Nigeria: Pension Funds and Currency Exchange Adjustments

27 March 2020

The recent 'adjustment' of the exchange rate of US$ to NGN from the long-standing official rate of US$1 for NGN305 to a US$1 for NGN380, must have implications, one way or the other, on the value of the N10.22 trillion in the Retirement Savings Accounts (RSAs) of millions of Nigerians on the Contributory Pension Scheme(CPS).

That adjustment and the swinging rate of inflation create doubt about the ability of the money saved in the RSAs to retain its value over the years and ultimately give savers the proverbial 'minimum comfort' leaders wish for pensioners.

The National Pension Commission (PenCom) the guardian of pension funds, and the Central Bank of Nigeria, the institution that adjusted the value of the Naira against other currencies, owes holders of RSAs explanations on how that adjustment and the swinging inflation could change the value of their savings. It is a duty. The Freedom of Information Act says so.

As a responsible guardian of pensioners' interest, PenCom should, in the next few weeks come up with a statement on this issue. The Commission should resolutely engage the CBN on the question. RSA holders deserve clear information and assurances that their savings will not end up been of mere paper value, devoid of sufficient value when they face retailers of essential commodities in our assembly markets.

Many watchers of the Nigerian economy are of the view that the value of pension assets should not be eroded by the well-intentioned review of the exchange rate of the Naira by the Central Bank of Nigeria. Protecting the value of the pension assets is imperative to encourage savings and enrolment into the nascent, if not stillborn, Micro Pension Plan.

If PenCom has no experience, rules or guidelines on how to work with the CBN to get the desired information, it can learn from the Insurance and Pension Commission (IPEC) of Zimbabwe, which recently acted in favour of holders of the equivalent of RSAs in Zimbabwe after a currency value review.

The Herald newspaper of Zimbabwe reported on March 23, 2020, that "pensioners are set to get better benefits following a directive by the Insurance and Pensions Commission (IPEC) for pension funds and insurance funds to revalue their assets twice a year to reflect actual values following inflation driven by currency changes and the switches in currencies used locally."

The Herald newspaper published more details on why IPEC, the guardian of pension funds in Zimbabwe, wants twice-a-year revaluation of pension assets in that country: "The directive comes as policyholders, pensioners and those getting lump sums were seeing their payments fall far behind inflation, even though underlying property and equity assets were keeping pace with inflation or were at least close to that, and holdings in interest-bearing financial instruments, which do not change much in value, were not a large percentage of held assets."

The story in the newspaper shed more light on why IPEC decided to intervene to protect the interest of pensioners: "According to a report by IPEC, the recent currency reforms prompted a rise in the inflation rate and instability in the exchange rate that has produced extraordinary gains, referred to as "Revaluation Gains," for most insurance companies and pension funds."

It continued: "In a bid to fulfill its mandate of protecting the interests of policyholders and pension scheme members, the commission has issued a guideline framework on the determination and treatment of these revaluation gains."

The "determination and treatment" of those revaluation gains in Zimbabwe focused on proportionate distribution of the gains to pension scheme members to boost the amount of money in their savings and any consequential value that might come with that.

RSA holders in Nigeria should be made aware of the likely impact the adjustment of the exchange rate of the Naira against the US dollar could have on the value of their retirement savings.

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