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Strict Regulations, Safety of Pension Funds


April 8, 2009




Operators in the Nigerian pension industry have always complained that the industry is over-regulated, but the National Pension Commission (PenCom) seems to have been vindicated by the strict regulations on investments, which prevented the colossal loss of the nation's pension funds in the face of the global meltdown.

Genesis of pension reform in Nigeria

Pension reform, which is now the in-thing throughout the world, became inevitable in view of pension debacle that was witnessed in the past. To reverse the trend and put a halt to the increasing rate of old age poverty, which inflicted maximum pain on the people, who had contributed so much to the growth and development of the country, the then President Olusegun Obasanjo-led Federal Government jettisoned the defined benefit, non-contributory pension scheme for the present defined contribution pension scheme with the enactment of Pension Reform Act 2004. The country, therefore, moved away from the Pay-As-You-Go to Pay-As-You-Earn pension system.

Objectives of pension reform

According to the Pension Act, the objectives of the contributory pension scheme are to

(a) Ensure that every person, who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as and when due:

(b) Assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age, and

(c) Establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the Public Service of the Federation, Federal Capital Territory and the Private Sector.

Updates on contributory pension in Nigeria

Director-General, National Pension Commission (PenCom), Mr. Muhammad Ahmad, said that at the last count, the regulatory body for pension business in the country had registered and certified 37 operators under the scheme. This consists of 26 Pension Fund Administrators (PFAs) and seven Closed Pension Fund Administrators (CPFAs) and five Pension Fund Custodians (PFCs).

About N471.77 billion has been contributed by workers and their respective employers in the last four years and in addition to N628.23 billion inherited funds from the various rested pension schemes before the advent of contributory pension in the country including the Nigeria Social Insurance Trust Fund (NSITF), the pension assets in the country sums up to N1.1 trillion as at last December.

The Federal Government as at last month has contributed N247 billion into the Retirement Savings Accounts (RSA) for its workers. It has also released an additional N96 billion to redeem the accrued rights of its employees for their past services under the rested pension schemes even as N70 billion has been paid out to 11,513 employees who retired between July 2007 and last month out of the 19,637 workers that enrolled to retire between 2007 and 2009.

As the global meltdown is impacting negatively on all businesses, the pension industry cannot be an exception. PenCom, however, states that its strict regulations on investment assisted in reducing this impact on the nation's pension fund assets.

Stock market crash

The bear run on the Nigerian Stock Exchange (NSE), which started as far back as the second quarter of 2008, has sent the prices of shares quoted on the floor of the exchange crashing by over 400 per cent in the last 10 months.

Reacting to this development, the Managing Director of Guinea Insurance Plc, Mr. Nicholas Ojinnaka, recalled that insurance companies invested a sizeable proportion of their capital and premium income in quoted stocks, adding that investment income make up a large percentage of the profit recorded by insurance companies every other year.

He reasoned any changes in share prices impacts significantly on the profitability of insurance companies and their ability to meet maturing financial obligations to all their stakeholders generally.

"It is mournful as the returns on investments of some companies have gone down by over 300 percent. A share that one bought at N70 per share earlier last year is now selling for N16 per share. This is tragic." he lamented.

According to the PenCom boss, the amount of "unrealised loss" suffered by workers under the four years old contributory pension scheme in the country peaked at N3.14 billion.

For the sake of better understanding, N471.77 billion has been pooled under the new scheme, 9.52 per cent of this totaling N44.91 billion was invested in equities of companies quoted stocks on the Nigerian Stock Exchange (NSE). 7 per cent of the amount invested in the capital market last year totaling N3.14 billion was lost as a result of the capital market crash during the outgone year. PenCom maintains that the loss is yet to be realised.

Pension assets loss globally

The global financial meltdown has virtually hit the economies of the nations across the world, with pension funds in different countries coming out as one of the major casualty. This is in reflection of the fact that in these countries, a significant proportion of pension assets are invested in equities of quoted and unquoted companies which is presumed to pay back higher returns within the shortest period of time among other investments.

Ahmad while reviewing the situation, said that "the crash in the stock markets has affected pension fund assets globally. Pension funds with the largest exposure t equities were worst hit... In 2008, global pension assets fell by US$5 trillion due to the financial crisis."

Confirming the extent of erosion of pension assets in key economies across the world, he said:

"In USA, retirement savings accounts alone lost US$2 trillion in 2008. According to the Pension Protection Fund, 89 percent of private pension schemes in the UK became unhealthy by the end of 2008 largely due to the stock market crash. Irish pension funds lost 30 percent of their value in 2008.

