Channeling Pension Funds for National Development

By

National Pension Commission

ensuring your comfort after retirement
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Outline
Global Overview Real Sector and Capital Market Developments Infrastructure Financing Promoting Corporate Governance Pension Funds and Economic Development in Nigeria Nigerian Pension Fund Investments Challenges Ways Forward
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Global Overview
Global demographic shift towards population aging reflects rising life expectancy and declining fertility Many countries switch wholly or partially from unfunded pension systems to funded systems Pension systems geared towards provision of benefits and generation of long term finances Pension assets were generated and invested in various sectors of economic development Total assets were on a weighted average of 67.1% of GDP across OECD countries in 2009

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Global Overviewcontd
Accumulated pension funds had contributed to national savings and economic development East Asian tigers achieved double digit growths following increased savings and investment at levels in excess of 30% of their GDPs, notably Singapore and Taiwan Similarly, boost of savings in Latin America and investment of the funds in meaningful economic projects has been of great benefit to their economies, especially in Chile following its pension reforms initiatives Indeed, pension assets are at levels above 65% of Chilean GDP

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Global Overview...contd
Global Fund Management Assets under Management in $trillion

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Pension Funds and Real Sector & Capital Market Developments

Real Sector Developments
Pension funds act as intermediaries into a lot of financial assets, including corporate equities, government bonds, etc Provide long term financial intermediation to the real sector through corporate debt instruments and through investment funds In some jurisdictions, pension funds acquire long-term money market instruments issued by banks, allowing the banks to issue loans to the corporate clients with varying maturities

Capital Market Developments

In countries with robust and large capital markets, pension funds acquire, directly or indirectly, longterm securities, issued by corporate entities through the capital market Pension funds largely influence capital markets in three direct ways:
Enhanced investment Introduction of new regulations in capital markets with impact on corporate governance practices Monitoring of conflict of interest issues

Facilitate the development of yield curve within the fixed income segment of the market
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Infrastructure Financing
The OECD report on Infrastructure (2006/7) estimated global infrastructure requirements by 2030 to be in the order of US$50 trillion The International Energy Agency also estimated that adapting to and mitigating the effects of climate change over the next 40 years will require around US$45 trillion Such capital requirements need long term investments that match the long duration of pension liabilities In particular infrastructure assets linked to inflation could hedge pension funds liability sensitivity to inflation Enabling Developments:
Less public spending on infrastructure The size of pension funds (US$17.0 trillion in 2009 in OECD Countries) Increasing exposure to alternative assets Growing appetite for diversification Robust investment regulations
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Promoting Corporate Governance

Provide informed counterbalance to controlling shareholders to safeguard against the companys board and management Promote appointment of independent directors on Boards of companies Brought improved disclosure & protection of minority shareholders interests Emergence of legal reforms & improvement of oversight on companies Established conflict of interest redress mechanisms Improved professionalization of financial intermediation
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Pension Funds and Economic Development in Nigeria

Pension funds had generated appreciable pool of long term investible funds Grown to N2.73 trillion worth of assets as at 30 June, 2012

Invested in authorised markets with portfolio limits & performance benchmarks

The proportion of the assets to Nigerias GDP grew from 1.4% in 2006 to 7% in 2010 and 2011 Up to 35% of the Assets Under Management (AUM) can be invested in Corporate Debt Instruments to support real sector development In addition, pension assets can be invested in commercial papers issued by corporate entities

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Pension Funds and Economic Development in Nigeriacontd

Up to 35% of the AUM can be invested in Money Market Instruments to support the activities of banks in proving finances for the real sector Securities issued by Private equity funds are allowed, further facilitating direct real sector financing Facilitated Capital Developments and created institutional investors in the country Allowed a maximum of 25% of AUM to be invested in quoted equities Provided more than 80% of AUM to support developmental projects by Governments (both FGN and States) Specifically targeted infrastructure developments to bridge the infrastructure needs of the country Development of insurance products Group Life and Annuities
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Nigerian Pension Fund Investments

PENSION ASSETS DISTRIBUTION
AS AT JUNE, 2012
Asset Class
FGN Securities (limit: 80%) Equities (max limit:25%) Money Market Instruments (limit: 35%) Real Estate Property (various)

Growth of Pension Assets As At June 2012

3.00 Amount (N trillion) 2.50 2.00
RSA CPF A AES Tot al

3%

1%

4% 6% 10%

2%

1.50 1.00 0.50 0.00 Q4:2006 2007:Q2 2007:Q4 2008:Q2 2008:Q4 2009:Q2 2009:Q4 2010:Q2 2010:Q4 2011:Q2 2011:Q4

11%

63%

State Govt. Securities (limit:20%) Corporate Debt Securities(limi t: 35%) Others (various) Open/Close End Funds (limit: 20%)

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Pension Funds and Economic Development in Nigeria Challenges

Lack of appreciation of the opportunity provided by the pension industry Failure to engage the business community by PenCom and Operators Culture barriers used to banking facilities for financial intermediation Paucity of supporting instruments/products
Although 35% of AUM has been allocated to Corporate Debts, only about 3% is currently placed REITs is in its infancy less that 7% of AUM is invested in real estate No infrastructure bonds and Funds yet Private Equity Funds, though inexistence for long, but the market remains undeveloped

The shallow nature of the Financial Market prevents it from taking advantage of the long term nature of the Funds
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Pension Funds and Economic Development in Nigeria Challenges

Taxation Issues Tax laws need to be updated to accommodate some of the new products Concessions to support the objectives for long term financing Regulatory Barriers Lack of robust guidelines Delays in processing and approving applications/products Regulatory arbitrage Barriers to Pension Fund Investment in Infrastructure:

The Investment Opportunities Lack of clarity on investment opportunities Non-availability of investment instruments Infrastructure investment opportunities in the market are perceived as too risky
The Investor Capability Lack of expertise in the infrastructure sector Short-termism of investors The Conditions for Investment Lack of clear valuation of infrastructure projects Shortage of data on performance of infrastructure projects Lack of benchmark
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Suggestions on the Ways Forward

General awareness campaigns particularly for the business community PenCom to engage other regulatory agencies for continuous enlightenment and support Provision of enabling laws and review of existing ones

SEC to update existing laws on corporate debt issuance and enhance existing procedure of processing applications for issuance SEC needs to also review existing securitization laws FIRS to provide tax concessions for infrastructure projects and investment funds ICRC to facilitate development of infrastructure Funds and in conjunction with DMO issue infrastructure bonds Project owners should consider securitization and issuance of infrastructure bonds

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Suggestions on the Ways Forward

NECA to engage its members and encourage them to take advantage of the opportunities provided by the pension funds as well as develop the required investment instruments Operators should work in a coordinated manner to come up with strategies that few capable operators could provide adequate intermediation for a corporate issuance or infrastructure projects Regulators must develop necessary supervisory tools including documentation, valuation and benchmarks Capacity building for the financial sector and the business community where necessary, the efforts should be jointly handled by the relevant regulators and their operators
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Thank You
National Pension Commission
174 Adetokumbo Ademola Crescent Wuse II Abuja

www.pencom.gov.ng info@pencom.gov.ng + 234 9 4610466 - 8

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