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COVID-19 And The Pension Industry

The Corona virus pandemic has brought with it lots of economic implications across the globe. It is no news that businesses of different kinds have been affected mostly negatively due to the pandemic effect on general production and consumption of goods and services.

Since its effects became noticeable in the early period of the year 2020, sovereigns and businesses have been designing ways to survive with it.

With the pandemic still ravaging the world, it means things have to be done differently and efficiently too. Hence, the concept of working remotely or working from home became prominent since it became the global standard of keeping safe from the pandemic while still delivering on work schedules.

With drop in general demand and production across the globe, business activities also slowed down except for the essential sectors that witnessed a continuous patronage due to their nature such as food, telecommunication, logistics and health, other sectors generally suffered and witnessed a drastic drop in the demand for their products and services. It is expected that majority of world economies will witness recession before the end of 2020 all thanks to the effect of COVID-19 pandemic.

Coming home, the Nigerian economy is not shielded from the effect of this pandemic either. Businesses have struggled to survive while most have had to retrench their workers just to stay afloat, a tough but necessary decision for most of them. The NBS in its Q1 2020 GDP report revealed that the Nigerian economy grew by 1.87% down from 2.27% in Q4 2019 and 2.1% in Q1 2019. It is expected that this downward trend will continue in the next quarters of the year.

WHAT IS THE IMPACT OF THE COVID-19 ON THE NIGERIAN PENSION INDUSTRY PENSION FUND
The pension industry is in no doubt negatively impacted by the pandemic. It is expected that almost 50% of the world working population will lose their jobs. Going by this statistics, it is expected that about half of the active contributors in the contributory pension will lose their jobs. If this happens, expect the pension assets to shrink as more and more people will file for benefits payments due to temporary loss of jobs.

For those still lucky to be in employment, employers have been looking for ways to balance up by reducing costs thereby cutting salaries as much as 70% and as low as 30%. The overall effect of all these is that total pension assets will not increase as we have witnessed in the last few quarters.

On the investment side of the pension industry, these are not the best of times. As interest rates have generally dropped, the return on investments is expected to drop compared to last year’s. Interest rates have been hovering around 4% and 5% in the money market and pension funds have no choice other than to place funds at such low rate. Interestingly, pension funds are not allowed to take advantage of the OMO auction leaving them with little or no option than investing huge portion in the money market.

As a complement, the equity market has been quite impressive so far returning 1.80% growth as at the end of 22nd May 2020, thus recording a 5-days positive streak, it is indeed not to be relied upon for a long time because of its high volatility and correlation somehow with the crude oil price movement.

With limited bouquets of investment products, the PFAs are confined to invest pension funds in low interest yielding instruments and this will affect the overall growth of the fund in the year 2020.

PFAs, PFCs, PENCOM
The revenue of the 3 major participant in the CPS is expected to drop in line with the drop in pension assets. Since their management fees are dependent on the value and income earned by the pension funds, it is expected that their revenue will go south as long as the pandemic effect remains.

Fewer contributions means lower Administrative for PFAs. Little pension asset growth due to fewer contribution and lower earned investment income will mean lower management fees for the PFAs, PFCs and PenCom.

Recovery agents will have their work cut out as they chase around erring employers who refused to remit pension contributions of their workers. They will have to design an effective strategy to recover pension contributions from some of these employers, some of which might have been negatively impacted already by the COVID-19.

However, it is still expected that the pension industry players will weather the storm and should be able to manage the drop in revenue without causing a rise in the unemployment industry. In extreme situation, salary cuts should be expected here as theirs is a little shielded from the direct impact of the pandemic.

WHAT CAN BE DONE TO LESSEN THE EFFECTS
As the world learns to live with the virus and survive, businesses have been returning gradually and production have started picking up. It is expected that more and more people will continue to do their jobs and salaries will be paid too. When this happens, it is expected that normalcy will return gradually and the negative effect of the pandemic will ease off. However, this is not expected to go away overnight. In fact, recovery is expected to begin latest Q1 2021.

Government can therefore in the meantime, as a form of palliative measures, bailout those industries that are mostly hit by the pandemic to save their livelihood. Industries such as aviation, travel, hotel, tourism, education and manufacturing. The bailout will help to revive their businesses and overall the economy. 

Employers of labour on their own part should help their workers by keeping them and paying their salaries when due, especially when they can afford to. Delaying their salaries will not only hurt the workers welfare but also the economy at large as this slows down spending in the economy.

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