Pension Funds Investment In Real Estate, Infrastructure Will Grow Assets – Ojumu

The Head of Equities and Fixed Income sales, Absa Nigeria, Simi Ojumu, speaks on the operations of Absa in Nigeria, how to diversify pension portfolio and how Pension Funds Administrators can meet their recapitalisation targets.

Question: We noticed a stronger presence of Absa in Nigeria. Tell us about your operations in Nigeria.

Answer: Absa is a leading Pan-African Bank with a strong footprint and proven on the ground capabilities across the African continent. In 2010, Absa established a corporate and investment banking representative office comprising 3 bankers. The team has since expanded.

We now have two licensed subsidiaries namely Absa Capital Markets Nigeria Limited and Absa Securities Nigeria Limited; both firms are fully owned subsidiaries of Absa Group Limited. We are licensed by the Nigerian Securities and Exchange Commission (“SEC”) to provide financial advisory, capital raising services and Stockbroking services in the Nigerian capital market.

Absa Capital Markets Nigeria Limited and Absa Securities Nigeria Limited were established in 2017 to further expand Absa’s product and service offerings in Nigeria.

Question: As the custodian of Absa’s pension portfolio in Nigeria, what is your opinion on the pension industry in Nigeria, how has the Contributory Pension Scheme (CPS) fared?

Answer:The Nigeria pension industry has really evolved and in the right direction too. This significant growth we have seen is incident on the enactment of the Pension Reform Act (PRA) of 2004. While that Act has been replaced with the PRA 2014, the growth trajectory we have witnessed in the pension industry is hinged on the PRA of 2004. 

Prior to the PRA of 2004, the industry was near stagnant catering to only a few of the Nigerian workforce. With the PRA, it became mandatory for every employer with more than 5 staff strength to enroll its staff in the scheme and contribute. Today, the Contributory Pension Scheme (CPS) has enabled millions of Nigerians to have inputs on who manages their pension funds. A savings culture is being imbibed, as both employee and employer must contribute towards the employee’s retirement. The CPS, through the multiple operators and agencies- the Pension Fund Administrators (PFAs), Pension Fund Custodians (PFCs), Closed Pension Fund Administrators (CPFAs) and the regulator National Pension Commission (PenCom) has created an ecosystem of career path, employment, business and investment opportunities for several Nigerians. 

In less than two decades, Nigeria’s Net Assets Value of Pension Assets has grown fromFederal government budgetary pension deficit estimated at N2 trillion as at June 2004 to N13.6 trillion as at January 2022. Its contribution to GDP has grown from 0.9% in 2004 to 9% in January 2022. Of the N13.6 trillion Net Assets Value, over 60% of the funds are invested in FGN Securities, while the rest are spread across local money market securities, states governments securities, real estate, mutual fund, corporate debt securities, infrastructure funds, private equity, cash and other assets.

Indeed, the CPS has fared well, but there is room for growth. 

Question: With a labour force of over 80 million Nigerians, only 9.5 million have Retirement Savings Accounts (RSAs). What would you say is responsible for this? And how can it be improved?

Answer: Despite the considerable success of the PRA 2014, the CPS has faced and continues to face some challenges. Low coverage, lack of political will on the part of state governments (only 24 states in the country have adopted the law), inadequate awareness on the scheme’s benefits and the inability to ensure strict compliance by the parties, especially the Federal Government who is the largest employer of labour. Several bills, requesting exemption of different groups of Federal government employees continue to be put forward, even with the knowledge that this will cause a disruption to the flow of the CPS as we know it.

Concerted efforts should be made to ensure the complete success of the CPS. More public and private sector organizations should participate in the scheme. The Federal government should adequately fund its employees’ accrued benefits. Compliance should be ensured, and massive awareness should be carried out by all the parties involved.

Question: How have the pension assets fared, in terms of contribution to GDP?

Answer: The bulk (61%) of the pension assets, as of the end of January 2022, was invested in Federal Government securities, providing the Federal Government with low-cost long-term funds to implement its capital budget. PFAs also invested in companies listed on the Nigerian Stock Exchange, with 7% of funds invested at the end of January 2022. In addition to providing stable ownership in key firms, PFAs also improve corporate governance in listed firms they invest in, this is due to their collective investing power, which they can use to enforce best practice in corporate governance. Furthermore, PFAs invested 7% of pension funds, in the same period, in private sector corporate bonds, providing the firms with long-term cheap funding to finance growth.

The Net Assets Value of Pension Assets under the Contributory Pension Scheme, N13.6 trillion represents 9% of nominal GDP

Question: Should a part of pension assets generated in Nigeria be invested in global markets?

Answer: This is already being done, as the pension assets are invested in a much-diversified portfolio, including a mixture of global and local equities, which is strictly regulated by the PenCom. PFAs willing to invest in global markets will seek PenCom’s approval. 

Currently,majority of the pension funds are invested in government securities (federal and state governments bonds), there are other investments in the stock exchange, corporate bonds, real estate, private equity, infrastructure funds and there is the need for diversification to foreign markets for higher returns and hedge against inflation, currency fluctuation and market volatility.

