Pension fund jumps 120% after reform, as analysts see informal sector as threat. Retirement plan is not one of the favourites thing for an average Nigerian, but for those working in much organised companies, pension contribution has come to stay.

After successful pension reform in 2014, the fund has jumped by about 120% in five years, though experts say huge informal sector is largely a threat to the retirement plan in Nigeria.

It would be recalled that as at June 2014, total pension assets was N4.5 trillion.

Pension fund assets in Nigeria have more than doubled in size in the last five years, growing to N9.3 trillion which is approximately USD25 billion at August 2019 according to the Nigerian Pension Commission (www.pencom.gov.ng).

Meanwhile on Pencom website, in its October 2019 report total pension assets increased to N9.811 trillion. Of the total sum, 70.43% was invested in Federal Government Securities.

Fitch Ratings report thus highlighted that the rapid growth began following the 2004 Pension Reform Act which made pension contributions compulsory for companies with three or more employees.

According to the report, regulation continues to be central to shaping the pension fund industry with multi-fund structure regulation and launch the of micro pension schemes in 2018 being two examples.

Following the introduction of the ‘multi-funds structure’ regulation, the Ratings agency stated that it expects to see greater market risk in pension funds as their asset allocations change.

The regulation aims is to align pension investments with the age and risk appetite of retirement savings account (RSA) members by creating three new RSA funds (formerly one) for active contributors.

Fitch revealed that Pension fund allocations to equity were over 9% on average for the Fund I type which is optional for RSA members under 50.

It compared this to 3% on average for the Fund III type for RSA members 50 and over as at October 2019 based on a sample covering over 50% of industry assets.

It also believes pension fund assets typically have low exposure to credit risk on a national scale.

“Assets are generally managed conservatively against the regulatory investment guidelines with just 5.6% average exposure to equities at August 2019 compared to the 25% historically allowed.

“In addition there was over 70% average exposure to Federal Government of Nigeria (FGN) securities considered to be among the highest credit quality on the national scale.

“At the same date over 90% of industry assets were held in fixed income securities with national ratings of ‘BBB-’ or better”, it revealed.

Pension fund assets have grown rapidly since the first pension fund administrator (PFA) licenses were granted in 2005.

At August 2019 pension fund assets had grown to NGN9.3 trillion which was approximately USD25 billion from NGN4.5 trillion at June 2014. Fitch estimates that pension assets at August 2019 accounted for over 80% of total industry AUM.

Expert said by design Pension Reform Act of 2004 sought to address malpractice and low levels of funding, together with the strain on the federal government budget as a result of unfunded public sector defined benefit pensions.

Then, analysts agreed that the reforms heralded the mass adoption of defined contribution pension schemes, among other structural improvements.

This becomes possible on the back of the fact that pension contributions became a requirement for all employers with over three employees.

Just as regulation through the Financial Crisis Restrictive investment guidelines introduced as part of the pension reforms were tested through the financial crisis in 2008 and 2009.

“Restricting exposure to listed equities to a maximum 25% of portfolio assets for retirement savings accounts helped to limit the impact of stock market declines on the pension industry”, Fitch held.

It recalled that in 2008 pension funds recorded unrealised losses of approximately 7% amid a stock market decline of approximately 45% in the same year.

Then, the government and wider financial system viewed the pension sector’s out-performance of the market due to regulatory investment guidelines as a success, emboldening the Pension Commission to press ahead with further reforms.

Analysts, Fitch however reckoned that the large informal sector, those economic activities that is not taxed or regulated, in Nigeria poses challenges to the adoption of pensions across all demographics in Nigeria.

Today, some mid-size businesses have been slow to adopt the pension regulations, seeing them as a ‘cost’ given the employer contribution requirements.

Meanwhile, regulations such as micro pensions and new rules allowing early access to funds have been introduced in an effort to capture the informal sector.

Though, it is yet to be seen how successful these new reforms will be, Fitch noted.

“Regulation remains the key driver for growth as compulsory contributions are required from businesses of a certain size.

“However the success of the pension reforms in building market confidence is key to growing pensions in the informal sector as participation from these individuals is voluntary”; analysts stressed.

By Julius Alagbe