Prospects for Pension Assets in the Nigerian Non-Interest ...

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ARMPENSION | Classification: INTERNAL USE

Prospects for Pension Assets in the Nigerian Non-Interest Capital Market Ecosystem



Abimbola Sulaiman CFA27th October 2021


3

9.3m

Industry RegistrationApril 2021

12.3Trillion

12.3Trillion

N12.4t

Industry AuM

April 2021

7.9%

Pension assets % of

GDP

March 2021

62%

RSA Funding RatioDec. 2020

10.24%

11.53%

78.22%

Industry AuM Breakdown

Existing Schemes CPFAs RSA Funds

Gender Distribution March 2021

30%70%

Industry Snapshot


4

1.7

2.8

3.54.0

4.54.9

5.45.7

6.46.9

7.37.8

8.48.9

9.2

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

RSA (Million) YoY growthSource: PenCom Data

0.8 1.1 1.5

2.0 2.4

3.2

4.1 4.6

5.3

6.2

7.5

8.6

10.2

12.3

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

7 8 9 10 11 12 13 14 15 16 17 18 19 20

Pension Assets Annual Growth

RSA Registration Trend(m) Pension Assets Trend (NGNtn)

• Pension assets have continued to experience consistent growth in nominal terms

• Industry assets under management have grown at a CAGR of 23% (2007-2020) to N12.3 trillion as at December 2020

• Growth in the number of contributors to the CPS in Nigeria has reduced to an average 5.8% over the past five years compared to an

average of 8.7% (2011-2015) and 28.3% (2007-2010) due to slower growth in the labor force in recent years

Industry Trends


5

MICRO PENSION SCHEME

Micro Pensions scheme was

introduced to extend the pensions

scheme to the informal sector.

MULTIFUND STRUCTURE

The introduction of the multifund

structure to cater for contributors'

different risk profile and age

OPENING OF THE TRANSFER WINDOW

The opening of the Transfer Window is

driving improvement in service delivery

in the industry as operators are

striving to improve clients’ satisfaction

in order to retain existing clients and

attract new contributors.

NON-INTEREST FUND

The introduction of non -interest

fund to cater for RSA Holders

who desire their savings to be

invested in non-interest

instruments

MINIMUM PENSION GUARANTEE

MPG was introduced to ensure

sustainable pensions for

vulnerable retirees

.

Major Industry Developments


6

Source: PenCom, ARMP research

*RSA I: N35bn*RSA V: N185mn

Uptake for Optional/non-default funds have been slow


7

Pe

nsi

on

Ind

ust

ry

Devaluation risk

Only 13.5% of the Labor force

are currently enrolled in the

Contributory Pension Scheme

Inability to adequately hedge

returns against devaluation

Low coverageNegative Real Returns

Delivering real returns has been a

challenge due to high inflation

Non-Compliance by some State Governments

Some states governments have not showed

enough political will to implement the CPS

Inadequate awareness

The scheme’s benefits and operations

as well as distinction between other

government schemes that are fraught

with challenges still need to be more

publicized

Dearth of investment outlets for pension assets

There are limited investment options for Pension

assets in Nigeria

Challenges


8

Globally, Islamic Pension Funds are still relatively underdeveloped

• Data collection/Integrity Issues

• Poor Institutional Setup of Pension funds in predominantly Muslim

countries

• Only 3 pension funds from 2 countries are listed in the global top-300

pension funds (2 from Malaysia and 1 from Kuwait)

Outstanding

Value

USD 'bn, 2018

Mutual Funds 97

ETFs 9

Insurance Funds 2

Pension Funds 0.37

Potential Growth Drivers

• Gradual Conversion of Existing conventional pension funds

• Reform of Social Security System in most OIC member countries

• New awareness of Muslims living in Western developed economies preferring to use Islamic products

• More close alignment between Islamic finance and Sustainable/Responsible ESG investing as these two

approaches are quite intertwined


9

Fund VI Launch

• Fund VI could fare better than other optional funds launched so far due to the strong value-based intent

driving adoption

• The Times UK reported that as many as 30% of Muslims opted out of Workplace pension schemes

because of a lack of options that align with their religious principles

• This demonstrates that the fund VI launch is critical as there is no “opt-out” option in the Nigerian CPS

• It is unclear if this could serve as a conversation starter for Segments of the economy that have yet to

embrace the CPS and we would have to wait and see for the “financial inclusion” argument to play out

(for instance, none of the State governments have cited the lack of a Halal-option as reason for not

legislating the scheme in their states)


10

Fund VI Launch requires a radical shift in the investment mindset

CapitalizationPension Assets

CPS ownership

FGN bonds, N'tn 12.29 7.78 63.3%

Listed Equity, N'tn 21.82 0.85 3.9%

FGN Sukuk, N'bn 362.56 73.8 20.4%

“The Shariah Plan invests 100% of your money in

company stocks and so it carries a higher level of risk

than some of our other plans, which invest a higher

percentage of your money in bonds that are less risky.

This means that there is a higher growth potential over

the long term, however you may also see larger ups &

downs along the way. Please bear in mind that these

short-term ups & downs are to be expected when it

comes to investing in the stock market, and are in fact

necessary when trying to grow your money over the long

term”

………HSBC Islamic Global Equity Index Fund / PenFold

https://help.getpenfold.com/en/articles/3540424-equities

https://help.getpenfold.com/en/articles/3540302-bonds-fixed-income


11

Fund VI Launch requires a radical shift in the investment mindset

• More reliance on specialist investment vehicles and 3rd party providers

• Higher exposure to variable income instruments and equity-type investments

• Clear differentiation in investment strategy and outcomes

• Clear communication to the sell-side and capital markets that non-interest fund should

not translate to sub-par returns

• Willingness to back and invest in new product structures and new managers

• Education and Reorientation of Investing Public and subscribers


12

Continuous strengthening of the

industry’s capacity to evaluate and

manage associated risk with new

kinds of asset classes

Capacity Development Promote Diversification

Remove barriers to pension funds

efforts to diversify their investments in

offshore assets or other alternative

assets in search of positive real returns

Closer collaboration with other regulators to

achieve deepened financial markets that is

constantly creating new asset classes that

can absorb pension assets growth

Closer CollaborationExpand Coverage

Pursue increased coverage through

the newly introduced options and

continuous enforcement for

compliance

Government support needed through

legislation, policy and regulation to de-

risk investments and drive increased

private sector participation

Increased Government Support

Improve Ecosystem Education/Awareness

Deliberate effort to educate and inform the

contributing public as well as employers, media,

PFA staff, capital market operators etc on

mutually beneficial priorities

Looking Forward


We are optimistic that the launch of the RSA fund VI will further catalyze the growth non-interest investing in Nigeria



Thank You

Prospects for Pension Assets in the Nigerian Non-Interest ...

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