N13tr pension assets: How inflation, naira devaluation pauperize contributors
The Nigerian pension industry has shown remarkable growth with N13 trillion assets under management and projection of N20 trillion assets position by 2023. The pension assets, under the regulation of the National Pension Commission (PenCom), are invested in various portfolios with the hope of getting good yields for contributors. But contributors now face an uncertain future at retirement as rising inflation and weakening naira erode the value of their income. Workers who retired 12 years ago on what they thought was an adequate retirement income have seen their pensions cut in half by inflation and depreciating naira. The Nation Newspaper writes that regulatory bottlenecks on changing to new Pension Fund Administrators, frauds in pension assets administration, and mismanagement are red flags that retirees will continue to face hard times unless drastic measures are taken to reverse the trend.
Abubakar Mohammed, a Lagos-based civil servant is one of the 9.2 million workers that have opened Retirement Savings Account (RSA) with one of the 24 Pension Fund Administrators (PFAs) licensed by the National Pension Commission (PenCom).
Mohammed, who will be 60 years old in June 2022, is looking forward to a quality life in retirement.
He is one of the over 9.2 million contributors to the over N13 trillion pension assets invested by PFAs in different instruments for good returns on investment.
Like other contributors, Mohammed is worried that his retirement savings are being threatened by myriads of economic factors especially inflation and exchange rate crisis that has continually eroded the value of the naira.
“I have continued to worry about my future in retirement. How the naira has lost significant value over the years and inflation continued to rise, threatening the value of my pension savings,” he lamented.
Martins Abiodun, another civil servant, who will retire in July 2023, rising inflation and currency risks are key impediments to his retirement plan.
He disclosed plans to make alternative plans that will cushion the effect of inflation and currency devaluation on his income in retirement.
“Inflation uptick is eating up my pension savings value. I worry to see my hard-earned funds badly depreciated at this period of my retirement when the fund is badly needed,” he said.
Findings showed that in retirement, many retirees’ medical expenses surge, some retirees could require a housekeeper or nursing care when they are no longer able to care for themselves. These increase the need to protect retirees’ income from inflation and currency risks to avoid value erosion.
The PenCom has therefore deployed the RSA Multi-Fund Structure to align with contributors’ risk appetite with their investment horizon, at each stage of their life cycle.
The RSA Multi-Fund Structure is to achieve optimum returns for contributors by aligning their pension savings with their individual risk/return profiles, providing investment portfolio choices to contributors, and enhancing the safety of pension assets through adequate portfolio diversification, through increased investment in equities and alternative assets, such as infrastructure and private equity.
An economist and Managing Director, Financial Derivatives Company (FDC) Limited, Bismarck Rewane, disclosed that over seven million Nigerians lost their jobs due to inflationary pressures in 2020, taking the total number of poor people in the country to over 83 million (40 per cent of the total population).
Inflation hit a four-year peak in March. Driven by the effects of Covid-19, it rose to 18.17 per cent, up 4.85 per cent from February. As of July 2021, Nigeria’s headline inflation stood at 17.38 per cent but has moderated to 15.4 per cent in November.
Rewane said Nigeria is expected to have the fifth-highest inflation rate on the continent by the end of 2021, behind only Zimbabwe, Zambia, South Sudan, and Angola.
He said the high inflation has compounded the financial pressure on households already faced with a shrinking labor market, stagnant economic growth, and increasing levels of insecurity.
“Nigeria is experiencing cost-push inflation, where prices of goods and services are driven up by the high price of inputs, wages, and production resources, most specifically, imports. Although Nigeria has experienced a downturn in its inflation in the past four months, the inflation rate could increase again due to the likely increase in energy costs (PMS price),” he stated in the FDC Economic report released to investors.
For Rewane, inflation is the biggest driver of poverty because of its impact on households, businesses, and overall security.
“Rising prices erode real incomes and purchasing power of consumers, heightens pressure on operating costs, increases production costs, and reduces real returns on investment. Businesses struggle to survive as it is not always possible for producers to transfer additional cost to consumers, and employment suffers as a result,” he said.“Rising unemployment, in turn, will push more Nigerians into criminal activity to support their livelihood and make up for lost earnings. A surge in insecurity over the last few years has slowed economic growth further and left more people displaced and unemployed, leading to a vicious cycle of violence,” he added.However, the problem is not easily solved. The combination of rising inflation and unemployment rates creates a unique set of challenges for policymakers. Policies that boost economic output and reduce unemployment, such as a reduction in taxes and an increase in government spending, would worsen inflation because these policies tend to increase the supply of money in the economy.
