- But more work still to be done despite prediction
With a compound annual growth rate (CAGR) of 18.3 percent within the last five years, Agusto & Co, an indigenous credit rating firm, has projected that the Nigeria’s pension industry will grow at an average of 18 percent over the next thirty six months, with the total pension industry assets expected to hit N20 trillion mark from the current N12.49 trillion as of May 2021.
According to the rating agency’s forecast, pension assets growth will be mainly driven by increased participation on the back of Nigeria’s favourable demography of young adults population and rising yields in money market instruments. It also anticipates a significant advancement in the performance of the industry as operators compete for higher return on investments, improved customer service and use of technology for operational efficiency.
Analysing the pension industry
Recent report by the pension industry regulator, National Pension Commission (PenCom), revealed that the pension industry assets hit N12.49 trillion in the month of May, while the contributors reached 9.35 million. The result depicts a significant movement along the growth path compared to the performance from the previous month at N12.4 AuM and 9.32 RSA registrations.
A further breakdown shows that total federal government securities bagged the highest investment valued at N8.3 trillion (67 percent), followed by the local money market securities at N1.7 trillion (14 percent), domestic ordinary shares at N830 billion (6.7 percent) and corporate debt securities at N794 billion (6 percent).
While items such as foreign ordinary shares, state securities and real estate properties saw meagre investment at, respectively, N101 billion, N117 billion and N156 billion, other items like foreign money market securities, open and closed end funds, REITS, private equities funds and infrastructure funds were spotted at the lower end of the ladder, with supra-national bond at zero investment.
Commenting on the industry performance, industry experts have explained that the imbalance seen in the investment of the pension asset is owing to the nature of the fund, which is channeled toward risk-free investment to allow employees access their funds at the appropriate period. Similarly, some analysts have argued that a well structured infrastructure fund will greatly reduce the huge infrastructure deficit being recorded in the country as they added that the extremely low investment in infrastructure is a big challenge causing housing deficit, bad transport network, potholes, which affect the ease of business operations in the long run.
In lieu of this, some have called for a reversal in the current operation, which favours FGN securities, to an investment climate that can truly hedge pension fund assets against inflation through diversified investments of pension funds in real estate, infrastructure, and other alternative assets.
Damilola Olupona, an analyst at Chapel Hill Denham, in a monitored interview, while analysing the first quarter PenCom report said, “The bulk of pension fund assets is invested in FGN securities which account for around 80 percent of the overall AuM. If you look at the trend over the past few years, we have discovered that in terms of return, the bond segment of the capital market generates more return than the equities market. Looking at the result for over six years, the bonds have returned over 60 percent, and that is different from negative one percent in the equity segment. So, I think this explains why you find many PFAs just investing on security investment towards the fixed income segment.
“Another key thing to note is that due to the nature of pension funds, which is to enable employees access their savings at retirement; this requires that the administrators would have to invest these funds in less risky investment asset classes. That’s why you find that the bulk of the investment is channeled towards fixed income, which is deemed risk free.”
The National Pension Commission (PenCom), while reacting to the imbalance in investment said, ‘‘The main challenge inhibiting the Pension Funds Administrators, PFAs, from investing the pension assets for infrastructure development is the non-availability of eligible instruments (funds and bonds) in the financial market. The Commission and the pension industry would support efforts at issuing eligible instruments for pension funds to support infrastructure development in Nigeria.”
Stressing that the investment must be done in safe and well-structured vehicles that align with the provisions of the Pension Reform Act, 2014 (PRA 2014) and the Regulation of Investment of Pension Fund Assets, the regulator added, “This establishes transparency and fair valuation, thus removing all ambiguity on the real market values and tradability of the assets. PFAs can then readily buy and sell at prevailing market prices. The eligibility requirement ensures that the assets are real, liquid and within tolerable risk levels,”
What experts say on the industry performance
According to Agusto & Co.’s newly released 2021 pension industry report and survey, the growth in the industry’s managed assets has been largely driven by investment returns and additional contributions to the scheme, to a lesser extent. Specifically, over the last five years, the industry’s annual contributions have averaged N699 billion, while withdrawals have averaged about N341 billion, translating to a net annual contribution of N347 billion and accounting for 26.6 percent of the industry’s AuM growth over the period, while the remaining 73.4 percent of average growth was attributable to investment returns earned on the portfolios which the managers invested into during the period.
