Contributory pension schemes in Nigeria have moved from a two trillion deficit to a five trillion surplus in almost a decade with a strong growth trajectory.
CEO of the Nigerian Stock Exchange, Oscar Onyema, told CNBC Africa that more than 5.6 million Nigerians are contributing to this scheme. Onyema said they are aiming to make this a more inclusive system that incorporates governments as well as small medium enterprises (SME’s) and small organisations.
“At the end of the day, it’s good for them and it’s good for relations as you amass these assets and deploy them to drive economic growth. It’s a vicious cycle as it also feeds into the wellbeing of their business,” Onyema said.
He shared that at the foundation of pension fund asset allocation needs to be equities because over long periods of time they tend to give higher returns. “The reason is simple, you want to beat inflation so that when the pension contributors want to withdraw during their retirement, their able to sustain a lifetime.”
Following an analysis that was undertaken for the time period between 1999 and 2014, Onyema said it discovered that if you invested one million naira in fixed income you returned about 11 per cent and if you invested in equities, you received a return of 17 per cent annually on average and inflation was at 11 per cent annually.
It is for this reason that Onyema recommends that for an appropriate portfolio, an investor must have asset class diversification, fixed income, ETFs, equities, infrastructure, commodities and alternative investments. “You should be able to marry and exposure that is not highly correlated and therefore be able to meet short-term needs.”
The key challenge noted by Onyema is “How do you maximise pension fund investments while addressing risk issues because preservation of capital is very important.”
He further filled in the blanks and said regulations and operators need to be at the forefront of enhancing pension asset allocation to match what the rest of the world is doing.
He gave special recognition to Pencom on the issue of inclusiveness saying that, “Pension assets will not be vested in state government bonds where those states are not contributing.” Onyema suggests providing a window to SMEs because currently in order for a pension fund to be invested a company, they need to listed and paying dividends