Likewise, naira’s fall in the last 12 months has left deafening sounds in the ears of pension enrollees. Many pension enrollees expecting the local currency’s speedy recovery to the pre-Covid-19 era were disappointed at how low it nosedived in recent years, hitting N485/$ at the parallel market in mid-July from around N465/$ at the beginning of this year.
The naira now exchanges at N566/$ at the parallel market while at the Investors & Exporters window, (the official market), the naira depreciated by 7.7 per cent from N380/$ to N410/$.The misfortune of the naira came from diverse occurrences, with the Central Bank of Nigeria (CBN) fighting back with policies, including naira-for-dollar incentives for diaspora remittances beneficiaries but little or no result is being achieved. For instance, in a similar fashion to the January 2016 episode, the CBN governor, Godwin Emefiele, at the end of the July 2021 Monetary Policy Committee meeting placed a ban on forex sales to Bureaux De Change (BDCs) and suspended the issuance of new BDC licenses over allegations of forex racketeering.The banks were directed by the CBN to set up forex teller desks in all branches to meet retail-end forex demands.In the last 20 months, the CBN had expanded its list of banned items from accessing forex to 45 (maize, fertilizer, milk, and sugar being the new additions), while foreign capital inflow declined 61.1 per cent year-on-year in the first half of 2021 to N2.9 trillion.With sustained dollar scarcity, banks came under pressure in meeting their clients’ demands in funding dollar-based transactions. Currently, banks are rejecting dollar-related transactions while businesses and consumers are in search of alternatives that would enable them to replace imported raw materials and products with homegrown substitutes.Trading Desk Manager, AZA, global forex dealers, Murega Mungai, said the naira crisis had worsened following the outbreak of the Covid-19 pandemic leading to a significant reduction in the demand for, and price of crude oil, Nigeria’s main source of forex receipts and fiscal revenue.
The price of crude oil fell by more than 70 per cent from a high of $68 per barrel in January 2020 to $24 per Barrel in April 2020. As of April 20, 2020, the price of some streams of crude oil fell below zero dollars per barrel, as producers were forced to pay buyers for overwhelmed storage facilities. Emefiele said while dollar flows began to recover in the early part of 2021, financial flows to emerging markets like Nigeria, are constrained by expected tapering by the Federal Reserve Bank in 2022, which is likely to affect global financial conditions.The resulting outflow has further heightened pressures on the currencies of major emerging market countries like Nigeria, leading to the adjustments of the naira exchange rate.Head of Consulting at Agusto & Co, Jimi Ogbobine, explained what is happening to pension contributors’ income.“Inflation is rising, largely on account of the gap between demand for and supply of goods and services. Population grows at the rate of about five million people per year but growth in output is barely positive,” he said.According to him, a weakening currency also puts some pressure on inflation but this is not the root cause of inflation in Nigeria.
He said the pressure on foreign reserves and exchange rates will remain elevated adding that the restrictive policies of the CBN mean that the parallel market premium will widen to 20 per cent to 35 per cent of the official rate.Despite the inflation and exchange rate worries, the pension industry had 9.2 million enrollees as of December 2020, up from 8.8 million in the prior year.The number of enrollees also rose on account of increased participation from the private and public sector driven by onboarding from the micro pension scheme and the influx of new employees into the mandatory contributory pension scheme.Ogbobine said the Industry’s Asset under Management (AuM) is expected to reach N20 trillion by December 2023 from over N13 trillion at present.However, the assets are threatened by job losses and subsequent withdrawals from the scheme, inaccessibility to viable government securities and an increased appetite for riskier investments which may lead to losses.
In the last five years, a significant portion of the growth in pension assets has been driven by the increase in gross investment returns (73.5 per cent) and to a lesser extent by net contributions (26.5 per cent). More at: https://thenationonlineng.net/n13tr-pension-assets-how-inflation-naira-devaluation-pauperise-contributors/