"The situation is similar in many European countries except Germany which adopted a safe approach to managing pension funds by ensuring that a higher proportion was invested in bonds. Chile's pension fund dropped from US$95.3 billion in October 2007 to US$69.1 billion in October 2008," he added.

It is notable that the losses suffered by Nigerian workers ranged among the least across the world going by the N3.14 billion unrealised loss declared by PenCom.

Due to the fact that Retirement Savings Account (RSA) investments in equities were 15.93 per cent in 2007 and 9.52 per cent as at the end of December 2008, he said this has taken the industry into a comfort zone of ensuring that pension assets are guarded from further effects of the global financial crisis.

As pointed out that the RSA fund, which stood at N471.77 billion lost about 7 per cent due to the crash in the equities market, Ahmad was quick to add that returns from non-equity and mutual fund investments were however positive and had outweighed the losses incurred in 2008 due to the meltdown in the capital market.

"Eventually, overall returns for the RSA funds was marginally positive at 0.73 per cent over the year. Being long term funds, the low return by the RSA fund may also be compensated in time when the capital market rebounds," he stated hopefully.

Need for more protection for pension assets in the country

Be that as it may, the regulatory authority in the nation's pension industry should be commended for its protective role over retirement benefits of workers in the country. The prudent management of the fund and the strict investment guidelines helped to reduce the losses that would have been suffered by the sector.

In the same vein, the pension operators too should be given commendation for being proactive enough to know when to reduce the level of investment in equities ahead of the burst in the capital market.

Explaining how the losses were mitigated, Ahmad said "The limit imposed by the Regulation of Pension Assets that only a maximum of 25 percent of pension assets under management can be invested in quoted equities shielded the largest proportion of the pension assets from becoming seriously affected by the stock market crash."

He added that "The only equities of very strong and rated companies that demonstrated positive returns are invested in. For example, RSA investments in equities were 15.93 percent in 2007 and 9.52 percent as at end of December 2008. This has taken the industry into a comfort zone of ensuring pension assets are guarded from further effects of the global financial crisis."

To cushion the effect of the volatility of the capital market on those who have already retired under the contributory pension scheme in the country, the pension operators in the country should establish Retiree Funds forthwith as directed by PenCom.

This is taking into cognizance the fact that the Retiree Funds can only be invested in the fixed income securities as the beneficiaries' investment horizons are relatively shorter than those of the exiting workers.

As the regulator had assured that with time, the multiple funds would also be introduced in the pension industry to cater for the different risk appetites of pension contributors, everyone of us should be seen to be supporting the commission.

It must be appreciated that the limit imposed by the regulation on investment of pension assets that only 25 per cent of pension assets under management can be invested in quoted equities, shielded the largest proportion of the pension assets from becoming seriously affected by the stock market crash.

Suggested recommendations

Having given PenCom a pat of the back for successfully ensuring the pension fund assets is not seriously eroded by the stock market meltdown, it will be instructive to state that the commission should not relax the regulations on the investment of pension funds. It should rather look for ways to strengthen these regulations.

Key stakeholders have been suggesting ways of mitigating future losses and protecting the value of pension assets. NLC's Vice President, Comrade Issa Aremu suggested that PenCom should lower the maximum exposure of pension funds in the stock exchange from the current 25 percent so that at any point of time, the risk would be manageable. This suggestion should be given due consideration.

The German model of pension administration which mandates that the larger proportion of pension assets be invested in fixed income investments including bonds, preference shares sounds attractive under this dispensation too.

This model ensures that notwithstanding the uncertainties in the economy, workers would be guaranteed minimum returns above the rate of inflation on their retirement benefits as against maximum gains and maximum losses as is the case with equities and it is advisable for the pension regulatory body to consider this option seriously.

At any rate, we should not also lose sight of the fact that another issue that is very important is the need to ensure that the value of the national currency remains stable because the greatest threat to savings including retirement benefits is the devaluation of Naira.

Government should do everything possible to ensure inflationary trends are curbed while ensuring stability in exchange rate of the Naira with other currency. These are the immediate ways to protect pension assets in the country.

It is further suggested that PenCom should come up with a comprehensive public awareness programme that would increase knowledge and understanding of the effects of the capital market crash and global financial crisis on pension assets.

Apart from closely monitoring private sector employers, there is need for the both workers and their industrial unions to ensure that the desired results are achieved by reporting aberrations and malpractices in perpetrated by employers.

It is needless to stress here that concerted efforts must be taken to ensure that the problems which bedeviled past pension schemes are not allowed to resurface again. However, we must bear it in mind that PenCom cannot do it alone. All hands must therefore be on the deck to ensure the safety of pension fund assets. It is only when these steps are taken that the laudable aims of pension reform are not defeated.

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