LAGOS, NOVEMBER 10, 2017 – Banks are making fresh moves to deepen their stakes in Pension Fund Administrators (PFAs). The new interest among top-tier lenders followed huge returns being posted by the PFAs as they explore new investment opportunities in fixed income securities, which are turning a gold mine for discerning investors. The growth of pension assets to N6.02 trillion since the Pension Reform Act of 2004 points to the rising liquidity and business opportunities in the sector, writes COLLINS NWEZE.
INVESTING in segments of the economy that present huge returns on investment is not strange in banking industry. The banks always have with eyes in the future, many say, as they also consider security of investment and impact on the economy.
As obtained in other developed economies, the Nigerian pension industry has been tipped to rival the banking sector in terms of size and economic importance over the next decade.
Interestingly, the Pension Fund Administration (PFA) is now the next investment destination for many discerning lenders because it is not only making huge returns for discerning investors but has huge impact on the economy. The banking sector has seen the First City Monument Bank (FCMB) Group’s increased investment in Legacy Pension, one of the PFAs.
The FCMB Group Plc decided to increase its stake from 28.2 per cent to over 88 per cent equity holding in the company. Investigation showed that other top-tier lenders are already preparing grounds to take major stake in PFAs.
How it all started
Pension remains invaluable source of income for the retired. To ensure that the pension funds remain secured, the Federal Government introduced the Pension Reform Act of 2004. And 13 years its introduction, the asset under management in the pension industry has grown to N6.02 trillion. The rate of growth is quite remarkable when compared to the 125-year-old banking industry that stands at slightly over N30 trillion.
Michael Stevenson, an equity fund manager based in Lagos, said aside the rapid growth of the sector, the PFAs have also delivered on the expectations of their retiring beneficiaries. He said that what stands out about Legacy Pension Limited is its adherence to set rules and sound business practices. He said FCMB’s decision to raise its stake in the firm remains wise investment.
Also, Market Opinions’ Analyst, Emefu Ibeayoka, said the FCMB Group’s history from City Securities Limited and FCMB to its current form of a diversified financial services group shows it has deep knowledge and experience in the investment space.
He said the announcement on the floor of the Nigeria Stock Exchange (NSE) of its intention to increase participation in the pension industry seems a natural next step for the group as the pension industry is set to rival the banking sector in terms of size and economic importance over the next decade.
General investment principles
According to the National Pension Commission (PenCom), led by its Director-General, Funsho Doherty, the PFAs are to invest pension fund assets with the objectives of ensuring safety and maintenance of fair returns.
By virtue of Section 10 (2) of the Pension Reform Act 2014, all interests, dividends, profits, investment and other incomes accruable to pension fund and assets shall not be taxable. PFAs are expected to recruit and retain highly skilled personnel in their investment departments.
“PFAs shall not invest Pension Fund Assets in instruments that are subject to any type of prohibitions or limitations on the sale or purchase of such instrument, except for open/close-end/hybrid funds and specialist investment funds allowed by regulation,” the Act said.
Besides, the PFAs are not expected to trade on margin accounts with pension fund assets.
It further said: “A PFA shall not engage in borrowing or lending of pension fund assets. PFAs shall not trade in financial instruments with pension fund assets at prices that are prejudicial to the pension fund assets.
“Pension fund assets shall only be invested in bonds, Sukuk or other debt instruments issued by eligible state/local governments and corporate entities that are fully implementing the Contributory Pension Scheme (CPS)”.
Other analysts said the Pension Reform Act (PRA) has restored discipline and trust for retirement savers. It has also limited employers’ pension liability and enhanced retirement benefits administration. No pensioner has lost his/her savings due to mismanagement and the industry continues to grow at a healthy pace. A lot of this credit accrues to PenCom.
A cursory survey of stakeholders in the pension funds’ management would probably rates Nigeria’s pension reform and pension industry performance high. The only complaint seems to be coming from capital market operators and providers of infrastructure, who have been clamouring for pension fund managers to allocate more of their resources to these sectors in need of further development.
