Nigeria’s N6.5 trillion Pension Funds Industry is set to adopt International Financial Reporting Standards (IFRS), for preparing its financial statements, a move fraught with risk and benefits.
Nigeria’s Pensions regulator PenCom and its Financial Reporting Council (FRC) has told Pension Fund Administrators (PFAs) that 2017 shall be the latest year of adoption of IFRS by all duly registered Pension Funds.
“Accordingly, all Pension Funds shall issue financial statements prepared in accordance with IFRS for the year ending 31 December 2017,” PENCOM and FRC said in a letter to PFAs this month, signed by Daniel Asapokhai CEO of FRC and Aisha Dahir-Umar, Acting DG PenCom, and issued as a directive to PFAs for immediate compliance.
As part of industry reforms unveiled to prevent a repeat of the 2008/2009 home grown financial crisis, International Financial Reporting Standards (IFRS) became Nigerian Generally Accepted Accounting Principles (NGAAP) for all corporate entities in Nigeria since January 1, 2012.
The framework was to come into effect for Pension Funds in 2013 as specified by the Roadmap for Adoption of IFRS in Nigeria.
However, various complexities and the need for regulatory clarifications have led to non-compliance, with PenCom and FRC blaming the delayed adoption on the “practical expediency and…peculiarities faced by Pension Funds in Nigeria.”
Abiola Rasaq, Head of Investor Relations at United Bank for Africa Plc, foresees no downside risk to this development, rather that PFAs adoption of IFRS will help improve their standard of financial reporting and information flow.
Rasaq said: “I think what we will see is more transparency and more information flow. PFAs do not have any major financial risks in their books that should be a source of concern. Pending when we all transit to IFRS-9, the current IFRS requires that you treat securities like bond at amortised rate.”
Data from the National Pension Commission, or PENCOM, shows that as at April 2017, the net asset value of total pension fund assets stood at N6.49 trillion, with 7.4 percent invested in domestic ordinary shares or stock, 55.7 percent in FGN bonds, 15.66 percent in Treasury Bills, 6.26 percent in banks money market securities, 4.79 percent in corporate debt securities and 3.38 percent in Real Estate properties.
Together, these asset classes make up 93 percent of pension fund investments.
The data shows that at least 71.3 percent of Pension assets or N4.63 trillion, as at April, 2017 is invested in fixed income securities issued by the sovereign or Federal Government.
PenCom, in the new directive, advised PFAs to ensure that where a measurement basis, other than fair value is applied to fund holdings of government securities, the underlying business model of such funds align with the conditions specified in IFRS as the relevant PenCom Guidelines.
Experts tell BusinessDay that under IFRS rules PFAs can apply hold to maturity (HTM) rules to assets they don’t have an intention of selling, but the rest have to be marked to market (MTM).
Fola Lawal, an expert within the insurance industry, said in adopting IFRS, Pension managers have the option of fair valuing the pension assets which will immediately trigger substantial losses as much as 20-30% of book values, considering the current (high) market yields.
According to Lawal, those Pension Fund contributors who are retiring this year are at an advantage, as losses that will be triggered from asset sales to meet their cash requests will be passed on to the remaining retirement savings accounts (RSAs).
“If sales have to be made out of an HTM portfolio, then the remaining assets may have to be MTM,” Lawal told BusinessDay.
Bond prices have tumbled in the past three years, as yields spike as a result of rising inflation and greater issuance by the Federal Government, to fund its growing deficit.
The Debt Management Office (DMO) only managed to raise N56.05 billion ($178.50 million) at a bond auction held yesterday, less than half the N135 billion on offer as domestic pension funds and insurance firms cut demand due to low yields.
The DMO paid 16.80 percent for the 2021 and 2027 bonds and 16.90 percent for the 2037 debt.
Investors demanded for yields as high as 17 percent, auction results showed.
There are 21 licensed PFAs operating in Nigeria, according to PenCom data.
The new guidelines for PFAs to adopt IFRS was issued following the stakeholders meeting of 18 May 2017 that included the FRC, PenCom and External Auditors of Pension Funds.
