DIMENSIONING RETIREMENT BENEFITS FOR GROWTH
BY
ADEBAYO A. ADELEKE MBA,MNIM, PAPER PRESENTED AT THE 2014 NIGERIAN INSURANCE AND PENSION (INSPEN) AWARDS ON THURSDAY, FEBRUARY 26, 2015, AT THE LAGOS CHAMBER OF COMMERCE AND INDUSTRY CONFERENCE AND EXHIBITION CENTRE ALAUSA LAGOS.
BY
ADEBAYO A. ADELEKE MBA,MNIM, PAPER PRESENTED AT THE 2014 NIGERIAN INSURANCE AND PENSION (INSPEN) AWARDS ON THURSDAY, FEBRUARY 26, 2015, AT THE LAGOS CHAMBER OF COMMERCE AND INDUSTRY CONFERENCE AND EXHIBITION CENTRE ALAUSA LAGOS.
OLD SCHOOL!
Defined benefits Contribution
Defined benefits Contribution
Pitfalls of Defined Benefits Scheme
-Entitlement mentality
-Unfunded Scheme (Public Service)
-Nearly Same (Private Sector)
-Not sustainable in the long run
-Fraught with fraud
-Corruption, diversion, manipulations etc.
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| Adeleke |
TRANSITION
OBJ signs the Pension Reforms Act 2004.
OBJ signs the Pension Reforms Act 2004.
OBJECTIVES OF PRA 2004
-To obtain retirement benefits as at when due.
-To reduce old age poverty
-Abolish untold hardship of in efficient and cumbersome process (corruption) of pension payment (remember Maina saga)
-Uniformity of pension benefits standard for all Nigerians(Public/Private)
-Stem the growth of Pension fund liabilities.
-To obtain retirement benefits as at when due.
-To reduce old age poverty
-Abolish untold hardship of in efficient and cumbersome process (corruption) of pension payment (remember Maina saga)
-Uniformity of pension benefits standard for all Nigerians(Public/Private)
-Stem the growth of Pension fund liabilities.
The Ten – ‘ties’’ of PRA 2004
1. Sustainability
2. Safety
3. Security of benefits
4. Transparency
5. Accountability
6. Equity
7. Flexibility
8. Uniformity
9. Inclusivity
10. Practicability
1. Sustainability
2. Safety
3. Security of benefits
4. Transparency
5. Accountability
6. Equity
7. Flexibility
8. Uniformity
9. Inclusivity
10. Practicability
A NEW REGULATORY REGIME
The Pension Commission (PENCOM) was established by the PRA 2004.
-Overall function of Regulating & Supervising pension scheme under the Act.
The Pension Commission (PENCOM) was established by the PRA 2004.
-Overall function of Regulating & Supervising pension scheme under the Act.
PARADIGM SHIFT !
The Act moved pension from Defined Benefits Scheme to Defined Contribution Scheme.
The Act moved pension from Defined Benefits Scheme to Defined Contribution Scheme.
Implication of the Paradigm Shift
-Worker now fully responsible for his retirement
-Employers’ (Public/Private) responsibility for pension terminates with the exit of staff from active service
-No more father Xmas (death of entitlement mentality)
-Worker now fully responsible for his retirement
-Employers’ (Public/Private) responsibility for pension terminates with the exit of staff from active service
-No more father Xmas (death of entitlement mentality)
NEW FRONTIERS !NEW MANAGERS!
PFAs – Licenced Pension Fund Administrators with minimum paid up share capital of N 1b
- Currently 21 Licenced PFAs.
PFAs – Licenced Pension Fund Administrators with minimum paid up share capital of N 1b
- Currently 21 Licenced PFAs.
NEW FRONTIERS ! New CUSTODIANS!
PFC –Pension Fund Custodians. Required networth of N 500m. Balance Sheet size N 125b.
- 4 Licenced – Diamond, First, UBA & Zenith
PFC –Pension Fund Custodians. Required networth of N 500m. Balance Sheet size N 125b.
- 4 Licenced – Diamond, First, UBA & Zenith
NEW FRONTIERS! NEW ELITE CLUB
CPFA – Close – Ended Pension Fund Administrators
- Remember the 1st Commandment in George Orwell’s Animal farm (as amended) ‘’All animals are equal but some are more equal than others’’
-7 Licenced CPFAs – Total, Nestle, Shell, Chevron etc.
CPFA – Close – Ended Pension Fund Administrators
- Remember the 1st Commandment in George Orwell’s Animal farm (as amended) ‘’All animals are equal but some are more equal than others’’
-7 Licenced CPFAs – Total, Nestle, Shell, Chevron etc.
SITUATION REPORT – 2013
-5.7M out of 60m working class contributed to Pension (less than 10% of workforce)
-Over 90% uncovered by the Scheme.
-Value of pension is put at N 3.8trillion ($24b) as at Oct 2013
-Global value of pension $70trillion (Nigeria is 0.03%)
-Nigeria Pension has growth potential
*over the next 7-10 years
*1% of current global Pension Pool
*$0.7trillion or N 140 trillion
2014 – 10 YEARS AFTER
PRA amendment signed by GEJ
SOME RELEVANT FEATURES OF THE 2014 AMENDMENT
1. Investment of Pension fund to now include specialist investment funds, and other investment funds that PENCOM may approve
2. Rate of contribution reviewed from 15% to 18% - Employer 10%, Employee 8%
3. SMEs now accommodated in Pension Scheme
PENSION ! GROWING & GROWING !
