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Nigeria Strategy Report H2 2018 Excerpts - Pension: Multi-fund - Will variable assets Blow-Up or Blow Over?

• In today’s cut-out from our core strategy document – the Nigeria Strategy Report, we focus on developments in domestic pensions industry over H1 18 as well as delineate potential impact of new initiatives on the market.
• The pension fund assets continued its ascent, rising by N581 billion between year-end 2017 to April 2018, to print at N8.1 trillion, reflecting contributions (est. N174 billion) and more importantly, gains in assets. In terms of allocation, while FG securities remained the heavy weight, we saw renewed appetite for corporate debt and alternative instruments. Precisely, corporate debt grew by +32.9% to N354 billion, while alternative investments grew by 17.84% to N306 billion.
• Elsewhere, the Multi-fund structure finally kicked off on the 2nd July with a six (6) months window for implementation. To recall, PFAs are expected to divide existing retirement savings account (RSA) funds in four (4) distinct funds based on the age and stage of the contributors. Thus, while fund 1 is an optional fund and will be null at inception, active contributors within the age of 18 – 49 years and above 50 years will be moved to Fund 2 and 3 respectively, while retiree savings will be moved to Fund 4.
• In trying to estimate the impact of the re-allocation of funds to variable investments and the market, we ran a scenario analysis based on market survey to estimate the split in current RSA active to Fund 2 and 3. Our estimate revealed a split in RSA active to Fund 2 and 3 of 61% and 39% with estimate portfolio size of N3.3 trillion for Fund 2 and N2.2 trillion for fund 3. Our findings reveal that government securities seem to have breached its limit which implies a possible rebalancing of ~ N95.7 billion from government securities. On another end, alternative instruments, which currently accounts for ~0.5% of pension assets, is a far cry from the new minimum limit of 2.5%. Therefore, we expect a minimum flow of N54.5 billion into alternative instruments.
• Elsewhere, given that the industry’s compliance to minimum equity allocation is largely skewed by 9 PFAs, we expect a flow of new funds into the equity market as the other PFAs strive to comply with the new in vestment guideline. Consequently, we expect a minimum of N81 billion into the equities market however, we see little scope for an equity gyration. Overall, while the start of the multi-fund structure bodes well for alternative investment, we are likely to see a more cautious increase in exposure as players scamper for limited comfortable assets in the alternative space.