Friday, January 22, 2016 9:49 AM / ARM Research
Today we conclude the review of the domestic policy environment in ARM’s core strategy document – Nigeria Strategy Report, by exploring developments in the pension industry over 2015 and their outlook for the sector over 2016.
Pension fund assets continued its steady growth with AUM rising 11.7% year through October 2015 to
N5.1 trillion, largely reflecting expansion in Fixed Income (FI) instruments (+14.7%) which muted declines in Variable Income (VI) securities (-1.7%). Though the value of domestic equity assets contracted 5.4% year to October, its slower decline relative to the NSEASI’s performance over the same period (-15.8%) suggests increased purchase of stocks.
On the policy front, industry regulator moved to plug the loophole in the AVC which some contributors viewed as an avenue to lower tax liability by making tax exempt contributions and withdrawing same tax free, rather than increasing retirement benefits. PENCOM stipulated in the draft guideline that only 20% of the voluntary contribution balances would be accessible for withdrawal and that will only be once every four years. After the last withdrawal, a further withdrawal of 20% of subsequent additional contributions is allowed but the remaining 80% would only become available at retirement.
Furthermore, in a bid to stem the lingering housing deficit, the National Pension Commission released a guideline that will govern use of RSA balance to secure residential mortgages. In addition, PENCOM issued revised guidelines for two complementary initiatives earlier in 2015: the multi-fund structure and transfer window. Nonetheless, progress on these two items remain delayed in part reflecting absence of a sitting board, and the limited progress on necessary interplay with other regulators.
Attention shifts to curbing AVC exploitation and reducing housing deficit
The National Pension Commission finally released a draft guideline governing the Additional Voluntary Contribution (AVC) wherein the objective of the AVC was expressly stated as enhancing retirement benefits. Under the Pension Reform Act 2014, which currently guides pension contributors’ voluntary payments, only the income earned on such contribution was taxable and only if such income was withdrawn within 5-years of the contribution; the contribution itself was tax-exempt regardless of time of withdrawal. Scheme participants exploit this loophole in the AVC, making additional contributions for extremely short periods with PENCOM suggesting some accounts where being run in a semblance of savings accounts. In sum, the AVC was seen by some contributors as an avenue to lower tax liability, by making tax exempt contributions and withdrawing same tax free, rather than increasing retirement benefits. In a bid to restore the real objective of pension contributions, PENCOM stipulated in the draft guideline that only 20% of the voluntary contribution balances would be accessible for withdrawal and that will only be once every four years. After the last withdrawal, a further withdrawal of 20% of subsequent additional contributions is allowed but the remaining 80% would only become available at retirement.
Whilst adoption of this guideline should reduce scheme participants’ utilisation of the AVC, it should remain appealing to contributors whose true aim is to augment their retirement assets.
Furthermore, in a bid to stem the lingering infrastructural deficit, the National Pension Commission released a guideline that will govern use of RSA balance to secure residential mortgages. According to the guideline, pension contributors in active employment who have consistently contributed for at least 10 years and with a low leverage position (Maximum Debt/Equity: 33.33%) will be able to access up to 25% of pension fund as equity contribution in respect of their first home ownership mortgage. Furthermore, PENCOM stipulated that the mortgage loan must range between N1.5 million and N50 million with a tenor of between 5 to 20 years. In addition, proceeds from the loan must be used to purchase either a single family home or an apartment in a multi-unit building, which must be owner occupied. Given the aforementioned restrictions, at least half of pension contributors would likely be excluded from accessing their RSA funds for home mortgage as PENCOM’s target audience appear to be middle income earners. Whilst an immediate impact may not be felt, we see this as a critical legislation that could unlock massive capital that would flow into the real estate sector and help bridge the housing deficit.
FI market captures most of pension asset growth
Pension fund assets continued its steady growth with AUM rising 11.7% year through October 2015 to N5.1 trillion, largely reflecting expansion in Fixed Income (FI) instruments (+14.7%) which muted declines in Variable Income (VI) securities (-1.7%). In particular, FGN securities (bond and treasury bills) rose 18.4% to N3.4 trillion over the period as pension fund managers likely increased purchases to take advantage of attractive yield over the period (average yield: Year through October: 15.1%; 2014: 12.66%) with the asset class’ share of total assets climbing 3.78pps to 67%. Elsewhere, percentage holdings of Sub-National (-60bps to 3.1%) and Corporate (+40bps to 3%) securities were relatively unchanged with the directional changes largely in tandem with available new issuance in each category. Sub-national issues in particular appeared subdued as a consequence of fiscal challenges. Though the value of domestic equity assets contracted 5.4% year to October, its slower decline relative to the NSEASI’s performance over the same period (-15.8%) suggests increased purchase of stocks. Meanwhile there was sizable movement in the holdings of alternative investment, though overall share remains tiny, as value of private equity assets rose 56.3% over the aforementioned period to N17.3 billion while infrastructure fund witnessed an inflow of N1.3 billion over 2015 vs. nil at the end of 2014. Whilst percentage holdings of foreign securities (1.4%) remain insignificant, value of foreign assets rose 17.9% (foreign money market securities: more than five-fold to N652 million, foreign equities: +17.1% to N69.7 billion) largely in tandem with the scale of the USDNGN devaluation in February (18%).
Table 1: Sub-National Issued Bonds over 2015, trend in pension assets
Table 2: Table of Corporate Issued Debt Securities over 2015
Figure 1: PFA Asset Allocation
In sum, PFAs continue to maintain limited exposure to VI securities (16.2% of total pension assets) highlighting the risk-averse nature of pension managers despite a long term liability structure1 that should give scope for greater risk asset creation.
New efforts to catch cold from key initiatives still on ice
Perhaps, in a bid to address this long-standing dislocation, PENCOM issued revised guidelines for two complementary initiatives earlier in the year: the multi fund structure and transfer window. For the multi-fund structure, whilst our previously analysis clearly indicated the potential for the multi-fund structure to raise allocation to equities/VI instruments, even if PFAs only met the minimum floor allocation in risk asset category of each of the four sub-funds. However, the lack of implementation, perhaps due to absence of a PENCOM board which should give final approval meant the expected impact (boost to VI) did not materialize. Similarly, the expected opening of the transfer window which was expected to catalyse operational efficiency and a scramble by operators to differentiate their investment strategies, in a bid to retain clients, also failed to kick off. For this second initiative, the apparent reason for inactivity was the need to clean up multiple registrations present on the existing database.
Based on the nature of the issues that impaired implementation of these prior initiatives, in particular the absence of a sitting board, and the necessary interplay with other regulators to push the investment-related changes through, we do not expect significant action on this front going into H1 16. In contrast, we are of the view that the operational nature of new AVC, especially since it’s basically an amendment to an existing process, could see the regulator follow-through.
Nonetheless, we do not expect significant dampening implications from the initiative for pension assets given the previous AVC structure simply served more as a pass-through for seekers of tax shelter. For the mortgage initiatives, we believe more clarity needs to be provided for pension contributors as to exactly how the process will work, before the impact can be seen on any of the industries involved (banking, pensions, real estate).
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