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