On the 7th of February 2018, the National Bureau of Statistics (NBS) released PENCOM data for Q4:2017 which shows a breakdown of Pension Assets and Retirement Savings Account (RSA) membership. As at December 2017, total Fund Assets Under Management (AUM) was valued at N7.5tn, up 22.0% Y-o-Y and 4.9% Q-o-Q from N6.2tn and N7.1tn in FY:2016 and Q3:2017 respectively. Similarly, total number of registered RSA holders grew 6.5% Y-o-Y and 1.5% Q-o-Q to 7.8m people from 7.3m and 7.7m individuals as of FY:2016 and Q3:2017 respectively.
We attribute the impressive growth in Pension Assets (which was higher than 16.1% in FY:2016) to increase in Members’ Contribution as well as impressive Return on Investments (ROI) generated by Pension Fund Administrators (PFA) in a favorable investment climate of high yield on fixed income securities and bullish sentiment in the equity market. This is buttressed by Q3:2017 CBN data on pension assets which showed Members’ Contribution rose 15.2% YTD to N5.4tn while Reserves (accumulated surplus) were up 20.0% YTD to N1.8tn.
However, the historical risk aversion of PFAs remains evident in asset allocation strategy as the ratio of government securities to total assets stayed at peak level of 72.4% with FGN bonds and Treasury Bills the dominant holdings. Assets remained skewed to FGN bonds (53.8% of total assets), up 4.4% Q-o-Q to N4.0tn from N3.9tn in Q3:2017. PFAs also invested in recently introduced debt instruments in the domestic market such as the Sukuk and Green Bonds issued in the quarter while reducing their positions slightly in Treasury Bills and Agency bonds - down 7.3% and 0.5% Q-o-Q respectively. Expectedly, domestic equity security asset surged 34.3% Y-o-Y to N672.2bn, the fastest annual growth since 2013, against the backdrop of improved sentiment in the equity market which buoyed returns and probably led to additional investments. Yet, the ratio of ordinary shares holding (domestic and foreign) to total assets in FY:2017 (10.3%) remained below regulatory cap of 20.0%. Similarly, total PFA portfolio invested in infrastructure funds was estimated 0.1% compared to regulatory cap of 5.0%.
Since the Pension Reform Act of 2004 was passed into law, pension assets have recorded steady growth and PFAs have now become the largest non-bank domestic institutional investor base; yet, they have faced increased criticism for risk aversion and perceived asset-liability mismatch due to high concentration of assets in risk-free government securities. In their defense, the relatively small size of pension assets (in comparison to GDP and Middle Income Countries), volatility in macroeconomic indicators and weak enforcement of contracts make the case for investing in risk assets and infrastructure less compelling.
To address some of the concerns on assets-liability mismatch, PENCOM recently introduced a Multi-Fund structure to align the age and risk profile of RSA holders with asset allocation. The Multi-Fund structure divides RSA Fund into 3 Fund Types with different regulatory limits on exposure to variable income instruments (defined as investments that generate income or returns that cannot be pre-determined from the date the investments). According to industry sources, the Multi-Fund structure will kick-off in March with an additional 6-month window to comply. We expect the implementation of the new structure to boost participation of PFAs in the equity market and alternative investment vehicles such as Infrastructure Bond and Private Equity.
Also, we see a reduction in the scope of the Pension scheme as regards the private sector following the scheme’s amendment in 2014. The scheme applies to companies that have 15 employees and above (formerly 5 employees in 2004 act) and therefore effectively reduces the number of people who can benefit from the scheme. Although a micro pension scheme was introduced, we are yet to see data that supports how much it has been able to capture Small and Medium Scale Enterprises (SMEs). We believe that in order to effectively end old age poverty and cover 30.0% of the working population under the Contributory Pension Scheme by 2024, there must be a conscious effort to monitor this sector of the working population.
January 2018 Inflation Outlook: Headline Inflation to Continue Descent on Benign Core Price Growth
Next week, the NBS is expected to release Inflation report for January 2018 and in line with consensus opinion, we expect inflation to further moderate. Although we expect Food Index M-o-M growth to accelerate as seasonality effect begins to wear off, the effect on Headline Index will be offset by benign core price environment against the backdrop of stable FX market. Hence, we forecast Headline inflation to moderate to 15.0% Y-o-Y.