Pension Review Magazine

Pension Review Magazine

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In a bid to bolster their performance, strengthen their risk management strategies and in response to the lack luster performance of the Nigerian stock market, pension fund managers in Nigeria have increasingly been reducing their exposure to the stock market by allocating less and less of their assets to domestic ordinary shares and more and more to FGN bonds and other fixed income securities.   

Analysis of available information conducted by Quantitative Financial Analytics indicates that allocation to domestic ordinary shares has been suffering some reductions month after month since 2013. As at December 2013, 14.58% of pension funds’ assets were invested in domestic ordinary shares, by the same period in 2014, investment in domestic ordinary shares had fallen to 11.79%. As if that was not enough, by December 2015, pension fund managers reduced their exposure to the stock market by a further 2%, allocating only 9.76% to domestic stock market. The downward spiral continued in December 2016when just 8.13% of pension fund assets were allocated to domestic ordinary shares only for the sorry allocation to still suffer further reduction in January 2017 to stand at 7.79%.

Although pension funds have been recording positive returns month after month, (in trickles though), their asset allocation as indicated above is not reminiscent of diversified portfolios and may therefore be suboptimal. Optimal asset allocation is built on the premise that different asset classes offer returns that are not perfectly correlated and diversifying portfolios across such asset classes helps to optimize risk-adjusted returns. It does appear however that Nigerian pension fund managers’ ability or willingness to diversify is being stymied or fettered by regulatory impediments which specify, among other things, the required maximum allocation to a given asset class.
 

The importance of asset allocation as a major source of investment returns has been highlighted by researchers and analysts alike. A widely-cited study of pension plan managers has found out that 91.5% of the difference between one portfolio’s performance and another’s are explained by asset allocation. Specifically, in 1986, Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebowerposited that asset allocation is the primary determinant of a portfolio’s return variability, with security selection and market timing playing minor roles. Subsequent research results have come to support that assertion and it is hoped that in the near future and subject to the availability of asset classes and within limits of regulatory entanglements, Nigerian pension fund managers will diversify their portfolios optimally.

Nigeria Labour Congress, NLC, has reiterated labour's opposition to any attempt to use the over N6 trillion accumulated contributory pension scheme CPS, fund for anything outside the guidelines stipulated by Pension Reform Act, PRA, saying "We will resist efforts to remove the stringent conditions attached to their investment."

Speaking on Pension and State of Pension Administration, President of NLC, Ayuba Wabba, said, "In the last 12 months, we have witnessed serious deterioration in the administration of pension in the country. The incidences of MDAs and other employers withholding deductions from workers' salaries and not remitting same to their Pension Fund Administrators (PFAs); cases of workers leaving public service and having to wait for up to 15-18 months for their pension issues to be processed; and non-payment for those who are already pensioners - especially by state governments are some of the problems bedeviling the pension system currently in the country.

"Many state governments have used the excuse of the current recession to stall and delay their workers from joining the CPS. Despite all the hitches associated with the CPS, its benefits far outweigh the demerits. A critical factor here is that it is funded, and the funds once paid into the Retirement Savings Accounts (RSAs) of workers, are protected from the general mismanagement and misappropriation that we see at virtually all levels of governance.

"We wish to use this medium to call on the Federal Government to prevail on its MDAs and the Ministry of Finance and Accountant General's office to promptly remit all outstanding deductions to the respective PFAs of workers. We wish to again restate the point we have made over and over again that the over N6 trillion that has accrued in the pension fund since the coming into effect of the 2004 pension reforms is not free money, nor are the funds, government's. We will resist efforts to remove the stringent conditions attached to their investment."

Continuing, Wabba noted that as leaders of the NLC and industrial unions, we have spent the last 12 fighting a series of battles to protect and defend workers' rights, saying: "This ranged from public sector workers struggles with state governments, majority of whom were not prepared to prioritize payment of workers' salaries and pensions in the various state civil services. We fought against retrenchment in both the public and private sectors of the economy; we fought for firms and manufacturers to get foreign exchange allocation to keep our factories from closing, and our jobs moved to other shores, and countries in the sub-region. Within this period, we fought against the steep increase in the price of fuel; and we fought against corruption and for good governance."

Nearly two million British households will spend more than £1m during their retirement, new analysis shows.

This sum includes essential spending on housing, energy bills and food, as well as holidays and other leisure. Increasingly for this wealthier group of pensioners health care costs must also be met.

Post-retirement spending will be funded from a variety of savings and investments – from Isas to pensions, including those offered by the state, through an employer or built up privately.