Looking at the volatility of our stock market and the challenges of power sector privatisation (due largely to non-cost reflective tariffs), we must commend the PFAs and their regulator that they have remained conservative in their investment strategy.
Further reports are quoted to reveal that in spite of the macro-economic headwinds experienced last year, the Nigeria Pension Industry’s Assets Under Management (AUM) grew by 16 per cent (one per cent higher than growth in the previous year).
Despite the contraction in monthly contributions, growth in AUM was largely driven by the higher yield offered in the fixed income market.
The figures from May 2017, Nigeria Pension Industry Survey revealed that 12.1 per cent of respondents have decided to move to another PFA when the transfer window opens whilst 35.4 per cent remain undecided. The level of competition amongst PFAs in Nigeria is set to intensify, with the opening of the transfer window and implementation of the Micro Pension Scheme (MPS).
The intention announced by the FCMB to acquire a super majority of Legacy Pension Limited will broaden its service offerings with the group already offering commercial and retail banking, investment banking, asset management, and trusteeship services.
The successful completion of this transaction will bring FCMB Group’s shareholding in the company to 88.2 per cent, thus becoming its largest shareholder. The development follows months of negotiations, regulatory reviews, approvals and pending final clearances of all relevant authorities.
The broadening of FCMB Group Plc, led by its Group Chief Executive (GCE) of FCMB Group Plc, Ladi Balogun, to include a controlling stake in a PFA will certainly open a new vista of growth and stability to its income streams.
The bank’s reported four million customers, over 200 branch network and strong digital presence are fertile grounds for the rapid growth of this new addition to its portfolio.
On the other hand, Legacy Pension Managers Limited, whilst being a conservative player with a strong presence in Abuja and the North has steadily grown its assets under management to over N220 billion.
The company has maintained a strict investment policy and achieved decent returns since inception.
Also, FCMB Group’s equity mutual fund (known as the Legacy Equity Fund), has been returning 52 per cent. It is expected that FCMB’s over 40 years of investment experience will complement and enhance Legacy Pension Managers proposition to existing and prospective customers.
With the synergies from enhanced distribution and investment expertise, analysts have hailed the FCMB Group’s to acquire majority stake in Legacy Pension Managers by describing it as a significant development that would not only shake up the pension industry, but also enhance the future performance of the company.
Analysts anticipate that Legacy Pension Managers will be better positioned to grow its market share, compete effectively upon the onset of Retirement Savings Account portability, and also enter the micro-pensions segment in the informal market that will leverage the distribution and marketing muscle of a commercial bank within the group. These are interesting times for FCMB Group, Legacy Pension Managers and the pension industry as a whole.
Rules of investment
According to regulations on the investment of pension fund assets released by the PenCom, Pension Fund Custodians (PFCs) shall take written instructions from licensed Pension Fund Administrator (PFAs) with respect to the PFAs investment and management of pension fund assets held in the custody of the PFCs on behalf of the contributors.
The PFCs, in discharging their contractual functions to PFAs, shall not contract out the custody of pension fund assets to third parties, except for allowable investments made outside Nigeria. The PFC shall obtain prior approval from the commission before engaging a global custodian for such allowable foreign investments.
It said the PFAs, in discharging their contractual functions to contributors, shall not contract out the investment/management of pension fund assets to third parties, except for open/close-end/hybrid funds and specialist investment funds allowed by regulation.
The PFAs are also expected to maintain a multi-fund structure as provided in this regulation, to govern the investment of pension fund assets of Retirement Savings Accounts (RSA) funds.
In addition to the requirements of other guidelines issued by the commission on corporate governance, ethics and business practices, each PFA is expected to establish an Investment Strategy Committee as well as a Risk Management Committee, in compliance with Section 78 of the Pension Reform Act, 2014.
Besides, the Investment Strategy Committee, in addition to other functions specified in the Act, shall formulate internal investment strategies to enable compliance with this Regulation, taking into cognizance the macro-economic environment as well as the investment objectives and risk profile of the respective PFA funds.