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Nigeria Strategy Report H2 2017 Excerpts - New Regulations set sights on increasing gains for Pension Assets


  • In today’s cut-out from our core strategy document – the Nigeria Strategy Report, we focus on developments in domestic pensions industry over H1 17 as well as delineate potential impact of new initiatives on the market.
  • Pension fund assets continued its steady growth with AUM rising 5.4% to N6.4 trillion between year-end 2016 to April 2017. As in prior years, the increase in AUM was driven by increased return on pension funds as fixed income instruments gained +5.43pps, reflecting the prevailing general risk averseness exhibited by PFAs but also tactical shift in asset allocation to take advantage of the elevated yields at the short-end of the yield curve.
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  • On the 18th of April 2017, the National Pension Commission (PENCOM) released an amended Regulation on Investment of Pension Fund Assets. Central to the amendment is the introduction of the multi-fund structure which splits the RSA active and Retiree into potentially four funds with varying risk appetite as captured by varying asset allocation via minimum allocation to variable income instruments.
  • Using the estimated AUMs within the investment limits for each fund, we find that industry compliance pension fund allocation across all asset classes suggest minor disruptions to markets. For instance, blended allocation to variable income securities under the new structure should hover between 5% and 12% which is higher than current industry exposure of 9.45%. Similarly, combined allocation to FG securities of 75% is in line with current industry exposure. Although, current industry exposure (6.9%) suggests no need for rebalancing, we note that industry exposure is largely skewed by the top five PFAs (9.45% of top five pension assets) with the other PFAs holding about 4.02% of their total pension assets in equities. Thus, assuming the other PFAs are to increase their holdings to the minimum requirement for each scenario, while assuming the top five maintains current equity exposure, approximately between N50.7 billion and N74.5 billion will have to flow into the equities markets.
  • Still on the variable income securities, of the three asset classes competing for minimum 2.5% in alternative assets, we think infrastructure funds will experience the largest inflow in the near-term. Our reasons are not farfetched. PFAs have been investing in private equity (PE) funds and REITs for years and the return story has not been palatable. Thus, aided by moral suasion given the need to bridge the gap in domestic infrastructure investment, we think PFAs are likely to channel investments to the infrastructure funds. This premise is supported by regulators’ move to reduce its previous caveat to say the pension assets can be invested in infrastructure funds with 60% of their investment in Nigeria as against 75% in the previous reform.
  • Going into the second half of 2017 we expect yields to remain at its current level or higher as the central bank still looks to hold on to its current monetary tightening stance with FX stability and inflation as justification to keep rates elevated. Increasing the range of funds to satisfy contributors’ risk-return preferences may, ultimately result in the optimum design, which is to offer as many funds as there are to contributors - alongside increasing returns in the system. Nevertheless, we perceive increased administration costs for the pension administrators thereby limiting the number of alternatives that can be offered efficiently in practice.


20/07/2017 8 EN
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ARM Securities Limited
ARM Securities Limited

ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape. ​

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