Pension savings in Nigeria average out at just over $2,700 per saver. It is a dismal figure, but these people are the fortunate ones: most of the country’s workers do not belong to a retirement scheme at all.
A Nigerian who is in a scheme and retires at 50, the age set by the country’s pension system, can – based on the country’s life expectancy rate – expect to enjoy three years of leisure, according to the World Bank.
Yet the country’s nascent pension fund schemes are being seen as a bright spot in Africa’s biggest economy, with their development lauded by policymakers and investors.
Growth during the past 10 years has been impressive, although the schemes’ total assets of $22.5bn put them on a par with a small fund in North America or Europe.
Nigeria launched a national contributory pension scheme after its 2004 Pension Reform Act. Companies with three employees or more are required to participate, with worker and employer both putting in 7.5 percent of the employee’s salary.
In 2014, the total contribution was raised to 18 percent, of which employers contribute 10 percent. A clutch of providers came into being after 2004, including Stanbic IBTC Pension Managers, a subsidiary of South African financial group Standard Bank; and ARM Pension Managers, a subsidiary of ARM, a $2.7bn Nigerian asset manager.
Although dwarfed by their international peers, these groups have started to interest international investors, which are keen to tap the economic potential of a country whose population of 195m places it among the biggest in the world, the only African nation in the top 10.
Three years ago, Actis, a British private equity firm that specialises in emerging markets, paid $62m for a majority stake in Sigma Pensions, whose scheme has 675,000 members and $1bn in assets.
“It’s an underpenetrated market,” says Natalie Kolbe, Actis’s global head of private equity.
More recently, LeapFrog Investments, a private equity group specialising in emerging markets, put an undisclosed sum into ARM.
Karima Ola, a partner at LeapFrog, stresses Nigeria’s potential.
“Most consumers are underserved when it comes to key services, especially financial services,” she says.
The National Pension Commission (PenCom), the country’s pension regulator, is held in high regard, although it did not respond to a request for a comment.
“It’s a well-regulated sector. When you’re investing in financial services the regulator is an important consideration,” says Kolbe, adding that PenCom wants Nigeria’s pension system to be world-class.
Both Kolbe and Ola are reassured by the regulator’s efforts to protect the sector from corruption and bolster trust in financial services. Nigeria ranked a lowly 148th out of 180 countries in the annual Transparency International corruption perceptions index, but PenCom is introducing biometric authentication while the Central Bank of Nigeria is rolling out digital identification.
PenCom has kept a grip on how Nigerian pension funds can be invested: only domestically, and with limits on how much is allocated to each asset class.
Equities were traditionally capped at 10-25 percent, depending on whether a fund was already paying retirees or still receiving worker contributions. The decision to bar international assets reflects the regulator’s caution, says Ola.
“Their assets are basically limited to Nigeria. The reason for this is if you’re going to give people an international allocation, you want to know the underlying pension fund has got that experience. Most people do not have the experience for stock-picking,” she says.
She and others respect PenCom’s conservatism. Fund managers would have no problem if they wished to invest the maximum permitted in Nigeria-listed stocks, she says, pointing to the number of established companies. Nigeria’s All-Share index has more than 160 members and a market capitalisation of $36bn.
“You can put that to work in Nigeria, no issue,” says Ola.
Subsidiaries of groups including Unilever and Nestlé are listed on Nigeria’s exchange, as is Guinness Nigeria, a subsidiary of drinks group Diageo, and Total Nigeria, a marketing and services subsidiary for the French oil company.
Historically, Nigerian pension funds have invested heavily in fixed income, with bonds scooping up 85 percent of pension assets, says Wale Okunrinboye, head of investment research at Sigma Pensions.
He says there is pressure from younger savers for the funds to diversify for better returns. “People are a bit more aware,” he says. “These kinds of higher returns cannot come from fixed income.”
The 2014 reform gave funds permission to invest in alternative assets, but allocations are still small. In Okunrinboye’s estimation, less than 1 percent of assets are committed to private equity and 3 percent to real estate.
In July, funds received more freedom in how they can invest when PenCom introduced a “multi-fund” system, allowing them to manage their assets according to savers’ ages.
Managers investing for younger members are allowed to take on more risk and invest in equities, real assets and private equity. Funds aimed at the youngest savers can put up to 75 per cent of assets in instruments other than bonds.
Stanbic, which manages $7bn in assets for 1.6m retirement savers, says that while allocations to equities and alternatives have been small, it expects the new system to prompt a gradual shift.
Okunrinboye regards alternatives as promising but says the move beyond vanilla assets brings its own challenges. “We don’t have many fund managers with an established record,” he says. “The pressure is on to hire quality candidates and become more sophisticated.”
Other asset managers agree that competition for people with investment experience is fierce. “The investment landscape in Nigeria is still relatively nascent therefore, understandably, there is a dearth of investment talent,” ARM Pension Managers said in a statement.
“This is compounded by competition with other financial services firms outside the pension industry.”
The biggest challenge is to increase enrolment levels. Although the self-employed and tiny businesses can voluntarily sign up to the pension scheme, only 8.1m Nigerians – 4 per cent of the population – were enrolled at the end of May.
The low rate is blamed on the large number of people working informally, primarily as labourers or subsistence farmers.
Tackling pension provision for such workers is, says Okunrinboye, “the next frontier”.
PenCom is trying to address the issue and in April announced plans to launch a “micro pension” scheme, under which people not covered by the main scheme will be able to make whatever contribution they can as often as they can – even daily.
Its target is for 30 per cent of workers to have pension savings by 2024. Nigeria’s economic malaise has, more generally, also curtailed saving.
The country, which is Africa’s biggest producer of crude oil, went into recession for the first time in 25 years in mid-2016 as the oil price slump began to bite. Violence by militants in the Niger Delta worsened the situation.
The country came out of recession last year, as the oil price recovered and following action by the government, which included greater spending on infrastructure and an increase in lending to poor farmers.
Unemployment, however, is stubbornly high. It hit 18.8 percent last year, according to data from the National Bureau of Statistics.
Cobus de Hart, chief economist for west and North Africa at NKC African Economics, part of Oxford Economics, suspects the jobless figure could be higher.
“We underestimated how many businesses needed to be scaled back,” he says.
Kolbe says the economic situation is detrimental to pension contributions, both because of companies reducing the number of staff and new employees being slow to sign up to schemes so that they maximise their possible take-home pay.
She is positive, though, that the sector can grow and thinks consolidation could be on the cards, with the Leapfrog and Actis-led deals paving the way.
“There definitely is interest,” says Kolbe, who thinks the market will develop in a similar manner to South Africa, where local mergers whittled down a large number of fund providers to a few big players. “Besides Sigma, we have spent a lot of time looking at potential acquisitions,” she says. On consolidation she adds: “It’s not a question of if, but when.”
JENNIFER THOMPSON, FT
