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Fresh Regulatory Initiatives hold little Promise

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Saturday, August 20, 2016 02:45 PM / ARM Research

Here is the conclusion of the domestic policy environment review of ARM’s core strategy document – the “Nigeria Strategy Report H2 2016”; which explores developments in the pension industry over H1 2016 and the outlook for the sector over the rest of 2016.

Given that nearly 70% of the 9 million formal market already have a pension account, it appears that the uncovered segment of Nigeria’s 68 million working population is largely in the informal market where most workers have widely dispersed and irregular income streams. In a bid to penetrate the space, the National Pension Commission (PENCOM) is set to introduce the Micro Pension Plan (MPP) by the end of 2016.

According to PENCOM, the MPP is a customized financial programme for the provision of pension services to employees in the informal market. Without giving further details, the commission explained that the scheme would be structured to encourage small, regular and sustainable savings by low income earners and estimates that successful implementation should triple CPS clients to 20.4 million (~30% of working population) by 2020.

On other fronts, infrastructure allocation remained at a low 0.02% of total pension assets over Q1 16. However, PFAs are expected to re-direct fresh investments to infrastructure once the multi-tier structure is finally approved. According to the draft guideline, PFAs are mandated to invest a minimum of 5% of fund I and II portfolios in infrastructure with maximum allowable allocations set at 10% and 5% for funds I and II respectively. However, the draft guideline did not provide for allowable infrastructure allocations thresholds for funds III and IV, both of which will be heavily weighted towards investments in corporate and FGN/CBN securities.

PENCOM drums up new tack for informal market penetration…
The revised Pension Reform Act (2014) now permits self-employed persons and organisations with less than three employees to participate in the Contributory Pension Scheme (CPS). Given that nearly 70% of the 9 million formal market already have a pension account, it appears that the uncovered segment of Nigeria’s 68 million working population is largely in the informal market where most workers have widely dispersed and irregular income streams. In a bid to penetrate the space, the National Pension Commission (PENCOM) is set to introduce the Micro Pension Plan (MPP) by the end of 2016. According to PENCOM, the MPP is a customized financial programme for the provision of pension services to employees in the informal market.

Without giving further details, the commission explained that the scheme would be structured to encourage small, regular and sustainable savings by low income earners and estimates that successful implementation should triple CPS clients to 20.4 million (~30% of working population) by 2020.

…amid dreams of significant growth in client base
Indeed MPP is not a novel concept having already been implemented in countries like Kenya and Ghana, albeit with limited success. In June 2011, the Kenyan Retirements Benefit Authority lauched an innovative programme for extending pensions and savings scheme coverage to the informal sector in Kenya: the Mbao pensions plan. The Mbao plan is a voluntary individual savings account or pension plan where low income workers can make small contributions at flexible intervals of their choosing. In its first year of implementation, the Mbao had 38,000 members who had contributed KES37 million (USD 513, 054) or 6.5% of total pension fund assets.

However, despite further increase in number of contributors to 67,000 (up 76% from 2011) as at 2015, the Mbao only boasts 6% of Kenya’s informally employed population. Even close neigbours—Ghana—targeted only a modest 5% penetration of its 10 million informal market for the first five years of micro pension implementation. By contrast, PENCOM’s expectation of securing 30% of working population by 2020 (or 20.4 million of working population) would imply significant inroads into the informal space (i.e. 27% of the 53 million workers in the informal space). Indeed, aside the signals from other climes that expectations may need to be tempered, current domestic realities suggest that this target may be difficult to attain even in the medium term.

To start off, in line with MPP implementations in other terrains such as Kenya and Ghana, PENCOM is suggesting the use of mobile phone applications for micro pension products transactions. Whilst this strategy appears plausible on the basis of Nigeria’s high mobile penetration of ~83%, Efina surveys suggest that knowledge of the availability and use of mobile transaction options—a key contributor to micro pension implementation in other developing climes—is still significantly low amongst Nigeria’s informal population. Precisely, only 13% of Nigeria’s adult population (or 11.9 million) are aware of mobile transaction options. We believe this ‘aware’ segment likely also includes 6 million formal sector workers already under pension coverage.

