What should be done to increase awareness of and improve the sector?
Adeniyi Falade This must be done through the law and regulation. At present, the law states the minimum contribution that an employee can set aside is 8%. Employees are free to set aside more if they wish. In terms of increasing penetration, there are currently around 8 million people participating in pension plans. This is below expectations, and we should have been able to cover more people in the last 14 years; however, Nigeria's informal economy is huge, so there is an untapped group in that segment. A micro pensions scheme has recently been launched to attract workers in the informal space into a pension plan. The whole idea is to increase contributions from less than 10% of working population to at least 30% by 2020. A number of people who want to join the plan cannot because they do not have formal employers, are self-employed, or have irregular incomes. This new plan allows people to contribute as much as they can rather than having a set amount taken out of their paychecks.
Dave Uduanu Presently, the pension fund industry is well regulated, with enabling legislation and a self-funded regulatory agency. One area we would like to see improvement from the government is the area of compliance, especially at the state government level, as not all states have fully complied with the PRA (2014) act to get their workers to be part of the pension system. Every individual needs to have insurance and pension because in the event of a calamity prior to retirement, a pension plan would return 25% of the savings to help start a new life. In addition, given our long liability structure, pension funds are better placed to invest long-term savings unlike banks, whose increased regulatory capital requirements with heavy preference for liquid instruments constrain their ability to offer attractive returns for long-term savers.
What kinds of asset classes do you invest in the most, and which sectors have the biggest potential for investment in Nigeria?
AF We have restrictions regarding the types of asset classes we can invest in. We can invest in federal government bonds and treasury bills, equities, and state government bonds; these are the traditional asset classes that the industry started with in 2005. In 2010, in a bid to improve real returns on the funds, the regulator approved investment in alternative asset classes, but those are limited to around 5%. Alternative asset classes refer to private equity, infrastructure and real estate funds, and instruments. REITs are an investment class that allow for portfolios of different types of real estate. This portfolio is then valued and listed on exchanges with shares issued to investors. These shares entitle investors to a percentage of the revenues generated by those portfolios. Typically, 90% of the income generated by REITs are distributed to subscribers as dividends. We can invest in these assets but not directly in real estate.
DU Presently, pension funds are faced with a shrinking investment frontier in the traditional assets due to the thin depth of local equity markets and an over-concentration in FGN bonds. As a consequence, there is an increased demand for alternative investment assets like infrastructure, real estate, and private equity to diversify pension fund portfolios. As liquidity providers, pension funds' desire for predictability in the return profile of an investment means they have a lower risk tolerance. Another issue is that the power infrastructure in Nigeria is posed with many problems— mainly related to the tariff structure—so investing in it is fraught with high risk. The other alternative groups are still in their infancy in Nigeria. The lack of a strong return track record for most alternative asset managers has resulted in a scenario where most pension funds invest largely in government bonds and to a limited extent in equities, where returns in local currency are decent. However, the issue with local currency investment is the potential loss in purchasing power from devaluation of the currency. At present, one of our plans is to examine ways to gain exposure to multi-currency instruments such as eurobonds.