In a move likely to shake up Nigeria’s N6.5 trillion Pension Funds Industry, the regulator PenCom and Financial Reporting Council (FRC) has directed Pension Fund Administrators to adopt International Financial Reporting Standards (IFRS), for preparing financial statements.
“Accordingly, all Pension Funds shall issue financial statements prepared in accordance with IFRS for the year ending 31 December 2017,” PENCOM and FRC said in an August 3 letter signed by Daniel Asapokhai CEO of FRC and Aisha Dahir-Umar, Acting DG PenCom.
The guideline was issued as a directive to PFAs for immediate compliance and 2017 shall be the latest year of adoption of IFRS by all duly registered Pension Funds.
Industry sources tell BusinessDay that in adopting IFRS, Pension managers have the option of fair valuing pension assets which will immediately trigger substantial losses as much as 20-30 percent of book values considering the current (high) market yields.
An alternative approach might be to hold the assets till maturity (permissible under IFRS), which would benefit employees nearing retirement at the expense of other workers with longer years to retirement.
This is because retiring employees who elect to transfer their contributions to insurance/ annuity companies will cause losses to be triggered from the sale of the pension assets at low asset values due to current high yields.
If this disposal happens on a scale judged as material or substantial, then IFRS will demand the entire portfolio be reclassified and marked to market.
As part of industry reforms unveiled to prevent a repeat of the 2008/2009 home grown financial crisis, International Financial Reporting Standards (IFRS) became Nigerian Generally Accepted Accounting Principles (NGAAP) for all corporate entities in Nigeria since January 1, 2012.
The framework was to come into effect for Pension Funds in 2013 as specified by the Roadmap for Adoption of IFRS in Nigeria.
However, various complexities and the need for regulatory clarifications have led to non-compliance with PenCom and FRC blaming the delayed adoption on the “practical expediency and…peculiarities faced by Pension Funds in Nigeria.”
Data from the National Pension Commission or PENCOM shows that as at April 2017, the net asset value of total pension fund assets stood at N6.49 trillion with 7.4 percent invested in domestic ordinary shares or stock, 55.7 percent in FGN bonds, 15.66 percent in Treasury Bills, 6.26 percent in banks money market securities, 4.79 percent in corporate debt securities and 3.38 percent in Real Estate properties.
Together these asset classes make up 93 percent of pension fund investments.
The data shows that at least 71.3 percent of Pension assets or N4.63 trillion as at April, 2017 is invested in fixed income securities issued by the sovereign or Federal Government.
Bond prices have tumbled in the past three years as yields spiked as a result of rising inflation and greater issuance by the Federal Government to fund its growing deficit.
There are 21 licensed PFAs operating in Nigeria, according to PenCom data.