As more and more Nigerians begin to take their retirement planning more seriously thanks to growing awareness campaigns, the total asset value of pension fund assets has hit a new all-time high. For the first time since PenCom began publishing its ‘Summary of Pension Fund Assets”, the asset value of pension funds hit and crossed the N9 trillion mark; ending the month of March 2019 with a value of N9.03 trillion. This represents an increase of N393 billion for the first three months of 2019 in absolute terms or a growth of 4.6%.
Pension Asset Growth Dwarfs GDP Growth: The Q1 2019 growth in pension assets as noted above, is more than twice the GDP growth recorded by the Nigerian economy in the first quarter of 2019. Nigeria’s GDP grew by 2.01%, a growth which was hailed by the National Bureau of Statistics as the “strongest first quarter performance since 2015”. With aggregate GDP standing at N31.7T in nominal terms as at the end of the first quarter, pension fund asset value now represents 28% of the GDP.
Although this is definitely an improvement worthy of note and worth repeating, more needs to be done both by the government and the people to place Nigeria on the pedestal of countries with high ratio of pension assets to GDP.
Netherlands tops World Pension to GDP Ratio: According to available information from The Statistica, The Netherlands has the highest pension asset to GDP ratio of 166.7%, followed by Australia’s 130.7% and then by Switzerland’s 126%. The United States of America where the consciousness of the people regarding their pension savings is in red alert, surprisingly, has a pension asset to GDP ratio of 120.5%. South Africa has the highest pension asset to GDP ratio in Africa with a ratio of 56.4%. Malaysia, and Chile, countries that are characterized like Nigeria as emerging market economies have ratios of 65.4% and 65.5% respectively. As a note of encouragement, Nigeria’s 28% ratio is better than those of countries like Germany (15.4%), Brazil (12.7%), Italy, (9%), and France (5.5%), just to mention a few.
Low Rate of Return: One factor that has not helped the increase in pension assets in Nigeria is the low return and low-interest rate environment that the pension funds operate in. Although most pension funds have consistently been making positive gains year in year out, the percentage returns are not high enough to propel the value higher.
The major reason for the low rate of return is the “ultra-conservative” investment strategy of pension fund managers who invest almost exclusively in Treasury Bills and FGN bonds. The fund managers are not to blame so much for this, as the regulation requires them to allocate a sizable portion of their assets to fixed income securities while forbidding them from investing in alternative asset classes and equities. While one agrees that it is a risk management strategy, the government and the fund managers should work together to ensure that pension asset growth is not sacrificed at the altar of capital preservation.
Voluntary Contribution to the Rescue: The government, through section 4(7) of the Pension Reform Act of 2014, allows employees to voluntarily contribute to their Retirement Savings Accounts (RSA) in addition to the mandatory contributions required under the act. Similarly, the act allows those “exempted” from participating in the contributory pension scheme (CPS) like the members of the armed forces and retirees, to voluntarily participate in the scheme. By so doing, the government has and is doing its part to encourage people to contribute and grow their pension assets. However, there are a few restrictive parts of the voluntary contribution scheme that may work contrary to increasing pension fund contributions and assets.
For example, one of the provisions of the Guidelines for the administration of Voluntary Contributions is that not more than one-third of the contributor’s salary should be allowed into the voluntary contribution scheme and that voluntary contributions should be allowed only once a month. Understandably, this restriction was put in place to counter tax evasion or avoidance, pension funding laws should be made to encourage people to save towards their retirement given the effect such savings have on old age poverty alleviation.
There is a virtue in taking advantage of all available avenues to save for retirement, therefore, for those who can, make voluntary contributions as much as is permissible and tax advantageous to do so. By so doing, you are letting the government help you fund your retirement with the tax benefits.