followed by risk evaluation, classification and treatment. The treatment consists of either or both risk financing and risk control. Risk treatment needs to be monitored and audited to ensure that the mitigating actions are implemented according to plan and the staff complies with the set standards and regulations.

Risk management process in the pension industry is an integrated approach. For instance in a typical Pension Fund Administrator, Six risk management groups are saddled with the responsibility of operating the risk management operations structure. These are

  1. Board of Directors
  2. Risk Management Committee
  3. Heads of Department/Business units
  4. Risk Management task team
  5. The Risk Manager
  6. Chief Compliance Officer

Their roles and responsibilities are basically to achieve risk management purpose of ensuring a balance between Risk, Reward and growth by designing risk management policy and philosophy, risk management strategies and architecture for smooth risk identification, evaluation/assessment, treatment, monitoring and audit.

Essentially, the risk control measures under the new pension system are avoidance and minimization strategies. Risk transfer measures include insurance, out sourcing, discounting and guarantees Risk retention measures are capital backing, self insurance and pooling. Since certain risks are inevitable and, for a young industry as pension industry, some risk may be pervading, therefore, thorough environmental appreciation, appropriate management strategies and control system are inevitable for successful risk management in pension business.

The pension Reform Act 2004 had stipulated some limitations on the PFAs in terms of investments and risk undertake by them. The section 75 and 76 of the Act set limitations on the categories of permissible investments with a view to reducing the investment risk associated with the decisions of PFAs and PFCs as follows:

PFAs shall not invest pension fund assets in the shares or any other securities issued by The PFAs or PFCs and a shareholder of the PFA or PFC.

PFAs shall not sell pension assets to itself, any shareholder, director or affiliate of the PFA; any employee of its shareholder, directors, affiliates or employees affiliates of any shareholder of a PFA: and PFC is holding assets on behalf of the PFA. PFAs are also not allowed to purchase any pension fund Assets PFAs are not allowed to apply pension assets under its management by way of loans and credits or as collateral for any loan taken by any person.

Section 66(2) of the Act provides for the establishment of a risk management committee at the board level, responsible for; determining the risk profile of the investment portfolios of the PFA;

Drawing up programmes of adjustment –in case of deviation; Determining the level of reserves to cover the risk of the investment portfolios; and

Advising the PFA in maintaining adequate internal control procedures.

Summary And Conclusion

The new contributory pension scheme is obviously a new dawn for pension fund management in Nigeria with obvious benefits for employer employees, Government and society as a whole.

Risk is the possibility of suffering some form of loss or damage. Risk management is concerned with the application of professional's management and control of corporate loss exposures.

The pension Reform Act 2004 recognized the various risks that can hinder the pension industry's operations. These call for various mitigants that the Act stipulated in the operation of the pension fund Administrators.

Finally, it is believed that if all the laid down rules and regulations for the investments of the pension fund Administration (PFAs)'s Assets are followed; they are going to be successful in their operations. The purpose of the pension scheme in Nigeria and its objectives will be achieved with the various mitigants against the identified risks.


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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.