CBN Forex policy and pension funds’ assets – implications for pensioners in Nigeria

Q: By restricting PFAs from purchasing foreign ordinary shares, the forex policy has significantly inhibited the capacity of the CPFA Funds to maintain fair returns on investment giving its liability profile. Hence, the pensioners’ future well-being would be negatively affected.

In recent times, there had been many and varied divergent public views and comments on the impact of CBN forex policy on different sectors of the economy. But there is not much on its implications on the welfare of pensioners via the pension funds’ assets held by the respective Pension Fund Administrators (PFAs). I intend here to provide an empirical evaluation of the effects of the CBN Forex policy on the investment of pension fund assets by the PFAs in accordance with the provisions of the Pension Reforms Act (PRA) 2014 (as amended) which ultimately would affect the standard of living of the pensioners in Nigeria.

Broadly speaking, the total pension fund assets under the supervision of National Pension Commission (PENCOM) can be divided into three Pension Funds, namely Retirement Savings Account (RSA) Funds, Closed Pension Fund Administrator (CPFA) Funds and Approved Existing Schemes (AES) Funds.

The RSA Funds are being managed by Pension Fund Administrators (PFAs) for the active employees and retirees of the Contributory Pension Scheme (CPS). On the other hand, the CPFA Funds and (AES) Funds are being managed by Closed Pension Fund Administrators (CPFAs) and PFAs respectively for both employees and pensioners of pension schemes in the private sector in existence prior to the commencement of the CPS in 2004 and which have been approved by PENCOM to continue in accordance with their previous arrangements.

Furthermore, any employer that had a fully funded existing private sector pension scheme before the enactment of PRA 2004 with assets of N500 million and above was allowed to apply to PENCOM to be licensed as a CPFA in order to manage such pension funds for its employees directly or through a wholly owned subsidiary of such employer, provided the pension funds and assets are transferred to a Pension Fund Custodian (PFC) of its choice.

The basic investment principle of CPS is to maximize the investment returns within an acceptable level of risk. This requires every PFA to invest the employers and/or employees’ contributions prudently, having considered the individual circumstances (the risks profile). Although the member takes on the investment risks but the choice of investments and/or management of the RSA are carried out by the PFAs in practice.

However, Section 85 of PRA 2014 provides that the safety and maintenance of fair returns on the amount invested are the main investment objectives of the Pension Fund Administrators (PFAs) operating under the CPS.

The regulator (PENCOM) issues from time to time, regulations and guidelines on investment of pension funds and assets in order to achieve the investment objectives. Sections 86 and 87(1) of PRA 2014 specifies the types of financial assets and instruments pension funds can be invested in either in Nigeria or outside Nigeria by PFAs while sections 88 and 89 of PRA2014 place restrictions on assets and or securities pension funds cannot be invested in.

Furthermore, subject to the subsisting CBN foreign exchange rules, PENCOM may seek approval of portfolio limits for investment of pension fund or assets outside Nigeria from the appropriate authorities, Section 87(2) of PRA 2014.

The impact of CBN Forex policy on investment of Pension Funds’ assets would depend on the investment policies(based on the liability/risk profile) adopted by the PFAs, which may differ between defined benefit (DB) and defined contribution (DC) schemes, and the overall exposure to foreign investment securities, especially those denominated in Eurobond or Foreign currency bond and share purchased.

The CPFA Funds are mainly DB final salary pension schemes. Section 51 of PRA 2014 requires that new employees of sponsor companies with CPFAs shall join the CPS and open RSAs. Thus, CPFA Funds are closed to new entrants after the enactment of PRA 2014 which means that membership of CPFA Funds is likely to decline over time.

An empirical study of the monthly summary of the Pension Funds’ assets under the supervision of PENCOM, as shown in PENCOM website, revealed that only the CPFA Funds had investments in foreign ordinary shares and foreign money market securities over the years since PRA 2004 was enacted.

