Agusto & Co Forecasts N14.8trn Pension Assets as Mass Emigration, High Unemployment Decelerates Growth

Nume Ekeghe

Following massive increase in emigration and high unemployment in Nigeria, Agusto & Co has predicted slow growth for pension assets, first time in five years adding that the assets could end 2022 at N14.8 trillion.

In its latest report, Agusto & Co noted that the inability of pension funds to easily invest in dollar-denominated instruments would hamper pensioners’ funds growth in a bid to hedge against rising inflation currently below money market instruments, causing negative returns.

The rating firm in its report titled, “Limited Investible Options: An Impediment to a Potentially Bullish Industry,” stated: “The rising rates of emigration and unemployment in the last five years have slowed down the growth rate in pension contributions. If individuals who fall within these groups, who are eligible to access a 25 per cent lump sum of their pension assets, exercise the withdrawal option, it could cause the growth of assets under management (AuM) to stagnate.”

“The 3 per cent decline in the Industry’s annual contribution remitted to the RSAs in 2021 underlines this growing threat. Furthermore, PenCom has approved the use of 25 per cent of the amount of a pension contributor’s Retirement Savings Account (RSA) to pay for an equity contribution for a mortgage. While this may support the mortgage banks and the real estate industry, it will lead to a decline in pension AuM in the medium term.”

The report further stated that the operations, activities, and prosperity of the pension industry are crucially hinged on the direction of PenCom’s regulation, which Agusto & Co. expects to remain robust given the Industry’s strategic importance to the Nigerian economy, and the need for it to be more closely aligned to the Nigerian pension scheme with international standards in the near term. 

Agusto & Co. also estimated that growth in pension assets would slow from a five-year average of 12.2% to c11% in 2022 due to a combination of a muted interest rate environment and a slowdown in the rate of contributions which has been impacted by mass emigration and high unemployment.

“We, therefore, expect pension assets to reach ₦14.8 trillion by the end of 2022,” it stated.

It added that the pensions industry has since evolved into a global industry driven by the private sector, with several variations of the original pension plan.

“The 6% annual average growth rate recorded in global pension assets in the past two decades to $56.6 trillion in 2021, estimated at 76 per cent of GDP in the 22 major pension markets (P22), is not just reflective of the Industry’s robustness but also highlights its importance to capital markets across the world,” Agusto & Co. also said.

 “To protect pension assets, the current regulatory framework imposes stringent restrictions on investible outlets; with the majority of assets held in risk-free sovereign debt securities. While the increasingly hawkish stance of the monetary policy committee (MPC) of the Central bank of Nigeria (CBN) is leading to a rise in interest rates, yields on fixed sovereign debt securities remain low relative to the headline inflation rate which surged to a 17-year high of 20.52% in August 2022.

“The outcome is negative real returns on investment, which, when compounded, will lead to a contraction in the real value of AuM over time and implies that pension fund contributors could be worse off in retirement. This puts the question of diversifying investments into foreign-denominated securities, to improve returns and preserve value, under a renewed spotlight.”

“This option is constrained by some factors, notably the prohibition on PFAs from acquiring foreign currencies directly through official channels. In addition, despite the PRA 2014 permitting investments in foreign assets, PFAs still require the President’s approval, which could be a lengthy and tedious process, ”it said.