Rethinking Pension Fund Reforms in Nigeria (Part II)

Rethinking Pension Fund Reforms in Nigeria (Part II):

Author: Anonymous (Published with permission)

Beyond Short-Termism

The conversation on pensions cannot stop at asset allocation and mark-to-market rules. There are other questions staring us in the face, especially around contributors’ needs, credibility of the system, and whether we are truly building a pension industry that is fit for purpose.

Offshore Investing: Nice-to-Have or Necessary?

Offshore investing looks attractive on paper. Diversification is standard practice around the world and helps funds reduce concentration risk while improving returns. For Nigerian PFAs, the case is strong. But the real stumbling block may be the Central Bank. With reserves under constant pressure, the CBN is unlikely to smile at the idea of billions of pension naira going abroad. From their chair, it is not a technical matter but a survival one.

So the question is not whether offshore makes sense but whether Nigeria is ready for that bus to leave the park. PenCom can and should advocate, but until reserves are comfortable, this debate may remain a seminar topic.

The Two-Pot Solution: Learning from South Africa

Nigeria has no social welfare net. When things get tough, people naturally look for relief wherever they can find it, and pensions quickly become the first option. The problem is that our current system is too rigid. Contributors are allowed a one-time 25 percent withdrawal after four months of unemployment, but then they are locked out for another five years.

South Africa solved a similar problem with what they call the Two-Pot System. One pot is for emergencies and can be accessed once a year with tax implications. The other pot is strictly for retirement and cannot be touched. Every year, contributions are split between the two.

Adopting something similar in Nigeria could be a game changer. It balances long-term security with short-term flexibility, and it saves regulators from the endless lobbying that arise when people demand access.

Think of it like Nigerian jollof and plantain. The jollof is the main course, meant to simmer and grow over time. The plantain is the quick bite, ready when hunger cannot wait. Both are needed on the plate.

External Fund Valuation: Building Trust

As portfolios become more complex, credibility will matter even more. Right now, PFAs and custodians mark their own books. Globally, that is not how it is done. Independent fund valuers are used to reassure contributors that numbers are real and not house-marked.

Firms like RisCura and Alexander Forbes, or the global Big Four and their local affiliates, can play this role. For illiquid assets like infrastructure and private equity, it is a requirement. In Nigeria, assets are already held by custodians, so bringing in external valuers simply completes the trust chain.

It frees PFAs to focus on investing, while professionals handle the valuations. The message to contributors is clear: your money is being counted with independent eyes.

Scale, Systems and the Future of PFAs

Finally, PFAs need better tools. The system built in 2004 was fine for a world of government bonds and fixed deposits. But if Nigeria is serious about alternatives and long-term investing, the technology must catch up.

Globally, funds use sophisticated platforms such as BlackRock’s Aladdin or SimCorp Dimension. These systems allow managers to monitor risk in real time, run simulations, and match assets to long-term liabilities. Without them, PFAs are managing trillions with spreadsheets and monthly reports.

The problem is cost. These systems are expensive, and smaller PFAs will struggle. Scale will matter. Consolidation may not be a comfortable topic, but if we want world-class pensions, operators need world-class tools.

Part II of this discussion highlights three truths. Offshore investing is attractive but politically difficult until reserves are strong. Nigeria’s lack of social welfare makes a Two-Pot system not just desirable but necessary. And credibility in a maturing market requires external valuations and stronger systems.

Each reform points in the same direction: building a pension industry that is flexible, trustworthy, and future-ready. The foundation has been laid since 2004. Now the task is modernisation.

Rethinking Pension Fund Reforms in Nigeria (Part I)