- Fund projected to hit N 140trillion by 2022/2025
- About 14 times of today’s NSE market Cap
THE BIG QUESTION FOR PFAs :
Where will these trillions of naira be invested at a positive rate of return without fuelling asset bubble?
ASSET ALLOCATION OF PFAs – OCT 2013
-85% IN Govt Securities (FG & State)Bonds, TB and money market instruments.
-15% in various mix between Private Equity Fund, Infrastructure and mutual fund.
WHAT A BASKET OF ASSETS?
The Asset allocation of PFAs reveals 2 things:
1. Either PFAs are extremely conservative
2. Or, there are no real alternative assets worth investing in.
The Asset allocation of PFAs reveals 2 things:
1. Either PFAs are extremely conservative
2. Or, there are no real alternative assets worth investing in.
TRUTH
PFAs are constrained by regulation to be extremely conservative.
GROWTH WITHOUT ROOT
The growth in PFAs’ assets are quite impressive
- nearly 40% yearly between 2007 – 2013 (6yrs).
The growth is due largely to new contribution year in year out.
-This will remain so given 90% yet to register members
The growth in PFAs’ assets are quite impressive
- nearly 40% yearly between 2007 – 2013 (6yrs).
The growth is due largely to new contribution year in year out.
-This will remain so given 90% yet to register members
REAL GROWTH
A key sustainable growth driver will be the value addition by Fund Managers in generating ROI.
CURRENT REPORT CARD OF PFAs 2014
Fixed Income Instrument (72% in Sovereign Instruments)
An easy way out : Fixed yield with periodic coupons till maturity. No sweat !
Pitfall : Twin devils of inflation and devaluation pose a danger to such assets and may throw up a negative real return.
SUMMARY OF THE GRAPHS
1. Fund under management is growing – not due to ROI but new contributors joining.
2. There is sub – inflation rate of return dwarfed by double digit growth in Fund under management.
3. Effectively, the purchasing power of the Retirement fund of a Nigerian worker / contributor is eroding.
1. Fund under management is growing – not due to ROI but new contributors joining.
2. There is sub – inflation rate of return dwarfed by double digit growth in Fund under management.
3. Effectively, the purchasing power of the Retirement fund of a Nigerian worker / contributor is eroding.
THE WAY FORWARD
* Urgent need to search, structure, develop and invest in alternative asset classes that have the potential to beat inflation sustainably.
SOME CONSIDERATIONS – 1
Match Fund with Infrastructure : IPP, Connecting and tolled bridges, Specialist Hospitals (on Kidney & Cancer etc), Short rail system.
Match Fund with Infrastructure : IPP, Connecting and tolled bridges, Specialist Hospitals (on Kidney & Cancer etc), Short rail system.
SOME CONSIDERATIONS – 2
PFAs as Institutional Investors (not speculators/gamblers on NSE)
-In UK, Pension Fund investment is geared towards equity. The share of asset in Corporate Securities moved from 50% in 1960 to 60% in 2009.
-In Ghana, the SSNIT (Social Security & National Insurance Trust) holds between 7%-25% equity of most quoted/viable companies.
SOME CONSIDERATIONS – 3
SMEs – The engine room of economic development and social stability. Don’t run away from the work it entails
SMEs – The engine room of economic development and social stability. Don’t run away from the work it entails
SOME CONSIDERATIONS – 4
AGRICULTURE : Towards real mechanized farming for food production, processing and export.
AGRICULTURE : Towards real mechanized farming for food production, processing and export.
SOME CONSIDERATIONS – 5
Manufacturing – e.g Modern textile mills. A nation of 170m people cannot clothe itself. A basic need of man. This is an expansive and growing market.
Manufacturing – e.g Modern textile mills. A nation of 170m people cannot clothe itself. A basic need of man. This is an expansive and growing market.
SOME CONSIDERATION – 6
REAL ESTATE – 17m housing deficit requires $500b.
PFAs should fund real estate massively. ROI in real estate has consistently exceeded inflation rate.
-Partners with Real Estate Developers & Mortgage firms.
REAL ESTATE – 17m housing deficit requires $500b.
PFAs should fund real estate massively. ROI in real estate has consistently exceeded inflation rate.
-Partners with Real Estate Developers & Mortgage firms.
OBSTACLES?
Get rid of excuses like: We can’t tie down the money for so long.
-Pension fund is not short term fund like bank deposits
-Do medium/long term investments – 3, 5,10,15,20,25 yrs
-Drop conservatism, be more creative, more dynamic
-Drop the easy way out fixed income investment approach.
-Create a more robust regulatory framework
DEMOGRAPHY SPEAKS !
Demography of Retirement Savings Account (RSA) shows pension fund growth accounted for by under 30 population ( which was 33% in 2013)
-Fund available long term.
THANK YOU.
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