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How informal sector inclusion in pension scheme can bridge housing affordability gap


The inclusion of the informal sector of the economy in the contributory pension scheme of the federal government has the capacity to bridge the housing affordability gap in Nigeria, experts have said.

Nigeria is one of the most expensive housing markets in the world. A combination of factors including high poverty level, absence of a functional mortgage system, high cost of building materials, etc has helped to make house prices too expensive for a good number of citizens, hence the widening housing affordability gap in the country.

Over the years, the informal sector has been excluded in government’s social safety initiatives such as the contributory pension scheme (CPS), national health insurance scheme (NHIS), national housing Fund (NHF), etc which the experts say represents a significant economic loss to all stakeholders.

The informal sector has always been underrated by policy initiators. But this is a sector that represents well over 50 percent of the country’s total workforce. Whereas there are only 5.83 million Nigerians in the public sector;  7.78 million in the  private formal sector, there are  as many as 67.54 million people in the informal sector. Altogether there are  81.15 million people working in the country.

Citing a recent survey from Phillips Consulting, Sonnie Ayere, CEO, Dunn Loren Merrifield, revealed in his presentation at the Real Estate Unite 2017 summit in Lagos recently that the average income of people in the informal sector is N100,000 per month  which equals N1,200,000 per annum.

When N1,200,000  is multiplied by 67.54 million people in this sector, the result is N81,048,000,000,000 and this represents the size of the opportunity for the pension fund industry.

Ayere said the pension administrator could get his own share of this opportunity by adding Housing Fund to the PenCom Multi-Fund Structure of I – IV (Housing Fund V). This fund allows contributors, from both the formal and informal sector, to direct their Pension Fund Administrators (PFAs) to allocate 20 percent of their existing and future contributions to this new Housing Fund.

“A contributor should be able to ask for part of his/her contributions to be set aside into a separate fund to ensure he/she can afford a home. The PFA can split a contributor’s total contribution into 80:20”, he said, explaining that 80 percent of total contribution remains invested in the 18 percent yielding funds, while 20 percent is invested into the Housing Fund with a yield of say 5 percent.

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“By investing 20 percent of this individual’s contributions to their Housing Fund V, the person is guaranteed a mortgage of no higher than 8 – 9 percent per annum,  assuming the capped yield on AAA rated housing related securities are now 5 percent by choice and consent of contributors / PenCom”, Ayere assured.

Taking a look at an informal sector entrepreneur with an income of N3 million per annum, Ayere said that  with his N3.5 nillion annual income, he can buy a home worth N10.5ing  million, adding that at 9 percent mortgage over 20yrs, his monthly payment of N75,576.98 is only 30.23 percent of his gross salary of N250,000 per month which is within the agreed maximum of 33.33 percent of his annual income for mortgage repayment.

This, he noted, is the beginning of the solution to the affordability gap, pointing out that if 25 percent of the  67.54 million informal sector population joins the CPS because of home ownership, this translates to N3.65 trillion per annum coming into the scheme. “By designing a solution to housing, the pension fund industry is able to capture the informal sector”, he emphasized.

Ayere posited that this will become a reality when PenCom agrees to include a fund within its multiple funds program; contributors elect to have 20 percent of existing and future contributions into Fund V;  returns to Fund V are capped at 5 percent for AAA rated housing securities only, and mortgage and other institutions add a spread on to the cost of funds of 5 percent for mortgage rates not to exceed between 8 and 9 percent, depending on perceived customer risk

“So,  by a contributor giving up some yield on current and future contributions, he opens up the opportunity to buy his desired home at an affordable and sustainable rate; the desire to own a home at a single digit rate becomes the strongest selling point to entice the informal sector to begin contributing”, he said.

Including the informal sector in the pension fund scheme will come with lots of benefits for the stakeholders. For the government, that means significant increase in job creation, social stability, stronger GDP, home ownership culture, and wealth creation for citizens.

For the pension commission and pension operators, there will be significant increase in funds under management, a whole new market and consistency of contribution, while for mortgage banks, it means increased mortgage flows, lower non-performing loans (NPLs), increased asset growth and profitability.