PENSIONS
Nigeria Strategy Report H1 2017
Pension Reforms Set Sights On Infrastructure Investing
Key Developments in Domestic Economic and Policy Environment
In today ’ s cut-out from our core strategy document – the Nigeria Strategy Report , we focus on developments in domestic pensions industry over H2 16 as well as delineate potential impact of new initiatives on the market over 2017 .
Despite prevailing economic headwinds which drove unemployment rate higher (+ 4pps to 13.8 % in Q3 16 ) and delayed payments of RSA contributions to appropriate PFAs at the Federal and Statelevels , total pensions asset rose 17 % YoY ( 2015 : + 11 % YoY ) to N6 trillion over 9M 2016 . Specifically , the rise in the number of unemployed had stoked concerns over outflows from RSA accounts given the PENCOM provision which allows individuals who are out of work for a period of at least 4 months , to access 25 % of their RSA contributions .
The concerns notwithstanding , optimism was bolstered by subsisting increases in the number of compliance certificates issued by PENCOM which could cascade into new offsetting RSA inflows .
Elsewhere , possibly reflecting concerns over the sustainability of currently elevated interest rates environment — in view of the recession-hit domestic economy — and recent clamour for a redirection of Nigeria ’ s pension resources to infrastructure upgrade , PENCOM released draft regulation on investment of pension funds in infrastructure in November 2016 . Under the guidelines , PFAs can now invest up to 20 % of accumulated pension assets in infrastructure ( vs . 5 % previously ) split into investments in infrastructure bonds ( 75 %) and infrastructure funds ( 25 %). However , PENCOM noted that both instruments ( infrastructure bonds and infrastructure funds ) must demonstrably meet the conditions for investing pension funds in infrastructure before PFAs would be allowed to take advantage of the utlets .
Our review of experiences across other markets suggest inherent problems with attaining the 20 % target . First , in terms of deal flow , after a brisk pace in early 2000s , privatization of public enterprises has slowed on the back of strong resistance by labour unions and political interest groups which shrinks the amount of brownfield assets available for infrastructure investing . Secondly , the average lifespan for PPP projects is north of 20 years and given the lack of a deep and liquid non-sovereign naira yield curve , funding for such projects acts as a constraint . Added to all these , given the usual long gestation periods for infrastructure projects which is often characterized by constant litigations in environments where contractual agreements are often breached , Nigeria ’ s weak regulatory and legal institutions look set to remain a key setback to the new initiative .
PFAs maintain FI “ love story ” as equities journey south …
Despite prevailing economic headwinds which drove unemployment rate higher (+ 4pps to 13.8 % in Q3 16 ) and delayed payments of RSA contributions to appropriate PFAs at the Federal and State levels , total pensions asset rose 17 % YoY ( 2015 : + 11 % YoY ) to N6trillion over 9M 2016 . Specifically , the rise in unemployment (+ 21 % to 16 million people by Q3 16 ) stoked concerns over outflows from RSA accounts given the PENCOM provision which allows unemployed individuals , who are out of work for a period of at least 4 months , to pull out 25 % of their RSA contributions . The concerns notwithstanding , optimism was bolstered by subsisting increase in the number of compliance certificates issued by PENCOM ( 9M 16 : + 31 % YoY to 3,619 vs . + 27 % YoY to 2 , 762 in 2015 ) which could cascade into new offsetting RSA inflows .
Looking at the breakdowns of overall asset holdings (+ 11 % YoY to N6 trillion ), gains mirrored strong expansion in value of Fixed Income ( FI ) securities (+ 24 % YoY N4.7 trillion ) which offset contraction in Variable Income investments ( -3 % YoY to N1.3 trillion ). Notably , PFAs stepped up their chase for higher yields ( average fixed income yields over Q3 16 : + 127bps YoY to 15.98 %) which boosted FGN (+ 26 % YoY to N3.5 trillion ) and corporate bonds assets (+ 99 % YoY to N294 billion ). Accordingly , FI share of pension assets climbed 437 bps YoY to 78.4 %. 27 At the variable income end , weakness was underpinned by sharp declines in value of assets held in local money market securities ( -13 % YoY to N413 billion ) and domestic equities ( -3 % YoY to N525 billion ). Nonetheless , given the scale of the inflationary spiral in 2016 , gains in overall pension assets looked less promising in real terms .
… PENCOM unfurls investment guidelines for infrastructure investing
Possibly reflecting concerns over the sustainability of currently elevated interest rates environment — in view of the recession-hit domestic economy — and recent clamour for a redirection of Nigeria ’ s pension resources to infrastructure upgrade , PENCOM released draft regulation on investment of pension funds in infrastructure in November 2016 . Under the guidelines , PFAs can now invest up to 20 % of accumulated pension assets in infrastructure ( vs . 5 % of fund I previously ) split into investments in infrastructure bonds ( 75 %) and infrastructure funds ( 25 %). However , PENCOM noted that both instruments ( infrastructure bonds and infrastructure funds ) 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 underlying ( single ) infrastructure project must be worth at least N5 billion with the
invests . ng - MARCH / APRIL 2017 7