Other diversification considerations should include alternative and non-traditional investments as consistent with global trends. However, the PenCom restrictions on the percentage of funds that can be invested in various sectors, markets and financial institutions, should be further reviewed. The current percentage of funds allowed to be invested in real estate, private equity and infrastructure funds are grossly inadequate if we want to grow the Nigerian pension assets to GDP to the 100% mark as obtained in other markets.

Beyond investment in global markets, the investment portfolio for the PFAs should be critically reviewed in terms of performance.  It is important to ensure that inflation does not erode the value of these assets and investments over time.

Question: What can the National Pension Commission (PenCom) do to increase participation in the CPS and compliance from existing employers?

Answer:There is a need for massive awareness on the implications of partial and non-compliance with the PRA 2014 by private employers, state governments and the federal government as well.It is uncharitable for any state government or any employer of labour, be it in the public or private sector, to delay enrolling their workers in the new pension scheme. There is also the need for stricter enforcement to ensure that state governments and private employers remit pension deductions to workers’ PFAs. There is the need for PenCom to engage the critical stakeholders here; State houses of Assembly, National Assembly, the Financial Reporting Council of Nigeria (FRCN) to drive compliance in enrollment and remittances.

Question: The Pension Reform Act 2014 amendment is in its final legislative stages. With the amendment seeking to exempt the Nigerian Police Force (NPF) from the PRA 2014, what will be the immediate effect on the economy in view of the current budget deficit of N6.2 trillion?

Answer: Exemption of the personnel of the NPF would imply additional financial burden on the Federal Government by way of unsustainable pension obligations.

As of September 2021, there were 304,963 police personnel based on IPPIS data, and actuarial valuation revealed that the retirement benefits (pension and gratuity) liability of this personnel under the defunct Defined Benefits Scheme would amount to about N1.84 trillion.

The liability under the CPS for the same NPF personnel is made up of N213.4 billion with accrued pension rights and monthly employer pension contributions of about N2.2 billion.

In the light of this and the current budget deficit, all parties involved need to seek other solutions, as withdrawing the NPF from the scheme could destabilize the entire model and will impact heavily on an over-burdened budget.

Question: How will the amendment impact on the savings culture of Nigerians?

Answer: It may set an unhealthy precedence of various groups wanting to pull out of the CPS, which will in turn, negatively impact on the savings culture hitherto imbibed. The mandatory nature of the contributions has helped employers and their employees to be directly involved in saving for their pensions and ensure accountability in the process. Compared to what was in existence during the era of Defined Benefits where there were no funds and people waited forever to receive their retirement benefits.

Again, it brings us to the need for increased awareness for the benefits of the CPS, its contribution to economic growth and the security it portends against defined benefits. 

Question: The deadline for recapitalisation of Pension Fund Administrators is upon us and we have seen the initiation of some mergers and acquisitions in the pension industry. Increasing the shareholders’ funds from N1 billion to 5 billion per PFA, how do you see this affecting the pensions industry?

Answer: This is the second recapitalization the pension industry has seen since the inception of the Contributory Pension Scheme, and it is a sign of growth in the industry. As the assets under management and the PFA portfolios grow, the recapitalization becomes necessary.

The PFAs will need to retain their skilled workers and attract top-tier talent. There is need for digitalization, post Covid-19. 

For those who have been unable to meet the capital base on their own, they have gone the route of Mergers and acquisitions, to make them bigger players in the pension industry. 

Question: How will the M&As affect the contributors’ assets and will there be any downsides?

Answer:PenCom announced the approval of three Mergers and Acquisitions on March 2, 2022, these mergers and acquisitions enable the entities to pull their resources together and become a larger force. The new PFAs will have the combined Assets Under Management (AUM) of the previously separate PFAs under one umbrella, which gives them more resources at their disposal.With smooth transitions, there should be no negative effects to the contributors’ assets.

However, smooth transitions are also largely dependent on the Investment bank that facilitates the reorganization and, in this case, the mergers and acquisition. This is one of the core services of Absa Group in Nigeria. At Absa Nigeria, we have proven expertise to manage mergers and acquisitions to ensure smooth transition of the new company.

Question:How can the Pension Fund Custodians (PFCs) take a more active role in the CPS?

Answer: Pension Fund Custodians (PFCs) are responsible for keeping safe custody of pension assets on trust on behalf of contributors. The main functions of PFCs are to receive pension contributions on behalf of PFAs; settle transactions and undertake activities relating to the administration of pension fund investments on behalf of PFAs and to notify the PFA within 24 hours of the receipt of pension contributions from employers.

The role they play in ensuring the safety of the contributor’s assets cannot be over emphasized.

Question: With Absa being experts in the Fixed Income and Equities trading space, how would you advise policy makers to go about improving the business of pensions?

Answer: The most important thing would be to ensure the sustainability of the contributory pension scheme. Ensuring participant compliance by the Federal, State governments and the private sector, creating awareness of the benefits, creating an investor-friendly environment, are some of the ways that policy makers can ensure that the pension sector continues to thrive and improve its contributions to the country’s GDP. 

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