A developing economy perspective on Pension Fund Reforms and liberalisation of the domestic economy: Nigeria

1. A developing economy perspective on Pension Fund Reforms and liberalisation of the domestic economy: Nigeria Presentation by M. K. Ahmad Director-General National Pension Commission August 2007 ……ensuring your comfort after retirement

2. Presentation Outline • Rationale for Reform • Objectives of the Reform • Key features of the scheme • Implementation Breakthrough • Pension reform and the economy • Key success factors • Pension fund investments • Lessons and policy implications 2

3. Rationale/Goals of the Reform Rationale for Reforms • Most schemes were under or unfunded • Unsustainable outstanding pension liabilities • Weak and inefficient pensions administration • Defined Benefit Scheme/PAYG was unsustainable • Most workers in the Private Sector not covered by any form of retirement benefit arrangements Pensions Reforms Primary objectives of Reform • Ensure that every worker receives his retirement benefits as and when due • Empower the workers & assist them to save in order to cater for their livelihood during old age • Establish uniform rules, regulations and standards for administration of pension matters • Secure compliance & promote wider coverage 3

4. Secondary objectives of Reform • An integral part of government medium term development agenda – National Economic Empowerment and Development Strategy (NEEDS) • To reduce the fiscal cost of pension to the government • Stem the growth of outstanding pension liability • Mobilise long term savings • Stimulate the development of an efficient capital market • Provide long term finance for the real sector • Promote GDP growth 4

5. Key features of the scheme The Key Elements of the Pension Reform The establishment of PenCom as a single Supervisor & Regulator of all pension matters in the Country The Establishment of Contributory Pension Scheme for both Public and Private Sectors The Establishment of Transitional Provisions for both the Public and Private Sectors 5

6. Key features of the scheme … cont’d

7. Key features of the scheme … cont’d

8. Implementation Breakthrough • Establishment of Supervisory and Regulatory Framework • Regulations/Guidelines Issued (Transitional arrangements, Licensing, Investments, valuation of investments, Fees Structure, Life Policy and Operational Guidelines) • Reporting requirements for operators & Daily monitoring • Consultative process in rule - making • Licensing of Operators • 23 PFAs, 4 PFCs, 6 CPFAs • Registration of Contributors • Registered a total of 2.45 million RSAs as at the end of July 07 • Public sector – 73.16% • Private sector – 26.84% 􀂾

9. Implementation Breakthrough….Cont’d • Accumulation of Pension Funds • Generated pool of long term investible funds for the first time in Nigeria • Estimated size of pension fund is N655 billion (USD 5.12 billion) as at end of July 2007 & Normal monthly accumulation of about N6billion (USD 0.05 billion) • Out of the assets N190.2 billion (USD 1.49 billion) are new contributions while N464.8 billion (USD 3.63 billion) are transferred by legacy funds • Public Sector Accrued Pension Rights being covered by Retirement Benefits Bond. About N1.6 trillion (USD 12.5 billion) for over 800,000 employees • Public education & enlightenment • Seminars/Workshops, Website, FAQs also in local languages • Strong partnership with key social partners- labour/employer Unions • General acceptance of the Scheme by employees & key Unions

10. Buoyant Capital Market Social Impact Sustainable Economic Growth Impact of the Reform on the economy • Improves living standards of the elderly • Secures financial autonomy & independence of retirees • Improves Labour market • Increased market integrity/transparency • Innovative products • Improved regulation/supervision • Creation of domestic institutional investors • Vibrant and competitive securities market • Lower transaction costs • Improved integrity/corporate governance • Avenue for long term borrowing • Promotion of Employment Generation Activities 10

11. Key Success Factors • Political will and policy consistency and continuity are essential • Macro economic stability and low inflation to protect pension assets (single digit inflation achieved and lower/stable exchange rate) • Effective regulation and supervision • Commitment create an effective agency- licensing, inspection • Level of development of the financial market is critical • Determine the type of pension reform (multi-pillar not appropriate with underdeveloped financial market) • Number and diversity of financial instruments • Liquidity and valuation of assets • Transparency and efficient settlement system is key • Sound banking and insurance companies due to banking and insurance reforms • Contributions and payments • Insurance and annuity contracts • Custodial services 11

12. Pension Fund Investment Management: Key Objectives • Secure safety & security of funds • Ensure adequate, affordable and sustainable benefits • Link between contribution and benefits • Ensure diversification & acceptable risk levels • Safeguard conflict of interest • Promote & sustain public confidence 12

13. Pre-requisites for Pension Fund Investments in Nigeria • Authorised Markets for Trading • Primary - new issues • Secondary – Floors of recognised Stock Exchange • Quality of Instruments • Instruments/Issuers must be rated • Records of past profitability and/or dividends payouts • Instruments must be readily marketable • Foreign investments and derivatives are future possibilities • Regulated investment limits (asset class/instruments) & performance benchmarks 13

14. Un-authorised investments/future possibilities • Direct real estate, private equities/venture capital and unlisted securities – not allowed due to: • Valuation and reporting issues • Liquidity/exit • Transparency and disclosure requirements • Specialized expertise and the need for capacity building • Need to build contributors’ confidence 14

15. Opportunities for entrepreneurs • Indirect promotion of other businesses/institutional operators • Sales agents • Stock brokers • Rating agencies • Insurance companies and brokers • Mutual funds • Mortgage finance institutions – through mortgage bonds or mortgage securitization • Factoring and Leasing 15

16. Lessons and policy implications • Pension reform should not be an isolated policy decision, but complimentary to other reforms • Financial sector reform e.t.c • Political will and policy consistency/continuity are essential • Adequate and timely delivery of data are essential for planning • Conducive investment climate that would create avenues to invest the pool of pension funds 16

17. Lesson for developing…..Cont’d • Challenges of expanding coverage of the informal sector: problem of identification, securing buy-in, irregular income basis for contribution, mode of collection • Challenges of enforcement, compliance and evasion • Inter-regulatory agencies’ co-operation is essential • Awareness and sensitization programmes • Need for skill development and capacity building 17

18. Abbreviations SEC- Securities & Exchange Commission PenCom- National Pension Commission NAICOM – National Insurance Commission JTB – Joint Tax Board PFA – Pension Fund Administrator PFC – Pension Fund Custodian CPFA – Closed Pension Fund Administrator RSA – Retirement Savings Account ABS – Asset backed Securities MBS – Mortgage Backed Securities REITs- Real Estate Investment Trusts

19. Thank You! National Pension Commission Plot 174, Adetokunbo Ademola Crescent Wuse II, Abuja - Nigeria 234 (9) 413 8736 – 40 info@pencom.gov.ng www.pencom.gov.ng