Remarkably, while it can be said that success has been accomplished to date, however, Nigeria should not rest on its oars as the level of coverage needs to be extended, compliance enforced, vulnerable retirees need a minimum level of economic security and sufficient funds need to be set aside for accrued pension liabilities. As noted by PwC, Nigeria’s leading audit and professional advisory firm, pension fund administrators would need to support contributors to the scheme in making the best retirement decisions by proposing personalised pension advisory services which would eventually increase voluntary contributions in the industry.
Comparing Nigerian records with other African countries, Olupona said, “The AuM has been growing. Under a period of five years, it has grown about 60 percent, which is commendable and in dollar terms, it is $29.8 billion. But then, if you compare it to African pairs and what’s obtainable outside Nigeria, we are still lagging compared to pairs like South Africa, which has AuM as a percentage of GDP of around 64 percent, and Brazil, who have their own at 13 percent, so at 7 percent, Nigerian still has a long way to go. Whilst these funds have been growing over time, we are still falling short of where we should be.”
As for the expectations by Agusto & Co for the industry, the credit rating firm noted that in the subsequent quarters of 2021 (Q3 and Q4), the number of transfers will rise further as more enrollees become aware of the transfer process.
“In addition, we expect competition to intensify in the pension industry as PFAs seek to attract new enrollees while retaining existing ones. Nonetheless, Agusto & Co expects the industry’s structure to remain relatively unchanged in the short-to-medium term with the top five players leading on the back of good market presence and strong brand recognition.
Going forward, Agusto & Co. envisages continuous growth in pension assets supported by increased participation on the back of the country’s favourable demographic of young adults and rising yields in money market instruments.
“We expect an improvement in the performance of the industry as operators compete for higher return on investments, improved customer service and use of technology for operational efficiency,” it stated, whilst also projecting that the industry’s net assets will hit the N20 trillion mark by 2023, recording an average growth rate of 18 percentin the next three years leading to 2023 (in line with the five year average growth rate of 18 percent).
The Nigerian pension industry has progressed from one with principally public sector participants running a defined benefit scheme to a mandatory defined contribution system for all government and private sector employees. The 2004 pension reform redefined retirement planning in Nigeria and drove a significant growth in the number of enrollees and the size of managed assets in the industry. Consequently, the contributory pension scheme was introduced to make certain that Nigerian workers on retirement have a stable income source to hang on when they could no longer work and earn a living.
Relatedly, the pension transfer window was opened on 16 November 2020 by the Nigerian pension commission (PenCom) to allow pension retirement saving account (RSA) holders switch Pension Fund Administrators (PFAs) once a year, at most, and at no cost. As at the end of the second quarter of 2021, which is less than nine months after the transfer window was opened, over 25,600 RSA holders with pension assets worth over N102.5 billion were reported to have changed PFAs.
Meanwhile, as of the close of year 2020, the Nigerian pension industry’s assets under management (AuM) printed at N12.3 trillion (or $32.3 billion) representing a 20.6 percent growth over the N10.2 trillion reported at the end of 2019 and an 18.3 percent compound annual growth rate over the last five years, this was according to the industry reports published by the pension industry regulator.
Nevertheless, to achieve more growth in the industry, industry experts have also asserted that the regulators should expedite actions on the introduction of pension protection funds and safety, with a further review of guidelines to make compliance easier; with sanctions for non-compliance. Also, fund custodians would need to enhance their internal procedures to process contributions efficiently and in turn promptly pay retirees their benefits upon the receipt of the prerequisite advice from PFAs.