The concept of intergenerational equity was best explained in 1974 by economist James Tobin, who wrote that, “Trustees of endowed institutions are the guardians of the future against the claims of the present. Their task in managing endowments is to preserve equity among generations.”
Intergenerational equity challenges are common in endowment fund management, but are gainingattention in Defined Contribution (DC) and Defined Benefit (DB) schemes, thoughmore obvious in the latterdue tothe ease of estimating“present value” of projected benefit obligations.DC’sintergenerational inequities however,are subtly suppressed and usually underestimated,yetwith far reaching consequences on futuregenerations. To illustrate the above: A typical DB pensioner who joined the federal civil service in 1980 and retired in 2015 would readily acknowledge that:
•Exchange rate fluctuations over the years have significantly weakened the ability to buy foreign or locally made goods that are marked to global standards and prices
•Inflation rates over time have eroded the purchasing power of monthly pension; e.g. a loaf of bread could be bought for 50kobo in the 80s’ but currently sells for over N450; and
•Earlier generations of retirees faced lowerrisks and consequences of underfunded liabilities than later generations
The above facts are the realities of some retired civil servants in Nigeria, most of whosetotalpension assetsare lesser than a fresh graduate’s annual salary, despite their superior qualifications and contributions to the economy. The genesis of their plight however, rests on theprevalent regulations at that time, the fund managers’ choice of assets and the “targeted returns” that failed torecognize compounding impact of inflation and currency fluctuations. The systemic effect of the above wasseverely underfunded pension schemesthatcharacterizedthe privatization of government parastatals in early 2000s.
In today’s pension schemes (mostly DCs), a similar malady is subtly taking root as we celebrate nominal returns without consideration of“real-value-added”, if any. According to “Pension Market in Focus 2017” by OECD,the Nigerian pensionindustrywas the only one out of 85 reporting countries that had a negative average real return (-0.4%) ina time frame of 5years up to 2016, and also one of the 7 countries with negative industry real return (-5.7%) in 2016. The relatively poor performance can be traced tolack of intergenerational equity in our investment decisions andregulations on; assets mix, asset selection andtargeted returns during the period under review.
Promoting intergenerational equity in asset allocation requires, at a minimum, a statistical assessment of a fund’s demographics, return and risk profile, and reflection of same in asset allocation decisions.As at September 2017, the Nigerian aggregate pension assets was 78% vested in FGN Bonds and Treasuries,6.8% in banknotes,9.98% and 4% inEquities and Alternative investments respectively. The above asset mix isa remarkable disservice to individuals within their 20s and 30s – whohave more than three economic cycles before retirementto recover from recessionand who according to PENCOM’s Annual Report respectively comprised 29.2% and 35.2% of RSA contributors as far back as 2011. The bewildering twist to the above observationwasthat the NSE Pension Index increased from 803.52 in January to 1,215.41 in September 2017 (i.e. a YTD return of 51%) while FGN Bonds and Inflation rates were 15.9% and 15.8% respectively, during the period under review.This goes to prove that if the N7.2 trillion national pension assets was 30% invested in equities it may have recorded a weighted average “real” return of about 10% as at September 2017.
In consideration of the above, even from an Absolute Return (AR) perspective, there was no way a Roy Safety First, Sharpe Ratioor Real Returns assessments of the asset categories would have justified the nature of investments made. In essence, the industry’sasset mixis an indicator of a coaxed generation of pension contributors who are forced to adopt a sub-optimal portfolio even in the sea of enabling regulations and reforms by PENCOM.To further buttress the assertion, a comparison of Nigerian pension funds with contemporary funds from27 OECD nationsrevealed that Nigeria had almost twice the ratio of investments in fixed income instruments (i.e. 78.9%) than other countries (42.2%), while high yielding asset classes like mutual funds, structured products, PE funds were “almost” non-existent in the Nigerian pension portfolios.
Another area where Nigerian youths are experiencing inequityis asset selection, due to the lumping of risk and return profiles of different segments of an age group within a fund. For example: A young(<49 years) tenured professor from UNILAGcan accommodateslightly more volatile equity exposure in his pension portfolio, given the “fixed income” nature of his “human capital” while a stock broker of same age would likely have a human capital that ispositively correlated with the NSE index. Obviously, the asset selection needs of the two contributors are different despite their classification tothe same demographic group. To resolve the above,PENCOM may need to consider the introduction ofa “limited self-selection policy” andaccreditationofmore fundsalong the lines of various equity investment styles.
Following the recent introduction of“multi-fund structure” by PENCOM,the creation of more Pension Indexes is incontestably overdue. The proposed indexesshouldcoverdominant risk appetitesand return objectives of identified demographic groups and different investment stylesin order to avail a broader platform for intergenerational equity investing. In addition, PFAs should be encouraged to invest in foreign funds that availacceptable return or risk combinationsuncommon in the local market.
Overall, the Nigerian pension assets mix is subnormal, nationalistic and biasedin favor of older generations, thereby creating sub-optimal returns for younger Nigerians who are the major contributors to the funds. The problem, however, can be rectified by PENCOMthroughprovision of further guidelines on asset selection, creation of more indexes, enforcement of the “Amended Investment Regulation”, promotion of due process in investment management, introduction and accreditation of more funds along equity investment styles as well as formulation of inclusive policies – through engagement of professionals from several demographic groups in review of “exposure drafts”.