IFN Monthly Article on Nigeria: July 2018 Issue

Nigeria’s pension industry evolves into multi-fund structure. What next?

 

On July 1 2018, Nigeria’s pension fund industry took a major leap as operators commenced the implementation of a new structure for investing retirement savings. The new structure termed the multi fund structure (MFS) ensures retirement savings are invested in alignment with contributor’s risk appetite and return expectations. The investment regulations sets limits on each funds’ exposure to variable investments. The variety in the MFS fund structure represents a significant improvement on the previous mono-fund investment approach.

The MFS allocates individuals into four separate funds based on years to retirement and sets limits on each fund’s exposure to variable instruments. A major innovation of the MFS is that individuals are able to opt for the more aggressive fund type if they wish to earn higher returns on their pension funds (subject to age limits).

Nigeria’s pension industry has evolved steadily over the past decade and with the introduction of the MFS, the next frontier being discussed is the potential establishment of Shari’ah compliant pension funds. At present, over 70% of Nigeria’s N8trn (c. $25bn) pension fund assets are invested in interest bearing instruments such as bonds, treasury bills and commercial papers, which makes the return impermissible for Muslim contributors. The yearning of this segment of the pension market for an urgent alternative has inspired some pension fund operators to consider meeting this demand.

It is interesting to note that a pension fund administrator (PFA) recently signaled its willingness to establish a Shari’ah compliant fund should regulations and conditions permit. PFAs with a strong presence in Nigeria’s Muslim-dominated northern region, where there is a high demand for a Shari’ah compliant alternative, may consider this a competitive advantage. The prospect of the largest fund managers in the country searching for investment grade shariah compliant investments should spur shariah compliant asset creation and thus deepen Nigeria’s Shari’ah compliant financial services industry.

Just last year, the pension regulator issued guidelines allowing pension funds to invest in Shari’ah compliant instruments such as Sukuk, alongside other novel instruments, indicating its willingness to explore previously uncharted waters.