President Obasanjo’s greatest achievement

The nation experienced eight years of good, bad and ugly times under Olusegun Obasanjo’s 2-Term presidency. Under his tenure good things such as privatizations, liberalisation of the telecommunications sector and repayment of almost all of our crippling external debt occurred. Some bad things such as the aborted 3rd term bid and widespread corruption and election fraud also occurred, while we were also not spared downright ugly events such as the Odi Massacre. However, I believe on the economic front, President Obasanjo’s most enduring legacy will be the Pension Reform Act of 2004. This reform has significant implications for our long term economic sustainability and is indicative of the sort of large-scale, system-wide policy initiatives that have to be brought to bear in tackling some of the big challenges that we face in the areas of electric power supply, healthcare, education, transport infrastructure and other burdensome issues.

The Pension Reform Act mandated the vast majority of companies operating in Nigeria to subscribe to Defined Contribution Pension Schemes. The employers and employees each contribute 7.5% of the employee’s monthly income into a tax-exempt Retirement Account managed by a licensed Pension Fund Administrator of the employee’s choosing. The Retirement Accounts were made fully portable with employees being able to migrate their accounts as they change jobs, a critical option in these days of high job mobility. To ensure proper security of these Accounts they were also mandated to be safeguarded by Pension Fund Custodians (PFCs) owned by well capitalised and regulated banks with strict investment guidelines provided to PFAs to guide their investment decisions. As unsexy and possibly boring as this reform may seem it occupies first place in my mind for a number of reasons.

Firstly, it provides a social safety net in a society that is sorely lacking in countries such as ours. We do not have unemployment benefits or social security payments like developed countries hence siblings, children and close family end up acting as many Nigerians’ pension plans and unemployment insurance programmes. Prior to the advent of the Pension Reform Act, pensions were an exclusive privilege provided only to employees of the government and very large companies – mostly domestic operations of multinational corporations. The vast majority of Nigerians just retired without any dedicated funds set aside for their retirement with many people being left to the vagaries of unstable personal savings and the fickle charity of friends and family. Even public sector employees with supposedly pensionable positions found it difficult to depend on their pension checks as pension payment backlogs grew due to a combination of corruption, inadequate budgetary provisions and plain incompetence associated with a “Pay as you go along” pension system. The pages of Nigerian newspapers were replete with tales of pensioners living in penury and giving up the ghost before the first pension cheques arrive. Adopting a compulsory system-wide process that reduces the government’s involvement in pension payments was a great step forward in extending a safety net to a greater number of Nigerians.

Secondly, the reform has helped improve the long term competitiveness of Nigerian Companies. A close following of the travails of the US automobile industry will realise that a major challenge to the long term profitability and competitiveness of the Detroit Big 3 are their substantial pension obligations. These companies typically run “Pay As You Go” schemes that depend on the payments of working employees to cover defined and contractual payments to the company’s retirees. This is okay when there are much more current workers than there are retirees, it really starts getting ugly when there are more retirees than active workers as the companies are liable for making up the difference and rack up significant pension liabilities in the process. This makes every single product produced by these companies relatively more expensive than those produced by firms without such costs. What the pension reform in Nigeria did was to move most of the country into a Defined Contribution system that caps an employer’s liability to the 7.5% matching contributions that have to be made very month for the period under which the employee remains in its service. This makes it much simpler as company management – and would be acquirers – don’t have to become actuarial experts trying to figure out how long their employees will live for and how much their payment obligations will grow by in the future, as the costs are explicit and clear and have to be accounted for every financial year so their are no pension time bombs waiting to happen!!

Thirdly, the Pension Reforms have led to the creation of a significant pool of investable assets that have a potentially significant multiplier effect on economic growth. As at last count, Pension Assets under management is estimated at about N1.7 Trillion (US$ 11.3 Billion) and represent the single largest investment bloc in our capital markets from a base of nearly zero just 5-6 years ago!!. The emergence of such long term funds has helped in making our domestic government bond markets one of the most liquid in Africa with maturities extending up to 20 years, up from exclusively short tenors (i.e. 90, 180 and 270 days) just a couple of years ago. Furthermore, Sub-National Governments – such as Lagos State – have been active in issuing bonds with maturities up to 7 years. Companies have also joined the rush with Guaranty Trust Bank Plc successfully launching and pricing a 5-Year, Fixed Rate Bond late last year (which happens to be the only corporate bond in issue in Nigeria). All these long tenured issuances – and planned issuances – would definitely not be feasible without the long term funds that the Pension Reform Act created. The positive effects of the reform extend well beyond the fixed income markets as they have had a stabilizing effect on the equities market as well. At the height of the market downturn, PFAs were one of the very few net purchasers of equities on the Nigerian Stock Exchange. Their buying activities probably helped in placing a floor on stock market prices and it is reasonable to suggest that the stock market rout would have been deeper and more sustained had sizable and investible pension assets not been in place.

However its not yet “Uhuru” for the Pensions Industry in Nigeria has the industry is likely to be plagued by a number of factors that may delay or prevent the full realization of the reform to Nigerians. The first is the potential for non-remittance and/or participation by employers. Although the Act details fines payable by employers for non-remittance of pension contributions to PFAs, it’s an open secret that many employers have not been as conscientious in making remittances as the Pension Act envisaged. The pension regulator – PENCOM – has to step up its monitoring activities in this regard to ensure that hard-working Nigerians are not been denied the opportunity to quickly begin building a nest egg. As if non-remittance is not bad enough, a number of employers and employees – especially in the very large informal sector – are yet to join the scheme. A lot has been achieved in boosting participation by government and Organised Private Sector (OPS) employees, the next frontier will be in ensuring active participation by the much larger informal sector. This must be an industry wide strategy involving PENCOM, all PFAs and the Federal & State Governments, as they need to embark on a massive enlightenment campaign to bring more “converts into the fold”. It sure will be good economics for all PFAs to participate in widening the pool of potential customers. Upper and Upper-Middle Class Nigerians can also help in this crusade by formalising the employment of their drivers, cooks and legions of domestic employers by encouraging and signing them to a Pension Scheme and making the required remittances .

The second challenge I foresee for the industry is a possible lack of capacity to deal with the relatively huge sums of money in the Scheme. The largest player in the industry currently manages about N450 Billion (approx. US$ 3 Billion) in hundreds of thousands of Individual Retirement Accounts. Now, managing a large mutual fund – because that is essentially what a pension fund with thousands of IRA accounts is – requires substantial analytical, operational and customer service support. PFAs need to bulk up the strength of their investment teams to ensure above risk adjusted returns to investors – a task that becomes increasingly more difficult as the funds get larger!. Furthermore, ongoing plans to allow PFAs to invest in asset classes such as Private Equity and Infrastructure demand different skill sets from the typical stockbroker cum listed-equities analyst types that currently dominate the industry. In addition, PFAs may also collaborate on shared services platforms to support their operations and customer service activities to save costs and enable fund managers concentrate on their core competence: managing funds and not spend precious time reconciling accounts and/or responding to IRA account holders’ queries.

On the whole I think the Pension Reform is one of the greatest positives in Nigeria over the last decade (alongside our exit from the Paris Club debt overhang). However, we must “work out our pension salvation with fear and trembling” to ensure that all Nigerians realize the promise of a golden old age and a fulfilling retirement.