How foreign exchange risks and others affect the Nigerian pension industry

Despite being one of the fastest-growing sectors in the Nigerian financial services industry, the Nigerian pension industry has been affected by various risks, such as the volatility in the foreign exchange and other factors.

However, these risks have harsh consequences on the retirement income of contributors. For example, in Nigeria, whilst the pension assets in the last decade have grown by 21% annually, the growth in the value of assets when converted to USD, has been about 11% over the same period.

This is according to a recent report released on Pension Sector Forum by ARM Pension, with the theme “Pension Assets Risk Management in the Face of Uncertainties”

All other things being equal, the findings revealed that the Defined Contribution Pension scheme assets on a 10-year time frame, grew faster than Defined Benefits (CAGR 8.4% pa vs 4.8% pa). Increased member coverage and higher contributions were probable factors responsible for the growth. In addition, most retirees might not have enough funds to maintain a decent standard of living, as retirement risk has been transferred to them.

Other risks outlined in the summit include; interest rate risk, political risk, operation risk, and key macroeconomic risks such as unemployment, GDP, inflation, currency among others.

With regards to who bears the retirement risk, 68% of the risk is borne from one’s sources, while 38% is from outside sources.

The report also stated that the total pension contributions received in the industry from 2017- 2019, was almost equally split between the private and public sectors at the end of Q3 2019.

Way forward

In mitigating the risks inherent in the Nigerian pension industry, experts at the summit called for increased collaboration among stakeholders, engagement with all regulators, increased advocacy for corporate governance, increased awareness, and sensitization of contributors by stakeholders among others as viable options going forward.

Key highlights

As of June 2020, only 11.3% of the Nigerian labour force had opened retirement savings accounts (RSAs), while pension assets stand at less than 10% of GDP.
The total number of funds under management currently stands at N11.1 trillion.
There are currently over 9.04 million subscribers and 32 operators.