channeling pension funds for national development - pencom

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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

12 December 2012 2



Global Overview

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•

Global demographic shift towards population agingreflects 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 benefitsand 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



• Accumulated pension funds had contributed to nationalsavings and economic development

• East Asian tigers achieved double digit growths followingincreased 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 projectshas 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

Global Overview…cont’d

12 December 2012 4



Global Overview...cont’d • Global Fund Management Assets under Management in $trillion

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• Pension funds act as intermediariesinto a lot of financial assets,including corporate equities,government bonds, etc

• Provide long term financialintermediation to the real sectorthrough corporate debtinstruments and throughinvestment funds

•

In some jurisdictions, pensionfunds acquire long-term moneymarket instruments issued bybanks, allowing the banks to issueloans to the corporate clients withvarying maturities

• In countries with robust and largecapital markets, pension fundsacquire, directly or indirectly, long-term 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 yieldcurve within the fixed incomesegment of the market

Pension Funds and Real Sector & CapitalMarket Developments

Real Sector Developments Capital Market Developments



•

The OECD report on Infrastructure (2006/7) estimated globalinfrastructure requirements by 2030 to be in the order of US$50trillion

• The International Energy Agency also estimated that adapting to andmitigating the effects of climate change over the next 40 years willrequire around US$45 trillion

• Such capital requirements need long term investments that match thelong duration of pension liabilities

• In particular infrastructure assets linked to inflation could hedgepension 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

Infrastructure Financing

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• Provide informed counterbalance to controllingshareholders to safeguard against the company’s 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

Promoting Corporate Governance

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Pension Funds and EconomicDevelopment in Nigeria…cont’d

• Up to 35% of the AUM can be invested in Money MarketInstruments to support the activities of banks in provingfinances for the real sector

• Securities issued by Private equity funds are allowed, furtherfacilitating direct real sector financing

• Facilitated Capital Developments and created institutionalinvestors in the country

• Allowed a maximum of 25% of AUM to be invested in quotedequities

•

Provided more than 80% of AUM to support developmentalprojects 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 InvestmentsPENSION ASSETS DISTRIBUTION

AS AT JUNE, 2012

63%11%

10%

6%4%

3%

2%

1%

Asset Class FGNSecurities(limit: 80%)

Equities(maxlimit:25%)

MoneyMarketInstruments(limit: 35%)Real Estate

Property(various)

State Govt.Securities(limit:20%)

Corporate

DebtSecurities(limit: 35%)Others

(various)

Open/CloseEnd Funds(limit: 20%)

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0.00

0.50

1.00

1.50

2.00

2.50

3.00

Q 4 : 2 0 0 6

2 0 0 7 : Q 2

2 0 0 7 : Q 4

2 0 0 8 : Q 2

2 0 0 8 : Q 4

2 0 0 9 : Q 2

2 0 0 9 : Q 4

2 0 1 0 : Q 2

2 0 1 0 : Q 4

2 0 1 1 : Q 2

2 0 1 1 : Q 4

A m o u n

t ( N t r i l l i o n

)

Growth of Pension Assets As At June 2012

RSA

CPF A AES

Total



• Lack of appreciation of the opportunity provided by the pensionindustry

• Failure to engage the business community by PenCom andOperators

• 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 about3% 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

Pension Funds and Economic Development inNigeria – Challenges

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• 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 opportunitiesNon-availability of investment instrumentsInfrastructure investment opportunities in the market are perceived as too risky

– The Investor CapabilityLack of expertise in the infrastructure sectorShort-termism of investors

– The Conditions for InvestmentLack of clear valuation of infrastructure projectsShortage of data on performance of infrastructure projectsLack of benchmark

Pension Funds and Economic Development inNigeria – Challenges

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Suggestions on the Ways Forward• General awareness campaigns particularly for the businesscommunity• 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 andenhance existing procedure of processing applications forissuance

– 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 inconjunction with DMO issue infrastructure bonds – Project owners should consider securitization and issuance of

infrastructure bonds

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• NECA to engage its members and encourage them totake advantage of the opportunities provided by thepension funds as well as develop the requiredinvestment instruments

• Operators should work in a coordinated manner tocome up with strategies that few capable operatorscould provide adequate intermediation for a corporateissuance or infrastructure projects

• Regulators must develop necessary supervisory toolsincluding documentation, valuation and benchmarks

• Capacity building for the financial sector and thebusiness community – where necessary, the effortsshould be jointly handled by the relevant regulatorsand their operators

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Suggestions on the Ways Forward



Thank You

National Pension Commission174 Adetokumbo Ademola Crescent

Wuse II – Abuja

www.pencom.gov.ng [email protected] + 234 9 4610466 - 8

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http://www.pencom.gov.ng/

mailto:[email protected]

mailto:[email protected]

http://www.pencom.gov.ng/

channeling pension funds for national development - pencom

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