For instance, in October 2015, 13.97% of the Total Pension Fund Assets (N5,149,652m) was invested in CPFA Funds(N719,240m). Out of the total CPFA Funds, 9.78% was invested in both foreign ordinary shares and money market securities totalling (N70,313.58m) while 9.93%,45.35% and 17.12% were invested in ordinary shares, FGN securities and Real Estate Properties in the domestic market respectively.

The above investment in overseas assets was aimed to improve diversification, giving the possibility of higher returns and/or meet pension benefit payments in foreign currency. It is likely for CPFA Funds to have pension liabilities in foreign currency, if the sponsors of CPFAs (e.g. Chevron CPFA Ltd and Shell Nigeria CPFA Ltd, to mention just a few) are having workers (including foreign nationals) that are paid salaries in foreign currency.

Thus, the CBN Forex policy has effect on only the CPFA Funds because of the investment in overseas financial instruments mainly the ordinary shares. The policy impact therefore on the pension industry and hence the pensioners includes but not limited to the following:

·      Exposure to currency risk (unless it is hedged for a fee) resulting in volatile returns from overseas investments due to the devaluation of the Naira.

·      Risk of inability to invest new contributions from existing employees and/or funds injected by sponsors to bridge funding gaps (as determined by the actuarial valuation of the schemes) in overseas assets in order to meet future pension liability payments in foreign currency. This is because of the extra cost to be incurred in order to obtain foreign currency outside the Nigeria forex market.

·      Sales of foreign assets of pension schemes to meet expected pension liability payments in domestic currency and to realize higher returns because of the devaluation of the Naira.

·      The CBN forex policy has also created uncertainties in the domestic capital market which would lead to volatility of market value of domestic equities and hence it would have a second order effect on pension fund investments.

The AES Funds also have some DB schemes while the RSA Funds are generally DC schemes. Whatever the asset performance in a DC scheme, the individual member’s benefit (and hence the liability) is equal to assets held.

There is no evidence of investment in overseas assets by AES and RSA Funds, as they have been investing only in the domestic capital and money market instruments over the years.

For instance, in October 2015, 12.81% and 73.23% of the Total Pension Fund Assets (N5,149,652m) were invested in  AES Funds (N659,486m) and RSA Funds ((N3,770,925m).Out of the total AES Funds, 15.67%, 51.54% and 13.15% were invested in ordinary shares, FGN securities and Real Estate Properties in the domestic market respectively.Similarly, out of the total RSA Funds, 9.00%, 73.21% and 10.75% were invested in ordinary shares, FGN securities and Local Money market securities in the domestic market respectively.

The above shows that most PFAs are making bulk investments in a particular asset class (e.g. FGN securities) only without regard to the individual’s risk appetite based on the nature of his/her liabilities.

Thus, the CBN forex policy has little or no impact on the investments of AES and RSA Funds except that the policy has created uncertainties in the domestic capital market which would lead to volatility of market value of equities and hence it would have a second order effect on AES and RSA Funds.

In summary, the overall impact of the CBN forex policy on the Total Pension Fund Assets under the supervision of PENCOM has not been significant since the PFAs are investing mainly in secure investments in the domestic market.

However, there are exceptions both the CBN and PENCOM need to consider especially as it relates to the overseas investments being made by CPFAs to secure both the past service and future service pension liabilities.

By restricting PFAs from purchasing foreign ordinary shares, the forex policy has significantly inhibited the capacity of the CPFA Funds to maintain fair returns on investment giving its liability profile. Hence, the pensioners’ future well-being would be negatively affected.

Thus, PENCOM is hereby enjoined to exercise the requirements of section 87(2) of PRA 2014 in order to protect the pensioners’ exposed future loss by the forex policy.

 Pius Apere

Pius Apere, an Actuarial Scientist and Chartered Insurer, is Deputy Managing Director Linkage Assurance Company PLC