Using targeted investments to drive pension industry growth in Nigeria
In retrospect, it is widely attested that a pension eco-system effectively congregating players – a regulator, administrators, custodians, public and private sector employers and working-class persons across several age groups is well established in Nigeria. The maturity of this industry relative to more advanced economies of the world like the US or the OECD nonetheless, the pension industry globally has displayed great resilience, navigating the turbulence and whirlwinds – the macroeconomic shocks, economic downturns, recession and more recently a global pandemic in the year 2020 which instigated a fold-down of companies, job losses and a sharp drop in macroeconomic numbers and indices.
According to the National Pension Commission, at the end of 2020, the same year the COVID-19 pandemic severely raged resulting in two-quarters of negative economic growth, pension assets in Nigeria grew to N12.3 trillion. There were only a handful of industries that put up a similar stellar performance for the financial year.
More recently, the cumulative pension contributions from inception to the end of the second quarter of 2021 amounted to N7.10 trillion.
While these numbers look impressive at a cursory glance, they nevertheless do not paint the true picture of the capacity of the sector. This is because only 11% of the total working-class population are active on Nigeria’s contributory pension scheme. We could only imagine the huge funds that could be mobilized for investment and by effect – growth if coverage could extend to just half of the working-class population in Nigeria. By all means, it also portends that there is a huge prospect in this industry with a foreseeable ability to lead the quest for sustained economic growth in Nigeria.
I am certain that the Pension industry, if well nurtured, is poised to rank as one of the next three big sectors to lead growth and development in the Nigerian economy over the next two decades alongside manufacturing and agriculture.
However, there is a need for a buoyant pension system that is tuned with the ever dynamic macroeconomic environment. In addition to the mobilization of contributions from employers and employees alike, the Pension Reform Act grants allowance for the investment of pension funds to enable owners – employees and custodians to earn returns on them.
A prominent question to ask is “what drives the allocation and investment of Pension Funds by custodians and Administrators?”
According to Q2:2021 figures released by PENCOM, the 4 largest instruments where total pension assets of N12.66 trillion were invested are the Federal Government securities (66%), Local Money market Securities (13.72%), Corporate debt securities (7.51%) and Domestic ordinary shares (6.66%) in that order.
The Bond market unfortunately has in fact continued posting persistent total unrealized losses in the RSA Active portfolio. As of June 2021, instruments like Real estate properties, Private Equity Funds, and Infrastructure funds took up only 1.23%, 0.27% and 0.53% respectively of the total pension assets invested.
It can be argued that such an investment apparatus set up by the regulator constraints PFAs from investing pension funds in the real economy to boost immediate economic growth and development.
This is at variance with emerging trends in the global pension industry where the shift has now been towards allocation of capital to alternative investments – specifically to commodities, high-yield bonds, hedge funds, real estate, and private equity.
There is thus a need for the Nigerian Pension industry to consider other non-traditional avenues of investment in line with global trends.
This is even necessary given that the Nigerian financial and money market has been hit by record low interest rates in the past year. TB rates, in particular, have hovered around 2.5% over the past 4 quarters representing a dip from the over 10% plus rates obtainable in the year 2018.
The investments made by the PFAs should be subject to the prevailing exchange and inflation rate in the country. It will defeat the purpose if people save to cater for livelihood during old age, yet these funds that have been saved are not sufficient to cater for retirement after years of dedicated input over productive years of work-life into a RSA.
In terms of geographical biases, there is a need for the National Pension Commission to grant allowance to pension administrators to diversify their holdings from domestic to foreign instruments. Overseas investments have been known to effectively control currency fluctuations. However, care should be taken that these funds are invested in stable markets and that they are made upon strong asset management advisory services.
Overall, the regulatory body should provide the much-needed allowance, monitoring, supervision and guidance for the diversification of funds while ensuring that pension administrators are guided by strong governance, process and transparency. Goals of equitable distribution of income, good healthcare, education, and climate change, will be effectively advanced with a well-functioning pension system.