Even though the amount you can save annually into a pension has been cut dramatically in recent years – from a high of £255,000 in 2010-11 to £40,000 today – that still gives more than enough flexibility to save £1m into a pension by 65 for those with the spare cash to put aside.

A report published by Tilney, a financial advice firm, used Office for National Statistic figures to calculate how much households spend at various stages of their lives.

The analysis shows the richest 6pc will spend £1m in retirement, while the top 25pc spend £683,000 and even the average household will spend £420,000.

These are daunting figures, but following Telegraph Money’s five tips, a £1m pension pot is achievable even for those on more modest salaries.

1. Start early

As with all investing, the earlier you start the easier it is to reach your target. The magic of compounded returns means putting away small amounts for a longer period, normally beats saving larger amounts over a shorter amount of time.

Figures compiled by Prudential, the insurance company, assuming 4pc annual returns, show a 25-year-old, higher-rate taxpayer would be able to build a pot of £1m by age 65 by saving £506 a month. For a basic-rate taxpayer the monthly saving rises to £675 because tax perks on pension savings are less generous the lower your income tax bracket (see tip 2, below). 

If individuals wait until the age of 45 to start saving, a higher-rate payer would need to save over three times as much – £1,630 – to hit the £1m target by 65. For a basic-rate payer the figure is £2,174. Bear in mind, however, that even modest inflation over the years will drastically reduce the spending power of £1m in today’s money.

2. Claim tax perks

The big advantage of saving through a pension, compared to an Isa, is the tax relief offered by the Government. Most people can save £40,000 a year into a pension and receive these perks, beyond that you can keep saving but it will not receive the tax relief uplift.

Tax relief is based on your income tax bracket.

So, a basic-rate, 20pc, taxpayer pays £80 to make a £100 pension contribution. A higher-rate payer only needs to pay £60 to make the same pension contribution. You can only save as much as you earn in a year inclusive of the tax perks. This means someone with a £35,000 salary would be able to make contributions of up to £28,000 of their own money, with £7,000 added from basic-rate relief.

Even non-taxpayers – those earning less than the £11,500 personal allowance – can use tax relief to boost their contributions.

They receive relief at the basic-rate, 20pc, up to an overall limit of £3,600 a year (including tax relief). Tax relief can supercharge your saving but only if you claim it. While a pension offered through your employer will often have the correct tax relief applied, self-invested personal pensions (Sipps) will not.

These providers typically claim basic-rate relief automatically, but it is up to higher earning individuals paying 40pc or 45pc tax to claim the extra relief through their tax returns.

This money will be returned directly to you by HMRC and so will only end up in your pension if you put it there.

3.  Invest for growth

Simply putting money into a pension is unlikely to be enough to grow your pot to the £1m mark.

Investment growth is key, particularly in the early years of saving when you should have a greater tolerance for swings in the value of your pension.

This points to the stock market, and in particular, smaller companies and emerging markets that have the potential to grow the most over the many years or decades you will be saving.

Jordan Sriharan, of Thomas Miller Investment, recommended the Neptune UK Mid-Cap fund, which returned 126pc over the last five years. The fund’s biggest holding is ITE Group, a conference firm operating in fast-growing countries including Russia, China and Africa.

Tilney’s Jason Hollands suggested several “one-stop-shop” funds that take care of the asset allocation and give exposure to a broad range of stocks across the world.

He picked out three listed investment trusts: Foreign & Colonial (total return of 87.4pc over five years); Scottish Mortgage (174pc) and RIT Capital Partners (61.5pc).

If you are saving through a work pension and you have not made an active decision, you will be placed in a “default fund”. It is important to see exactly what these funds invest in to make sure they are suitable.

Many are designed to match annuity prices. This is because before the landmark pension reforms in April 2015, most people bought annuities with their pensions.

Consequently, the funds automatically buy lower-risk assets such as bonds and cash a decade or so before a fixed retirement date, this is likely to limit the growth in your pension severely in later years – although it should reduce the amount the value fluctuates.

4. What’s your employer offering?

Since 2012 companies have been required to save into a pension scheme on behalf of any staff earning at least £10,000 a year. At the moment the legal minimum they must contribute is 1pc, rising to 3pc from April 2019.

But studies have shown saving at these levels is extremely unlikely to produce an adequate pension. Many companies offer more generous contributions if you save more – matching what you add, up to a cap. Some firms will even offer “non-contributory” pensions where staff do not have to save anything themselves.

Check your employer’s benefit package as the generosity of pension schemes may not be widely publicised. 

Increasingly, employers provide pensions via “salary sacrifice” arrangements where pension contributions are made in lieu of salary. This results in a saving on National Insurance payments for both you and the firm – some companies share their savings with staff.

