DG, PenCom, Mr. Muhammad K. Ahmad

The Renaissance Capital recently predicted that going by economy trends in Nigeria, Pension Fund Administrators (PFAs) would be investing as much as N400 billion in equities.  However, some stakeholders are still worried about the capacity of the market to absorb such huge funds in the short run without unnecessarily causing shocks in the system.  Nnamdi Duru reports

The Pension Reform Act, 2004 provided that every worker in an organisation employing five people or more must contribute 7.5 per cent of his or her salary to a Pension Fund Administrator (PFA). The employer under the law is expected to contribute 7.5 per cent of the individual salary of workers to their respective Retirement Savings Accounts (RSA) resident with their chosen PFAs.

Renaissance Capital in its report titled, “Thoughts from a Renaissance Man: Nigeria’s Pension Funds – An Unsung Story” said, five million workers and retirees have registered under the contributory pension scheme with accumulated pension assets grown tremendously from N265 billion and 1.4 per cent of country’s Gross Domestic Product (GDP) in 2006 to N2.74 billion or almost 1 per cent of GDP in 2012, a N700 billion increase in the last 18 months.

The firm said the benefits of this are significant as ultimately, such schemes allow countries like Chile or South Africa to become safe havens during global turbulence due to the size of the pension funds investing in local assets.
It added that in the case of the United States and United Kingdom, they enable countries to retain AAA ratings from some credit rating agencies because private pension funds are sufficient in size to fund a country’s debt.

Investment Regulations
With the various investment guidelines, the National Pension Commission ( PenCom) tries to regulate the maximum level of investment any PFA could hold in any asset type and not the minimum.  This is to ensure that the retirement savings of workers and retirees is at no time put at risk by over-ambitious or in some cases reckless fund managers.

While some people complained that PenCom was restraining the operators too much by not allowing them free hand to invest the funds under management with the hope of optimising return on retirement savings, the regulatory body said safety of the funds was more important as far as it is concerned than investment income.

Investment regulation, according to PenCom, consists of the prudent man concept and the quantitative limit.
“The prudent man regulation is usually made in an industry where contributions are voluntary, where there are strong corporate governance and high ethical standards and where you have professionals who live up to their callings and would not do anything that is contrary to their professional ethics.

“On the other hand, we have quantitative limit because the contributory pension scheme is mandatory, people are compelled to save their retirement benefits.  We are operating in an industry where the skills are not all that strong and we need to build skills, we need to reinforce professionalism, so we need to have a guided investment regulation and most emerging market and countries that have adopted contributory pension including Chile, Mexico, Poland,  have this type of policy,” it said.

Director-General, PenCom, Mr. Muhammad K. Ahmad, said that  in trying to get an investment regulation, the regulator and operators agree, for diversification purposes and quality, on the accepted investment outlets and various limits in terms of asset classes and single obligor limits.

“Each time we draw up a regulation, we expose it not only to the operators but also to all Nigerians.  The commission gets comments from operators and other stakeholders before rolling out the guidelines.

“If we have agreed that these are the areas that we are allowed to invest… the commission will only ensure that those limits which we collectively agreed on are being complied with.  This is not over-regulation but only for the PFAs to implement the agreements.  However, if any PFA fails to do what we all agreed on then we can sanction it,” Ahmad threatened.

Variation in Fund Allocation
Over time, managers of pension assets have varied the level and composition of their investment portfolio in conformity with the investment regulations churned out by the pension regulator from time to time.

The Renaissance Capital also reviewed the variations in the funds allocated to various asset types by PFAs in the last five years, observing that while the sharp rise in equity prices in 2007, pushed PFAs to hold as much as 30 per cent of pension assets in equities, the rate has since fallen to10 per cent, following the decline in equity markets between 2008 and 2009.
“From 2007 to mid-2012, the biggest shift the other way was into federal government securities, from 34 per cent of total assets to 64 per cent. Given how well bonds have performed in recent months, such a large allocation has been very profitable for the PFAs,” the firm stated.

Investment in Shares
The Renaissance Capital in its report predicted that PFAs were likely to invest more money in shares of companies quoted on the Nigerian Stock Exchange (NSE) from next year saying the continuous increase in private sector debt would engender the trend.
It also predicted that going by regulatory limitations PFAs would invest not more than N400 billion in shares in the short run.
“What we assume is that pension funds will now begin to turn more to equities. The most important long-term reason in our view is of course that private sector debt in Nigeria (34 per cent of GDP in 2011) has tremendous room to rise and the economy has decades of strong growth ahead of it. Both suggest that a higher allocation to equities makes sense.

“In the short term, we still assume that lower bond yield.  The 10-year local yield is down from 17 per cent to 12 per cent in the past few months, will encourage banks to start lending, as investing in local securities offer less yield.

