Pension Funds and Long Term Financing: The CPS and Economic Development in Nigeria

Pension Funds and Long Term Financing: The CPS and Economic Development in Nigeria

By M. K. Ahmad Director GeneralNational Pension Commission

……ensuring your comfort after retirement

Outline

Pension Reform: The Journey So Far

Global Overview

Importance of Long Term Assets

Impact of Long Term Assets on Economic Development

Challenges

Ways Forward

Conclusion

Pension Reform: The Journey So Far

•       Regulatory

o   Established Legal and Institutional Framework

•       Established Supervisory Framework

o   Risk Based Supervision

o   Daily and monthly review of investment valuation reports

•       20 Pension Fund Administrators (PFAs), 7 Closed Pension Fund Administrators (CPFAs) and 4 Pension Fund Custodians (PFCs)

•       5.32million registered contributors  from 180,586 employers as at October 2012

•       55,904 retirees, currently receiving their monthly pensions as and when due

The Journey So Far: Comparative Analysis

Global Overview

Global trend in shift to funded pension systems

Defined Benefits had remained expensive and unsustainable due to aging population and lower support ratio

Pension assets of OECD 34 countries in 2010 amounted to US$19.24trillion, with USA having about US$10.59trillion

Pension Assets as % of GDP in 2010: Nigeria (7%), Chile (67%), Mexico (13%), Russia (3%), Brazil (0.1%), Netherlands (135%), UK (89%), USA (73%)

Importance of Long Term  Assets

•       Promotes and sustains Social Safety Net (disability benefits, retirements and death benefits)

•       Ensures efficient allocation of resources to productive sectors

•       Broadens the scope of economic activities, development of infrastructure, SMEs  that ensures sustainable growth

•       Promotes capital formation

•       Promotes better corporate governance

Impact of investment of Long Term Assets on Economic Development

•       Increase in domestic savings and investments

•       Development of the Capital Market

o   Increase in volume of intermediated funds, new products

o   Increase in level of trading, modernization of the market

o   Deepening of the capital market

o   Reduction in cost of capital

o   New Institutions

o   Facilitate the development of yield curve within the fixed income segment of the market

Impact of investment of Long Term Assets on Economic Development…cont’d

•       Promotion of Strong Corporate Governance

o   Brought improved disclosure & protection of minority shareholders’ interests

o   Provide informed counterbalance to controlling shareholders in order to safeguard against the company’s Board and Management

o   Emergence of legal reforms & improvement of oversight on companies

o   Promote appointment of independent Directors on Boards of companies

o   Established conflict of interest redress mechanisms

o   Improved professionalization of financial intermediation

Impact of investment of Long Term Assets on Economic Development…cont’d

Pension funds act as intermediaries into a lot of financial assets, including corporate equities, government bonds, etc

Provide long term financial intermediation to the real sector through corporate debt instruments and through investment funds

In some jurisdictions, pension funds acquire long-term money market instruments issued by banks, allowing the banks to issue loans to the corporate clients with varying maturities

Impact of investment of Long Term Assets on Economic Development – Challenges

•       Lack of appreciation of the opportunity provided by the pension industry

•       Lack of adequate engagement of the business community

•       Lack of public awareness and low financial literacy

•       Relatively high transaction costs/charges coupled with longer approval processes for issuances

•       Sustaining stable macroeconomic environment in terms of inflation, interest and exchange rates

•       Short term investment horizon leading to higher allocation to high turnover vehicles resulting from aggressive return expectations from investors

•       The banking sector dominates the financial system

Impact of investment of Long Term Assets on Economic Development – Challenges

•       Dominating influence of Government Bonds, which are having a crowding out effect on non-government bonds, based on their relatively higher yields

•       Paucity of supporting instruments/products and alternative assets

o   Although 35% of AUM has been allocated to Corporate Debts, only about 3% is currently placed

o   REITs is in its infancy – less that 7% of AUM is invested in real estate

o   No infrastructure bonds and Funds yet

o   Private Equity Funds, though in existence for long, but the market remains weak

Impact of investment of Long Term Assets on Economic Development – Challenges

•       Institutional Investors are less active in promoting good corporate governance

•       Barriers to Pension Fund Investment in Infrastructure:

o   Lack of clarity on investment opportunities

o   Non-availability of investment instruments

o   Negative perception of risks in infrastructure investments

o   Lack of expertise in the infrastructure sector

o   Short-termism of investors

o   Lack of clear valuation of infrastructure projects

o   Lack of clear benchmarks

Ways Forward

General awareness campaigns particularly for the business community

Enhance regulatory and supervisory framework

Simplify and streamline processes for corporate debt issuance and approval

Fast track the enactment of the law to back securitization of assets

Provide sustainable and reasonable concessions on a holistic basis for infrastructure projects and investment funds

Ways Forward

Increased private sector participation in the key sectors of the economy through:

• Full implementation of all necessary and critical reforms e.g. fiscal policy reform, financial sector reforms, tax reform, power reform, etc
• Putting appropriate legal, regulatory and supervisory frameworks in place to support these reforms

Use carrot and stick approach to get some large corporate listed on the NSE

Institutional Investors should be active in promoting better corporate governance

Continuous capacity building

Conclusion

The banking sector is yet to effectively & efficiently finance the real sector of the economy, bridge the infrastructural gaps and provide affordable housing in Africa, due to the short term nature of its deposit liabilities and cost of funds

Stable, long term and relatively cheaper funds for sustainable economic development can only be effectively mobilized through the reforms in pension & capital market, supported by a healthy banking system

The Pension Reform has positively impacted on the Nigerian economy, and would continue to do so considering the rapid accumulation of funds

However, all stakeholders must:

• Ensure the sustainability of the reform
• Hold PenCom & Operators accountable
• Promote wider compliance with the Pension Reform Act

Thank You


National Pension Commission
174 Adetokumbo Ademola Crescent
Wuse II – Abuja
www.pencom.gov.ng
info@pencom.gov.ng
+ 234 9 4610466 - 8