Friday, November19, 2021 / 10:02 AM / by Coronation Research / Header ImageCredit: SHRM

According to data from Nigeria's National PensionCommission (PENCOM) September 2021 report, the pension industry's assets undermanagement (AUM) rose by 0.8% m/m and 12.4% y/y to N13.0trn (USD53.9bn) as atend-September. Pension fund assets were mainly invested in FGN debt securities(FGN bonds, NTBs, agency bonds, sukuk, green bonds), which accounted for 63.2%of the total AUM, compared with 65.3% recorded in the corresponding period of2020. As at end-September, total FGN debt securities held by Pension FundAdministrators (PFAs) declined by -0.8% m/m but increased 8.9% y/y to N8.2trn.

FGN bonds held by PFAs increased by 0.7% m/m and 17.9%y/y to N7.8trn in September 2021 and accounted for 60.3% of total AUM. This iscompared with 57.4% of total AUM recorded in the corresponding period of 2020.The FGN's overall deficit financing in 2021 had a visible impact on the fixedincome market. As expected, the FGN's proposed 2022 budget of N16.4trn willinclude deficit financing of N6.3trn. We note that N2.5trn has been set as thedomestic borrowing target.

NTBs held by PFAs declined by -63.6% y/y and -30.9%m/m to N283.9bn in September 2021. This represents 2.2% of the total AUM. Inthe corresponding period of 2020, NTBs accounted for 6.7% of total AUM.However, we noticed a significant increase of 286% y/y in the average NTB yieldat end-September 2021 on the back of increased FGN domestic borrowing.

Based on the PENCOM report, state governmentsecurities held by PFAs increased by 0.5% m/m but experienced a -41.1% y/ydecline to N88.5bn. This asset class accounted for 0.7% of total AUM, comparedwith its share of 1.3% in September 2020.

Meanwhile, domestic equity holdings rose by 3.2% m/mand 49.1% y/y to N874bn. This asset class accounted for 6.7% of total AUM. Thisimplies a slight shift towards domestic equities by PFAs. In the same period,the all-share index (ASI) increased by 50% y/y.

There was a 0.7% m/m and a 5.7% y/y increase in thefunds allocated to infrastructure, real estate, and real estate investmenttrusts (REITs). Collectively, these funds accounted for 2.4% of the total AUMduring the period under review. Typically, investments into these asset classesare hampered by the shortage of eligible instruments.

Last month, PENCOM introduced a non-interest fund(Fund VI) that complies with Islamic Commercial Jurisprudence provisions.Accordingly, all PFAs must create and maintain the Non-Interest Fund (Fund VI)for interested Retirement Savings Account (RSA) holders. The Fund VI will beseparated into two funds for active RSA holders and retirees, respectively

Basedon a separate report released by PENCOM, the pension industry recorded a growthof 0.9% q/q to 9.44 million in schemes membership in Q2 2021. The growth inschemes membership was driven by the increase in the RSA scheme on the back ofincreased compliance.

In Q22021, the PFAs paid N74.1bn retirement benefits to pensioners under theContributory Pension Scheme (CPS). This is an increase of 9.9% or N6.7bn fromthe retirement benefits of N67.4bn paid in Q1 2021. Further analysis of thedata revealed that PENCOM approved 4,438 pension withdrawal requests, whichcomprised of 1,406 public (FGN & States) and 3,032 private sector retirees.As a result, these retirees received a total of N13.1bn.

Meanwhile,the commission granted approval to 1,708 retirees under the retiree lifeannuity for Q2 2021. A total of N4.6bn was approved for payment to theretirees. In contrast, the sum of N12.3bn was approved for payment to 14retiree life annuity providers as a premium in return for total monthly andquarterly annuities of N122.5m. In addition, approvals were granted for paymentof death benefits amounting to N6.2bn to the legal beneficiaries andadministrator of 1,209 deceased employees and retirees. This comprised of 835public (FGN & State) and 374 private-sector employees and retirees.

We notethat in April 2021, PENCOM approved a minimum regulatory capital requirementfor PFAs of N5bn from the initial N1bn, with a 12-month transition period.However, according to local news media, only 50% of the 22 PFAs have met thethreshold with barely six months to the deadline (April 2022) given to thePFAs.

Thepension industry should consider building on its successes and developing newcapabilities to support increased diversification of pension fund assets,expand coverage to states and the informal sector and enhance public awarenesscampaign efforts

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