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Eromosele Abiodun reviews the Agusto & Co Pension Industry Report, which revealed that the industry experienced an astonishing year-on-year growth in its first five years of new registrations.
Like most countries in the world, the Nigerian pension industry evolved from a little start to become one of the biggest in the world. Specifically, most countries started with the Defined Benefit (DB) scheme, but later changed, either completely, to the Defined Contributory (DC) scheme (common in Switzerland, Poland and Chile), or a combination of the two (as seem in Spain, United States of America and the United Kingdom).
Before the Pension Reform of 2004 was signed into law by the administration of Olusegun Obasanjo, the country’s pension system was characterised by many challenges. The principal challenge was funding, which made payment of retirement benefits by employers very difficult. The Pension Reform Act of 2004, adapted from the Chilean Pension Model, gave birth to 26 Pension Fund Administrators (PFA), seven Closed Pension Fund Administrators (CPFAs) and five Pension Fund Custodians (PFC), with an expectation of attracting over 50 million potential contributors and making the pension industry, by far, the largest buy-side investor in the country. By December 2011, five years after the full take-off of the scheme, total registered contributors were 4,927,216, with total pension fund assets of N2.45 trillion.
The performance of the pension industry can be evaluated in terms of number of Retirement Savings Account (RSA) contributors, the composition of the RSA contributors, the cumulative value of pension contributions, the annual additions to contributions, the total asset value of the industry and total portfolio value as well as portfolio growth. Though, the 2012 trend, in many of these metrics, indicates that there was a substantial improvement in the industry compared to 2006.
From the view point of both potential and the set target, the room for improvement is very wide. As at December 2011, the total registered contributors to the RSA were 4,927,216. This represents 8.4 per cent and 428 per cent growth, over the 2010 and 2006 figures of 4,542,250 and 932,435, respectively. This is however just 9.9 per cent of the estimated over 50 million working population in Nigeria. Meanwhile, the notable gap can be explained by the high percentage of Nigeria's working population operating in the informal sector of the economy and the remaining part of the private sector employers who are yet to join the DC scheme. The industry statistics, released by the National Pension Commission (PenCom), shows that the total number of registered RSA holders increased in both the public and private sectors, from inception to date. However, the public sector accounted for more than half of total registered contributors in 2011, accounting for 54.86 per cent.
Although, the public sector RSA registration was larger than the private sector, the rate of increase in private sector RSA holders was nonetheless high year-on-year. The public sector RSA registration is set to rise as a recent report by Agusto & Co revealed that more states are implementing the PFA.
Agusto & Co Industry Report
Agusto & Co in the report revealed that the Nigerian pension fund industry experienced an astonishing year-on-year growth in its first five years of new registrations with scheme membership rising by 8 per cent in 2014 to an estimated 6.39 million. The growth, it stated, was as a result of the RSA registration from states implementing the PFA scheme for the first time.
The public sector, the report added, accounted for 48 per cent of total RSA registration, while the private sector accounted for the balance of 52 per cent.
“In addition, RSA registration by age distribution shows that 30-39 years continues to account for the largest portion of registered individuals with 39 per cent as at 31 December 2014. Total asset of the pensions industry under the Contributory Pension Scheme (CPS) grew by 14 per cent to N4.6 trillion as at 31 December 2014.
“The growth in pension assets has created Nigeria’s biggest pool of long term funds. These pension funds serve as a possible way of achieving the transformation agenda of the Federal Government in providing infrastructure, energy, employment and general development to the economy. Nigeria’s young demography implies that the bulk of pension savers are within the 30-49 age grade thus ensuring these long term pool of funds remain available for investment purposes over the next two to three decades,” it stated.
The report pointed out that the Nigerian pension investment portfolio tends to be biased towards domestic equities and Federal Government Securities (FGN Securities).
“Our analysis indicates that an estimated 70 per cent of pension assets are invested in low risk debt securities. The FGN securities accounted for 51.97 per cent, money market investment accounted for 11 per cent, while the sub-national and corporate bonds accounted for 2.86 per cent. The total equities for the year stood at 13.32 per cent, while other investments accounted for the balance.
