Photo Credit: USAID Nigeria

 

We could join the clamour surrounding the cuts to the UK development aid budget but will instead highlight one area where technical assistance from advanced economies could be expanded. This is the nurturing of regulated pension industries. We exclude South Africa because of the scale of its industry, which had assets under management (AUM) of USD191bn for all retirement funds in 2019 or 61 per cent of GDP.

 

The regulated industry in Kenya is governed by the Retirements Benefits Act of 1997 and amendments. Total AUM at end-2020 amounted to KES1,399bn (USD12.8bn), equivalent to 14 per cent of GDP. The assets are diversified by most criteria including 45 per cent of the total in government securities, 18 per cent in immovable property and 16 per cent in listed equities.

 

There is also a reasonable degree of choice of fund manager. The regulator (Retirement Benefits Authority) has licensed 17 fund managers and a further 17 approved issuers. There is overlap in that in some cases one entity owns both a manager and an issuer. The highest share of AUM with one manager was 18 per cent at end-2020.

 

The regulated industry in Nigeria is a little more recent, being based upon the Pension Reform Act of 2004 and its two amendments. Total AUM at end-April were NGN12.4trn (USD30.2bn), representing just 8 per cent of GDP. The assets are rather less diversified than in Kenya. Government securities represented 73 per cent of the total, real estate properties just 1 per cent and listed domestic equities 7 per cent.

Several reasons specific to Nigeria present themselves to explain the skewed concentration of assets. The federal government generally offers attractive returns on the local currency debt it issues with the notable exception of Q4 ’20.  The regulator (PenCom) has numerous conditions attached to funds’ exposure to property. The Nigerian pension funds had a torrid time in the local stock market crash of 2008 and 2009. They have long memories.

 

Investors have a choice of 28 pension fund administrators, six of which are closed (ie company-specific) schemes and predate the industry legislation but which are governed by the regulator. Nestle, Shell and Total are examples.

 

Kenya and Nigeria have the two largest regulated pension industries in sub-Saharan Africa (after South Africa). Abidjan is another important centre, more subregional than national since it houses investments from across the West African segment of the Franc Zone. These industries do not manage all non-bank savings. Insurance companies and mutual funds are other important players.

 

Technical expertise would be welcome in several areas. We all favour the low-hanging fruit: the fund managers focus initially on the savings of the professional classes. PenCom introduced funds designed for sole traders and small businesses in Nigeria in January ’20. Take-up to date has been slow, at just NGN120m, suggesting that the managers would benefit from some guidance on marketing and strategy.

Another area is thornier, ie government and parastatal pensions. The two industries we have highlighted are broadly managing the money of private-sector employees. Civil servants may well wish that their own and their employers’ contributions were managed by a regulated industry (because they would be most unlikely to suffer pension payments in arrears). The industry probably thinks otherwise for fear of unwanted government intervention. Some creative thinking on hybrid schemes could prove helpful.

Development partners would be supporting a regulated savings culture in which a small number of nationals (initially) contribute to a pension that brings them and their dependents financial security. The process helps to cement the growth of the middle class.

 

Finally, we note another benefit of the process from the perspective of financial markets. When governments sell their local currency debt into the market, they do not want to rely on bids from foreign portfolio investors who can be fickle. In the extreme case of Nigeria the pension funds hold 47 per cent of the entire stock of naira bonds issued by the federal government.

 

We have seen many cases (Turkey, South Africa, Ghana and more) where an external shock and/or a domestic policy shift viewed as unfriendly to investors keeps the offshore community away from the debt sales and brings large funding gaps for the issuer to cover. We believe strongly that, where they have a decent story to share, emerging market governments should sell foreign currency market debt such as Eurobonds. Ideally, those governments can also fall back on strong domestic demand for their local currency offerings.

 

Jean Puri

08 July 2021