Pension Fund Management:
Implications For Sound Financial And
Economic Management
By
M. K. Ahmad
Director General
National Pension Commission
Outline
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Characteristics of Pension Funds
Pension Fund Management
Impact on Financial and Economic
Management
Lessons from Nigeria
Characteristics of Pension Funds
• Sponsorship of Pension funds
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contribution by employers and/or employees
wholly by employers
• Pension Funds as Institutional investors:
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collect, pool and invest funds for future pension
entitlements of beneficiaries
ensure sound financial and economic management
through financial intermediation, which affect
financial markets in particular and economic activity
in general
Characteristics of Pension Funds …Cont’d
• Returns to members of pension plans
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may be purely dependent on the market or may be overlaid
by a guarantee of the rate of return by the sponsor
• Portfolio diversification to mitigate against risk:
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spread of domestic securities
international investment
• Pooling of risk for small investors
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Long term liabilities allowing holding of long-tenured
and high yielding instruments
Characteristics of Pension Funds …Cont’d
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Ability to absorb and efficiently process
information on capital market operations
Large size and thus economies of scale,
which result in lower average cost for
investors
The countervailing power of pension
funds that is often used to reduce
transaction costs and custodial fees
Pension Fund Management
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Pension Funds are managed by:
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Pension Fund Administrators – take investment decisions
In some jurisdictions, pension fund management can be
by asset management and insurance companies
Some management decisions may be the responsibility of
Boards of Trustees in some corporate organisations
Pension Fund Custodians – keep custody of pension funds
Custodial services may be provided by Central Banks in
some jurisdictions
In the UK, Pension Protection Fund provides
compensation to contributors where employers become
insolvent
Pension Fund Investment... Cont’d
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Regulations required to promote both the
performance and the financial security of
pension assets
Regulations of pension funds require
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the appointment of a custodian, depository institution
or trustee
standards of conduct and minimum suitability of the
operators of pension funds
the rights of investors to withdraw funds
the right of investors to full, timely and accurate
information disclosure
Pension Fund Management … cont’d
• The main goals of pension investment are to:
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Ensure adequate, affordable and sustainable
benefits to contributors
Secure safety & security of funds
Ensure adequate liquidity to pay all pension
benefits of contributors as and when due
Achieve an optimal trade-off of risk and return
through strategic asset allocation
Pension Fund Investment … cont’d
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Risk Management for pension assets established on
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Quantitative limits: maximum limits for individual,
class or class of mix assets
Principle of Prudent Man - the preservation of capital,
while obtaining a reasonable income
Benchmark: indicator of market, sub-market or a mix
of assets commonly traded and used as a point of
reference
Pension Fund Management... Cont’d
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In practice, 60% of pension funds invested in local
markets
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Investment of pension funds in international
market
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Foreign investment might not overcome collective
systemic risks to world capital markets
International diversification may reduce risk since
shocks to equity markets tend to be country specific
Impact on Economic Management
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Pension funds can have positive impact on the
economy through:
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generation of savings that leads to capital accumulation
and hence promotes investment
transfer of resources in favor of long-term assets would
have significant impact on GDP growth
Shift to long-term assets tend to reduce the cost of capital
and increase the availability of equity and long-term debt
financing to companies, and hence promotes growth
Impact on Economic Management ... Cont’d
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Increase in capital investment and labour
productivity
Development of labour intensive, low productivity
“informal sector” to a capital intensive, high
productivity “formal sector”
Availability of long-term financing will simplify
government deficit financing through the issuance
and purchase of government securities
Impact on Economic Management ... Cont’d
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Promotion of infrastructural development
Development of other institutions
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Insurance
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Rating
Mortgage
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Annuity
Life insurance
REITs
Impact on Financial Management
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Development of the Capital Market
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Increased demand for new investment outlets would
stimulate innovation and development of new long
term instruments
Increased
market
integrity/transparency
and
corporate governance
Re-enforcement
of
Improved
regulation
and
supervision of the market and its efficiency
Creation
of
domestic
institutional
investors
(PFAs/CPFAs), with long term focus, would moderate
stock market and price volatility
Trigger the modernisation of capital market
infrastructure such as clearing and settlement
Impact on Financial Management ... Cont’d
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International portfolio of investment
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Qualitative developments in the financial markets
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risk reduction to pension funds
reduction of volatility of returns
financial innovation
development of corporate bonds market
development of indexed instruments
better accounting and auditing
better information disclosure
Efficient provision liquidity and price formation
Lessons from Nigeria
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Rationale for Pension Reform
 Defined benefit (DB) – Pay As You Go (PAYG)
 Largely dependent on budgetary provision for funding
 Unstainable pension liabilities
 Weak & inefficient administration
Public
Sector
 Demographic shifts and ageing make DB schemes unstainable
 Low compliance ratio due to ineffective control &
regulation
 Many workers in the private sector were not covered by
any form of retirement benefits arrangement
 Existence of diversified arrangements which were largely
unregulated in the private sector
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Private
Sector
LESSONS FROM NIGERIA … Cont’d
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Characteristics of the Contributory Pension
Scheme in Nigeria
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contributory: Contributions by both employer and employee
fully Funded: Funds set aside for retirement
individual Accounts: Nature of the account, portability and
withdrawals (Lump sum, Annuity & Programmed withdrawal)
privately managed: by PFAs, CPFAs and PFCs
life Insurance Cover
coverage and exemptions
strictly regulated and supervised by PenCom
LESSONS FROM NIGERIA … Cont’d
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Pension Fund Investments managed by two
institutional investors
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Investment Instruments
–
–
–
–
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Pension Fund Administrators
Closed Pension Fund Administrators
subjected to both quantitative and qualitative regulations
all instruments must have rating grades as stipulated in the
Regulations
rating carried out by Risk Rating Institutions
performance benchmark stipulated for each asset class
LESSONS FROM NIGERIA … Cont’d
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Securitization & Listing
•
Pension fund investments assets must be securitized
and listed for trading on the floor of the NSE or
Electronic Platform of MMAN
Pension Fund Assets:
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Generated pool of long term investible funds for the first time
in Nigeria
The industry has approximately N679.55 worth of assets as
at 31 October, 2007
RSA assets – N159.05 billion
CFPA assets – N195.01 billion
AES assets – N325.50 billion
LESSONS FROM NIGERIA … Cont’d
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Quantitative limits and performance
benchmarks stipulated
Assets invested in various instruments - FGN
and State Governments’ securities, equities,
money market instruments, mutual funds,
corporate debt instruments
Offshore investments and derivatives are future
developments
LESSONS FROM NIGERIA … Cont’d
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Development of other institutional operators:
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Enhancement of the skills of rating agencies
Development of mortgage industry
Development of insurance industry
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Provision of statistics for national development
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Provision of group life insurance policies
Developments of annuities market
Anticipated fall in premium rates
National databank
Pensioner verification exercise
Thank You!
National Pension Commission
Plot 174, Adetokunbo Ademola
Crescent
Wuse II, Abuja
09 – 4138736 – 40
info@pencom.gov.ng
www.pencom.gov.ng
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