“Owing to the dearth of long term funds in the country’s economic system for financial intermediation, there have been increasing pressures to invest pension funds in public infrastructure. These long term pools of funds offer unique financing options to fund Nigeria’s infrastructure deficit. However risks abound.
“We believe the regulatory framework to govern infrastructure funding in the country is still too weak to insulate pension funds from the political risks associated with this investment class. We are also of the opinion that government debt securities which form the bulk of pension fund assets in Nigeria are a major source of deficit financing in any economic system. Therefore, the agitation should focus more on instilling fiscal discipline in Nigeria’s economic management that will ensure the government spends more of its borrowing on infrastructure spending over consumption rather than the conscription of pension funds,” the report added.
Macroeconomic Impact on Industry
The Nigerian economy, Agusto & Co. pointed out, is currently facing macroeconomic challenges (exchange rate, interest rates, inflation, and unemployment) as a result of the recent decline in oil prices.
The report added that the biggest impact of lower oil earnings is on government’s ability to meet its financial obligations.
“We expect that the declining oil revenues will impede the ability of some state governments to remit employee pension contributions. In addition, we expect the Government’s fiscal cuts (capital and recurrent expenditure) as a result of the decrease in revenue to create economic shocks. The effect of these macroeconomics risk factors may also lead to job cuts and reduce the number of new jobs to be created which will eventually impact fund injection into the pension fund. Also, the pressure on the Naira could lead to a further devaluation of the currency and inflationary pressures,” it stated.
The government, the report predicted, may also resort to high yield borrowing to finance the widening budget deficit thus leading to higher returns on investments in government debt securities.
“We believe all the above mentioned factors; can also trigger capital outflows from the capital market and thus dampening returns on equities. Agusto & Co. believes the Pension Industry can broaden its contributors’ base by expanding into the informal sector for sustained growth.
“Our outlook indicates high yields on government debt securities and weak returns on equities. Operators in the pension industry will need to rebalance portfolio in a bid to exit high risk asset classes in a bid for high yield risk free assets. While volatility in the equities market will continue to create room for arbitrage, only pension fund operators with the commensurate risk management capacity will ride this wave,”Agusto & Co said.
Opportunities in the Industry
According to the report, “In June 2014, PenCom announced plans to extend the CPS to include the informal sector, with an amendment to the regulation, which was included in the 2014 Pension Reform Bill. The number of registered contributors is only about 12 per cent of the total labour force in Nigeria. The notable gap is as a result of the high percentage of Nigeria’s working population operating in the informal sector of the economy and the remaining part of the private sector that are yet to join the pension scheme.”
The inclusion of the informal sector, the report stressed, will help boost the pensions industry through increased membership and pension contributions.
It added: “Developing countries have issues incorporating the informal sector into already established pension schemes. A notable issue surrounding this would be the absence of a database, which is evident in Nigeria and the inability to determine the income of the informal sector. Furthermore, pension funds investment is restricted to asset classes (investible asset classes) included in the PenCom Investment Guidelines. In the most recent Investment Guideline issued by PenCom, PRA 2014, the regulator has made provision for investments in public infrastructure while seeking to guarantee the safety of pension fund assets.
“Agusto & Co believes in order to drive pension funds into investments in public infrastructure; there will be a need for an institutional framework which insulates PPP projects from policy and political risks. In addition, the development and deepening of the capital market will provide new investible assets for the Nigerian Pension Industry.”
On its outlook for the industry, it stated that the future of the industry continues to look positive as it is expected that RSA registration will continue to grow as more state governments and private sector employers continue to join the scheme.
“However, PenCom must ensure a smooth implementation process of the pension scheme and put in place effective monitoring system. In addition there must be available public education and information on the new reform as there is still a lot of misinformation and ignorance about the scheme. Therefore, we foresee a moderate growth in the performance of the Industry in the medium term,” it added.
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