5. Don’t forget the state pension

Personal and work pensions are unlikely to be the only source of income when you stop working.  The guaranteed payments provided by the state pension are the bedrock of many people’s retirements.

For those retiring after April 2016 the new “single tier” state pension applies. This replaced the old system of basic and earnings-related payments.  You must have a minimum of 10 qualifying years of National Insurance Contributions (NICs) to get a state pension.

The maximum pension you can get currently is £159.55 a week if you have 35 or more years of NICs. If you have gaps in your record that would take you under 35 years these can be filled.

 

Pensions are now the main cause of the remuneration gap between the public and private sector, according to the report of the Public Sector Pay Commission. Its analysis is that, excluding pensions, the gap between pay in the public and private sector has closed in recent years due to the cuts in public sector pay.

In general, lower-paid employees are better off in the public sector, while – before considering pensions – the higher paid are generally better off in the private sector. But the pension premium remains substantial.

Comparing pay between the public and private sector is a fraught exercise. Commission chairman Kevin Duffy says in his introduction to the report that the work was more difficult and complicated than expected, and that findings appropriate “comparators” for public sector pay was “difficult and time consuming”.

Like all its predecessors the latest report will attract much debate. However, let’s pull back from the thousands of figures to try to focus on the key issues.

Looking first at pay, before any consideration of tenure and pensions, nobody disputes that, on average, public servants are paid a lot more. According to the report, median weekly earnings in the public service were 63.4 per cent higher than in the private sector.

However to get any kind of meaningful comparison a host of adjustments need to be made. Public servants are, on average, longer in their jobs , more experienced and better-educated – all factors justifying a higher pay package.

Many of these adjustments , while complicated, are not particularly controversial. But some are.To what extent should public service salaries be compared to large private sector organisations, for example, instead of SMEs? And should membership of a trade union be counted as an explanatory factor for having higher pay?

New comparisons

The commission did not undertake detailed new analysis to compare public and private sector jobs, instead looking at the last major benchmarking report in 2007, updating it for what happened in the meantime and looking at some limited new comparisons.

Its conclusion is that the gap between public and private pay – before taking account of pensions or security of tenure – has closed in recent years due to the public pay cuts during the crisis.

In 2006, public servants were paid 26 per cent more than their private sector colleagues, but the report estimates that by 2014 it was roughly level pegging.

If trade union membership is included in the calculations, public sector employees were paid slightly less than their private sector counterparts by 2014, the report finds. However, recognising the controversy of the treatment of trade union membership, the report points out that if this factor is excluded, average public sector pay still sits a couple of per cent above the private sector in 2014.

The comparison varies hugely depending on pay levels. At lower pay levels, those in the public sector earn 15 per cent more than their private sector counterparts. At higher pay levels, the cash amounts are almost exactly reversed, with those in the private sector doing better.

Well rewarded

Public servants start on good pay levels, in other words, but many do not progress in pay terms as quickly as those in the private sector. Limited international comparisons show that Irish public servants are generally well rewarded by international comparisons, looking at sectors such as health and education at least.

However, this is purely pay. There are two other valid factor in the comparison – security of tenure and pensions.

On security of tenure, the commission says this is important but that it is impossible to put a cash value on it. Those in the private sector would argue that this was a vital support during the recession when tens of thousands of private sector jobs ended , while public servants only left on a voluntary basis.

The second key issue is pensions. The commission finds that this is now the area which gives the bulk of public servants an advantage in terms of their total package.

Around 25,000 public servants who entered employment in the service since 2013 are on a less favourable pension arrangement, and this does not offer them an advantage over the private sector, the report estimates.

However, the remaining 250,000 are on the original scheme, which is found to offer an advantage of 12-18 per cent in advance of their private sector counterparts.

Emergency cuts

For those allowed to retire early, in areas such as the Garda and defence sectors – and the special arrangements for judges – the report finds that the advantage is in some cases even greater.

The commission argues that this should be a factor in pay negotiations, with public servants asked to make a bigger contribution, effectively a retention of part of the pension deduction introduced as part of the emergency cuts.

The talks will thus kick off on this basis. How much the calculations will influence the negotiations is open to question. They are likely to be more affected by the huge political expectation of pay restoration on one side and on the other by the limited largesse which the Exchequer can afford, unless a decision is made to raise taxes.

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Pension Review Magazine is the authoritative source of information on how these schemes and their sponsoring employers are working together to provide their members with an adequate retirement income.

Our case studies, news analysis and informed comment provide trustees, management teams and their providers with timely, practical information to inform their day-to-day jobs.

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