The Contributory Pension Scheme (CPS or "the Scheme") regime in Nigeria was established by the Pension Reform Act (PRA) 2004 amended in 2014. The CPS puts the management of the pension fund in the hands of private organisations called Pension Fund Administrators (PFAs). The PRA 2014 introduced a tripartite system in a bid to minimize the possibility of misappropriation of pension funds by setting up three autonomous players; the Regulator, the Administrator, and the Custodian. The National Pension Commission (PenCom) is the body that regulates, supervises, and ensures the effective administration of pension matters in Nigeria. Employers and employees in both the private and public sectors are mandated to contribute towards employee retirement benefits which are managed by the PFAs, who invest in various investment portfolios based on the risk appetite of the fund category. The investment buckets include fixed securities instruments, equities, money market instruments, etc. The Pension custodians are institutions that play the role of undertaking the responsibility of keeping safe custody of pension assets on behalf of contributors. They receive pension contributions on behalf of PFAs, settle transactions, and undertake activities relating to the administration of pension fund investments.

The Nigerian Pension industry has grown significantly with pension contributors now over 9.5 million with a 14% pension penetration rate as at December 2021. The industry's asset under management gained significantly as it stood at ₦13.42 trillion as at December 2021 compared to ₦12.30 trillion and ₦13 trillion recorded in December 2020 and September 2021 respectively. This growth was mainly due to pension contributions received and market valuation of the Federal Government of Nigeria, FGN bonds, and equities. Following the significant growth recorded in the industry, PenCom launched the transfer window in November 2020, which allows pension contributors to switch their PFAs. As of 2021, 51,342 pension contributors have changed their pension administrator since the transfer window opened.1 The transfer window has now enhanced the level of competition in the industry as it has forced PFAs to improve on their services, user experience, and returns.

PenCom has directed all PFAs to increase their minimum capital base from ₦1 billion to ₦5 billion to adequately meet their operational needs, therefore, this article focuses on leveraging the Mergers and Acquisitions (M&A) option for capital expansion as it will not only help PFAs restructure their business operations but will also make the industry more competitive resulting in outputs that will foster economic development.

Need to Increase Capital Base in the Country

In April 2021, PenCom mandated all PFAs to raise their Minimum Regulatory Capital (shareholders' fund) requirements from ₦1 billion to ₦5 billion, with 12 months to complete the exercise. This is the second time the regulator is raising the capital base of PFAs since the inception of the CPS in 2004 as it raised the operating capital of PFAs from ₦150million to ₦1billion in 2011. PenCom 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, the increase in the minimum regulatory capital lies in the need to improve the capacity of PFAs in terms of operational efficiency, effectiveness, as well as service delivery. The growth expected after the recapitalization exercise of PFAs will result from the improved financial condition of the operators which will thereby facilitate the provision of adequate resources leading to improved services and product development, as well as improved capacity building. The increase in shareholder funds would also allow for employment, training, and retainment of qualified and skilled staff. With the new capital, PFAs would be able to invest in adequate IT infrastructure allowing for improved business processes and the creation of sufficient business outlets for increased presence nationwide. Furthermore, the improved cash flow will allow for the development of efficient research units for optimum investment decisions, as well as improved data management and record-keeping. PenCom said it would monitor the exercise and approve any option a PFA chooses to meet up with the new requirements. Options to be explored by the PFAs include right issue, private investment by current and new investors, mergers and acquisitions (M&A), stock exchange; etc. PenCom has given approval for M&A which will reduce the number of operating PFAs in the country. As at the time the recapitalization announcement was made, there were 22 licensed PFAs in Nigeria.

Mergers and Acquisitions as a Recapitalization Option

Mergers and acquisitions refer to the consolidation of companies or assets through different types of financial transactions to stimulate growth, gain competitive advantage, increase market share, or influence supply chains. The ideology behind M&A is that two separate companies together create more value compared to being on an individual stand. Even though the terms "mergers" and "acquisitions" are often used interchangeably, they do have slightly different meanings. While a merger happens when two companies combine to form one company, acquisition happens when one company is taken over by another company.

The major benefit of M&A is the synergies inherent after the successful completion of the process i.e., the added advantage that will be enjoyed by a company that would not have been enjoyed if they operated independently. Another benefit offered by M&A relates to the wider range of services or products which can be explored. By joining forces, the portfolio of the new business can increase and there is an opportunity for economies of scope which is not always possible through organic growth based on the constraints that would make internal development difficult. By having more revenue streams, it follows that a company can spread risk across those revenue streams, rather than having it focus on just one line of business. Furthermore, companies that engage in M&A can benefit from economies of scale through increased access to capital, lower costs as a result of higher volume, better bargaining powers with suppliers, etc. As a company becomes larger, it can harness economies of scale to compete effectively in the market. M&A can also help a company eliminate competition through acquisition or merger with a competitor. Finally, M&A may be completed to expand a company's reach or gain market share in an attempt to create shareholder value.

Recent Mergers and Acquisitions in the Pension Industry

The PFAs are expected to engage their various advisers on the optimal strategies to be implemented to raise additional capital. Based on this, Nigeria's pension industry has witnessed and will further witness varying consolidations as the sector is expected to see more M&As in the ongoing recapitalization. In March 2022, PenCom had authorized the acquisition of Investment One Pension Managers Limited by Guaranty Trust Holding Company Limited and the subsequent change of name from Investment One Pension Managers Limited to Guaranty Trust Pension Managers Limited; the acquisition of AIICO Pension Managers Limited by FCMB Pensions Limited; and the merger between Tangerine Pensions Limited and APT Pension Funds Manager Limited and subsequent change of name of the merged entity to Tangerine APT Pensions Limited.2

Impact of Mergers and Acquisitions in the Pension Industry

The increase in the minimum capital requirement of PFAs would encourage healthy mergers or acquisitions and promote stability in the nation's pension industry. Based on the present economic situation in the country, M&A might be the most optimal option to be considered in ensuring business retention. PFAs that cannot raise funds independently may have to consider merging with other similar PFAs while PFAs with excess cash may consider acquiring smaller ones for expansion purposes. PFAs can harness the synergy benefits associated with M&A to effectively carry out operations and further improve their service quality. The M&A exercise will help PFAs re-strategize their business operations and make the industry more competitive resulting in outputs that will foster economic development.

Importance of Engaging Consultants for the Merger and Acquisition Process

M&A consultants are needed right from the beginning of the acquisition process because they guide businesses on the right M&A strategy and opportunity prioritization that maximize the value and return from acquisitions, mergers, divestitures, and company integrations. Not leveraging the expertise of renowned consultants for the M&A process may result in M&A failure. Failure may result from poor strategic fit, poorly managed integration, incomplete due diligence, non-realistic valuation and projections, etc.

Therefore, before embarking on your next M&A transaction, seek to appoint a competent consultant with the right skill sets in mergers and acquisitions.


1. Retrieved on March 22 from RSA Transfer Report

2. Retrieved from Pension News

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.