Thus, optimistically assuming the balance figure constitutes only informal workers, realistic target market via mobile technology narrows to only 5.9 million—and this is without adjusting for 12.1% unemployment rate. Thus, using a working definition for the target market as part of the poorest 53 million earners in Nigeria with combined annual income of N6.7 trillion, we estimate a mere N59 billion addition to pension asset by 2020 assuming an 8% monthly pensions savings. Even then, PENCOM’s plan to adapt the mobile strategy would still require significant investments in raising the level of awareness and conviction of the informal populace before this target can be meaningfully penetrated, given the voluntary nature of micro pension schemes. Thus, given typically low and irregular nature of micro pension contributions, the extra cost burden imposed by the need for aggressive informal market education is likely to substantially compress margins for potential players in the segment in the near term.

Figure 1: Forecasted impact of micro pension on total pension fund asset (N’ trillion)

 Source: PENCOM, ARM Research

 

Asset re-allocation in the offing as PFAs maintain safety plays
Despite concerns over impact of rising unemployment rates, in Q1 16, RSA registration maintained an 8% YoY growth for the seventh consecutive quarter (vs. 2% growth in number of employed Nigerians). This largely reflects increased pension penetration following PENCOM’s continued application of stiff penalties on errant eligible employers which coerced more businesses into compliance.

Notably, reflecting increasing compliance, the commission had issued 2,762 compliance certificates by 2015 (relative to 2,178 and 1,163 in 2014 and 2013 respectively). Corresponding with the registration growth, size of overall pension assets sustained its growth trajectory in Q1 16 (+15% YoY to N5.4 trillion) as expansion in Fixed Income (FI) instruments (+19% YoY to N4.6 trillion) muted declines in Variable Income (VI) securities (-8% YoY to N538 billion). Specifically, FGN securities (bonds and treasury bills) rose 17% YoY to N3.7 trillion over the period due to higher bond purchases in the period (Q1 16 FGN securities weight: +1.3pps YoY to 67%; +1ppt QoQ). Similar to prior periods, higher bond purchase reflects impact of delayed adoption of IFRS standard, which has seen PFAs carry bond portfolios at armotized cost instead of marking to market. This has helped taper volatility of overall asset value and beyond its investment characteristics, the relative stability bonds provide to fund prices also underpins why the class is so favoured by PFAs (over 66% of total portfolio in the past 3 years).

Figure 2: PFA Asset Allocation

Source: PENCOM, ARM Research


On other fronts, infrastructure allocation remained at a low 0.02% of total pension assets over Q1 16. However, PFAs are expected to re-direct fresh investments to infrastructure once the multi-tier structure is finally approved. According to the draft guideline, PFAs are mandated to invest a minimum of 5% of fund I and II portfolios in infrastructure with maximum allowable allocations set at 10% and 5% for funds I and II respectively. However, the draft guideline did not provide for allowable infrastructure allocations thresholds for funds III and IV, both of which will be heavily weighted towards investments in corporate and FGN/CBN securities.

Whilst PFAs will have leeway to direct portions of these funds (III & IV) to corporate and FGN/CBN securities which the FGN could target at infrastructure, current realities suggest that this is unlikely to translate to meaningful infrastructural investments in the near term. Specifically, inflows from FGN issuances in Nigeria are primarily directed at financing government recurrent expenditure, with the FGN recently guiding to a continuation of this trend due to the collapse of oil revenues. In addition to this, assuming no pension contributor opts for fund I due to its relatively higher risk, fund II will be left as the only potential outlet for flow of pension funds to infrastructure.

Going by the recent classification of overall pension fund portfolio, Fund II closely approximates the RSA active—which currently houses 67% of total pension fund portfolio (N3.618 trillion)—in terms of risk profile of clients in the bucket. Thus, taking fund II as a replacement for RSA active, adoption of the multi-tier structure would translate to fresh N181.9 billion of new PFA investment in infrastructure. However, with Nigeria needing to raise N485 trillion in the next 30 years (or over N16 trillion annually) to plug her infrastructure gap, potential inflows from fund II would clearly amount to a trickle of set infrastructure investment targets. That said, to slightly quicken the pace of infrastructure ramp up, FGN could recalibrate utilization of funds accessed via funds III and IV – by reducing utilization for recurrent expenditure and increasing utilization for infrastructure investment.

Table 1: Multi-tier portfolio classification

 

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