How pension industry defied recession – Report
Despite prevailing economic headwinds which drove unemployment rate high and delayed payments of retired savings account contributions to appropriate pension fund administrators at the Federal and State levels, total pensions asset rose by 17 per cent in 2016.
The Nigeria Strategy Report H1 2017 released by the ARM research indicated that the industry performed better than 2015 as job cuts in the labour market and plunging investment yields made pension fund administrators adopted innovate ways of defying the downturns.
“Given the scale of the inflationary spiral in 2016, gains in overall pension assets looked less promising in real terms,” the report said.
Looking at the breakdowns of overall N6 trillion asset holdings, gains mirrored strong expansion in value of Fixed Income (FI) securities, which grew by 24 per cent to N4.7 trillion, offsetting contraction in Variable Income investments, which slowed by -3 per cent to N1.3 trillion.
The report stated that Pension Fund Administrators (PFAs) stepped up their chase for higher yields.
The average fixed income yields over by the third quarter of 2016 was 15.98 per cent, boosting federal government bonds by 26 per cent to N3.5 trillion and corporate bonds assets by 99 per cent to N294 billion.
Fixed income share of pension assets rose by 78.4 per cent while at the variable income end, weakness was reduced by sharp declines in value of assets held in local money market securities at -13 per cent to N413 billion and domestic equities to -3 per cent to N525 billion.
The 21 per cent rise in unemployment in the year with 16 million unemployed as at the third quarter of 2016 stoked concerns over outflows from Retirement Saving Accounts (RSAs) given the PENCOM’s provision which allows unemployed individuals, who are out of work for a period of at least 4 months, to pull out 25 per cent of their RSA contributions.
The concerns notwithstanding, optimism was bolstered by subsisting 31 per cent increase in the number of compliance certificates issued by PENCOM which could cascade into new offsetting RSA inflows.
PenCom issued 3, 619 compliance certificates in 2016, up from the 2, 762 certificates issued by the Commission to employers in 2015.
The report stated that PENCOM released draft regulation on investment of pension funds in infrastructure in November 2016, reflecting concerns over the sustainability of currently elevated interest rates environment and recent clamour for a redirection of Nigeria’s pension resources to infrastructure upgrade.
Under the guidelines, PFAs can now invest up to 20 per cent of accumulated pension assets in infrastructure, an increase from previous 5 per cent, split into 75 per cent investments in infrastructure bonds and 25 per cent infrastructure funds.
However, PENCOM noted that both instruments must demonstrably meet the conditions for investing pension funds in infrastructure before PFAs would be allowed to take advantage of the outlets.
Specifically, for infrastructure bonds, the infrastructure project must be worth at least N5 billion with the contract awarded to a concessionaire with good record of accomplishment via a transparent bidding process.
“To protect investing PFAs against project suspensions, cancellations, and changes in policy decisions that could alter prior financial forecasts, PENCOM also recommended that the said infrastructure bonds have practicable redemption procedures,” the report said.