Emerging & Frontier Capital (EFC) has said that the new minimum capital requirements introduced by the National Pension Commission (PenCom) for Pension Fund Administrators (PFAs) are rational and designed to encourage industry consolidation, but warned that they could weaken the sector’s overall return profile.
In a new report assessing the implications of the capital policy, EFC noted that while the regulations raise the barrier for entry into Nigeria’s pension industry, they may also make it harder for existing PFAs to sustain investor returns and dividend payouts in the long run.
“We believe that PenCom’s new capital requirements are logical as they raise the barrier for entry and encourage consolidation. However, they also threaten the sector’s return profile,” the firm said.
Rationale Behind the Capital Review
PenCom recently raised the minimum capital requirement for PFAs to N20 billion (from N5 billion) for operators with Assets Under Management (AUM) below N500 billion. For PFAs with AUM above N500 billion, the new rule requires N20 billion plus 1% of AUM above N500 billion. All PFAs must comply by December 31, 2026.
EFC argued that the adjustment is consistent with broader regulatory trends, noting that PFAs manage defined contribution (DC) schemes were contributors, not administrators, bear investment risk — making prudential capital buffers less relevant.
“There is no logical reason why the new capital requirements should be associated with increased prudential risk,” EFC stated. “The new thresholds seem more about increasing entry barriers and promoting scale.”
The firm also highlighted that the adjustment was partly a currency realignment, given the naira’s depreciation since the last review.
Profitability Pressure and Investor Concerns
EFC warned that while the move is logical, it significantly alters profitability expectations for investors. Under the new regime, the internal rate of return (IRR) for pension operators could drop sharply due to higher capital thresholds.
The firm estimated that a N5 billion investment that previously yielded a 10-year IRR of 34.2% would now generate only 3.6%, while a N20 billion investment capped at N499.9 billion in AUM would produce a negative IRR of -8.3%.
“Under the new capital requirements, which will force much lower dividend payout ratios, the forecasted return profiles of Stanbic IBTC Pensions and Access ARM Pensions fall by 20 percentage points and 19 percentage points, respectively, by FY31,” the report noted.
EFC warned that these lower return expectations could discourage long-term investment in the sector.
Alternative Models and Industry Outlook
EFC suggested that PenCom could have considered AUM-based requirements — similar to the United Kingdom’s model — instead of steep capital thresholds. Setting a minimum AUM of N500 billion by 2030, it said, would encourage growth and consolidation without eroding profitability.
The firm further proposed that regulators encourage PFAs to list on the stock exchange, allowing contributors to benefit through dividends while deepening governance oversight.
“Rather than reduce return profiles, regulators could incentivize listing and allow members to benefit from their contributions in the form of dividends,” EFC advised.
Despite the short-term disruptions, EFC concluded that the reforms would ultimately reshape Nigeria’s pension landscape, reduce the number of players but increasing operational scale and efficiency.
What you should know
- The EFC report comes barely one week after Renaissance Capital Africa raised critical concerns over the PenCom’s latest recapitalisation directive, warning that while the reforms aim to fortify Nigeria’s pension industry, they may inadvertently undermine the economics of Pension Fund Administrators (PFAs) and trigger over-capitalisation across the sector.
- In a report titled ‘Pension Industry Reforms, (Over)Strengthening the Pillars’, Renaissance Capital acknowledges the strategic intent behind the reforms but cautions that certain provisions, particularly those affecting PFAs with large asset bases, could distort market incentives and discourage growth.
