The economics are as dramatic as the implications for structure and markets: Nigeria is set for a pensions explosion, which will throw up vast sums of liquidity. Urgent changes in the capital markets are required to absorb this liquidity. The challenge to regulators and to market players is enormous. This is the message of Charles Stevens, a pension fund administrator with long experience of the Nigerian markets, who is advising a Nigerian bank.
Aigboje Aig-Imoukhuede, managing director at Access Bank, shares Mr Stevens’ view. “Pensions reform is one of the greatest legacies of President [Olusegun] Obasanjo. Most of our parents died without savings but in five years’ time, you will be able to borrow against your pensions,” he says. “Capital is being created in the hands of people and this is going to transform the country. There are three million retirement savings accounts (RSA) today. In 10 years’ time, there will be 20 or 30 million RSAs, each with N1m ($7835). That is N20,000bn. If the exchange rate grows to N75 to one dollar, the amount of money under management in pension funds will be $1000bn.”
Cash accumulation
The build-up in cash is partly fuelled by the reforms. These require employers and employees in small to medium-sized companies to contribute 7.5% of salary to a pension fund. The sums multiply as the size of Nigeria’s working population expands.
The mathematics of the pensions boom is not in doubt. The greater challenge is how this money is going to be invested. Nigeria’s bond markets are embryonic and, although they are growing fast, they will need a considerable push from the authorities to acquire the capacity to handle these sums. According to Mr Stevens, the pensions boom is going to “transform the stock market and the debt market. Nigeria will not be recognisable in three to five years’ time. We need to find an expanded group of investments both at the ordinary government debt level, in terms of maturity dates, in terms of range of products and in terms of corporate bonds. We also need to expand the stock market itself. Otherwise, there will far too much cash sloshing around to be coped with efficiently.” Mr Stevens is concerned that these funds might be poorly managed and not provide the returns that the pensioners will be led to expect.
Pool of liabilities
Banks see great opportunities in the accumulation of pensions liquidity. Ladi Balogun, deputy managing director at FCMB, says: “Reforms in the local market, plus the increased appetite for Nigerian risk, is creating a pool of long-term liabilities that banks can use to fund corporate business and consumer business long term. We have invested in a pension funds administrator to grow our share of wealth management in Nigeria.”
Union Bank sought to acquire licences for subsidiaries offering administration and custody, but managing director Barth Ebong says the regulators restricted it to a single licence for custody.
As more funds flow in and as the pensions sector becomes more experienced, the Pensions Commission will need to widen the scope of instruments where pension fund investments are permitted, says one observer. “At the moment, it is very restricted, very controlled, quite rightly so. But ultimately, it has to free out, to become more flexible. The government will have to lift exchange controls and allow a percentage of the funds to be invested overseas. That is going to come sooner rather than later.”
The spiralling process of cash accumulation is being speeded up by macroeconomic policy, says Mr Stevens. “Interest rates are under pressure, regardless of what inflation does. The government has issued more and more debt, which is fine, but they have not put in a proper transparent debt management process.” So structural and regulatory intervention is urgently needed.
Merger watch
International investors are watching one particular development in Nigeria’s fund management and custody sector: the progress of the merger between IBTC and Stanbic Nigeria, part of Standard Bank of South Africa. Stanbic is Nigeria’s leading custodian for international investors but it requires a banking licence to continue operating on the Nigerian markets and the merger with IBTC will provide that.
Should merger talks run into the sand, international investors in Nigerian stocks would be left high and dry. Observers suggest they would have to dump their Nigerian stocks, causing havoc on the Nigerian markets. Other local banks are watching the market carefully and may be gearing up to compete with Stanbic for custody business.NIGERIA 2