“There is a limit in the ability of pension funds to make the switch. They cannot invest more than 25 per cent in domestic ordinary shares, so we estimate no more than N400 billion could switch in the short term.  “In 2011, the regulators raised the cap from 20 per cent to 30 per cent, evidently in a bid to boost interest in this asset class,” Renaissance Capital stressed.
The firm noted that the above scenario would augur well for the country saying: “Assuming pension funds continue to grow by $2.5 billion a year, and that roughly 20-25 per cent are allocated to equities, this is a constant $600 million annual bid for equities, and one that is only likely to increase in the coming years and decades.”

Investment in Corporate Bond
Renaissance Capital in the report predicted that PFAs would be investing more pension assets in corporate bonds in the near future, adding that PenCom had been working on a proposal to bring workers in the informal sector into the contributory pension scheme.
“In 2011, the regulators raised the cap from 20 per cent to 30 per cent, evidently in a bid to boost interest in this asset class. More demand for corporate bonds will give companies a new source of funding, aside from bank loans, and perhaps encourage banks to lend now, to discourage a possibly permanent shift towards funding from this new source,” it explained.

The firm observed that Nigeria’s pension system was modelled after that of Mexico, which the country felt was an improvement on Chile’s version of contributory pension scheme, adding that government’s efforts at creating an enabling environment for businesses to thrive tends to help drive economic growth.

“Growth is expected to be around 6-7 per cent in 2012-2013, the currency is expected to be broadly stable, the 2013 budget may contain an average rate of N160 to US$1, and inflation may end the year at around 12 per cent in 2012 before falling in early 2013, though later in 2013 that may reverse,” Renaissance Capital projected.

Concerns about Renaissance Projections
While Renaissance Capital argued that investing more pension assets in companies’ shares would augur well for the country by driving economic growth and development, some experts have also stated concern over some of  the negative impacts that are likely to be associated with it.

A pension operator, who pleaded anonymity, said he was concerned about the ability of the capital market to absorb even the N400 billion which Renaissance Capital predicted would be injected into equities.  He also wondered if the fund would not unnecessarily drive share prices up creating bubbles that would eventually burst in future.

“Renaissance Capital may have predicted the renewed interest of PFAs in equities, believing that this would augur well for the country as has been reported.  However, I am worried about the ability of the capital market to absorb N400 billion in the short run without unnecessarily straining itself and the market.

“I also very concerned about the possibility of the injection of such a fund into the market in the short run not driving up share prices beyond the reasonable limits as companies many not have need for such money or even be in a position to immediately adjust their operations and investment programmes to be able to absorb such funds on the short run without creating shocks in the system,” he said.
“If these issues would be quickly addressed, I would then agree with Renaissance Capital that such injections into the market would augur well for the country since, many foreign investors may be getting ready to quit the economy in future,” he added.

Also, the umbrella organisation for operators in the pension industry in the country, the Association of Pension Fund Operators (PenOp) had earlier given the conditions for its member-companies to channels pension assets into infrastructural development.  The association insisted that government must guarantee in full, every kobo invested in this regard.

“There are preconditions that must be met before pension funds can be used for infrastructure. If those conditions are not in place the fund cannot be used for infrastructure. Why it is required that the projects must be guaranteed by the federal government is because we know that one government can give someone a concession and another government would come and revoke it. We want an irrevocable guarantee from the federal government so that the funded projects cannot be changed.

“Also, we want a principal guarantee; that is ensuring that the money would go into infrastructural projects guaranteed by the federal government. Therefore, the only two ways pension funds can go into infrastructure is either through a bond, a dedicated infrastructure bond that is tied to a specific project,” PenOp President, Mr. Dave Uduanu said.

“When the scheme started, we were allowed to invest up to 25 per cent in the stock market. Some of our member indeed invested but when the market started having problems they divested the money. There is no place in the world where pension fund has been used to stabilise the stock market, it is not done. You cannot use pension fund to pump-up the stock market,” he warned.

Future of Contributory Pension
According to the PenCom director-general, contributory pension has gained acceptance in the country as all the major and medium companies have joined the scheme and are willingly contributing.  The federal government is committed to that.  Many states have gone ahead also embraced contributory pension.

He explained that some states reluctantly joined the scheme because they wanted to access pension fund in their development drive in line with regulatory provisions.

“You cannot invest pension assets in a state that is not complying and because they want pension assets to be invested in their bonds they also want to join the scheme.  It is also good basically and in terms of acceptability and commitment, we believe that there is the political will for the scheme to work.

The processes have been simplified as workers have nothing to do with your employer when you retire.  It is also a fully funded scheme and money is being set aside, it is not when you retire that your employer would start running around to get money to pay your pension.
Also the level of corruption that we have in the government would be eliminated because you have your own account, it is not a pool.  Every contributor is responsible for his or her account and monitors it.  The scheme provides long term fund and new institutional investors have been created in our economy and in the long run it is more sustainable.

In order to attract the N400 billion projected by Renaissance Capital, the Nigerian Stock Exchange must strive to meet the conditions of the operators and ensure long run safety of funds invested in the market.