Nigeria’s N5.9trn pension assets threatened by inflation, naira devaluation

The value of Nigeria’s pension assets is being eroded by a weaker naira and rising inflation, dashing the hopes of many workers, of a comfortable retirement in future.
BusinessDay analysis shows that the dollar value of pension assets has dropped by as much as US$10 billion between 2014 and August 2016.
Total pension assets as at December 2014 was N4.611 trillion and has increased by 28.3% to N5.91 trillion as at August 2016 but whatever gains the fund made have basically been wiped out by the depreciation in the naira and rising inflation which has also risen from single digits in 2014 to 17.9% in September. In dollar terms, the value of the country’s pension funds has declined 53% from US$29.3 billion in December 2014 to US$19.3 billion in August 2016.
Analysts say that shallowness of the capital market has hampered the ability of the pension fund managers to diversify risk and hedge against the depreciating naira and rising inflation.
While pension assets have grown 12 percent from January to August 2016, inflation rose year-on-year to 17.9 per cent in September according to information from the National Bureau of Statistics. This means that any pension asset manager not making a minimum return of 18% on assets held is actually losing money instead of making money for contributing workers.
The instruments that the assets can be invested in have remained largely plain vanilla equity and debt of few companies and governments, fuelling concerns that the investment bankers may not be sufficiently innovative to evolve asset classes that will deepen the market and hedge against emerging risks.
“It is not our responsibility to deepen the market”, said Eguarekhide Longe, Managing Director, AIICO Pensions Managers Limited, in a recent interview with BusinessDay. “It is only our responsibility to assess the products that have been presented in the market,” he added.
The thin asset classes have limited the ability of the pension fund managers to carry out effective asset allocation that could have helped them hedge against adverse currency movements, causing the real value of the pension assets to plummet.
Eguarekhide added that it is the responsibility of the capital market operators, including the issuing houses, to create products for investment.
“So, they need to come up with innovative products. It is not my responsibility to design products and then sell it to myself. It is the responsibility of someone who has the license to do that.”
Having grown at an average of 18 per cent per annum in the last four years, the Nigeria’s pension funds are faced with the constraints of having to invest only in limited securities comprising shares and bonds of the few listed companies, and federal and state government bonds.
Pension funds asset allocation as at August 2016 was Fixed Income – 84.37 per cent, Ordinary Shares – 10.80 per cent, Open/Close-End Funds 0.31 per cent, Real Estate Properties 3.60 per cent, Infrastructure Fund 0.03 per cent, Private Equity 0.39 percent, and cash and other assets – 0.51 per cent, data from regulator Pencom shows.
The Pension Investment Corporation (PIC), the South Africa-based fund management company, has invested 5 per cent in offshore equities while allotting a further 5 per cent to the rest of the African continent.
“Investments in emerging markets resident in Africa will aid in diversifying the funds. It will also create a footprint for future corporate investment throughout the African continent”, said a statement from the website of PIC.
But capital market operators insist they have done enough, and are still doing much, to increase the depth of the market.
“In a nutshell, we are doing a lot. It is not only equities and bonds. There are Eurobonds; there are infrastructure bonds and funds. There are also the real estate investment trusts – that is the REITS”, said a Vice President at a Nigerian investment bank, who preferred to stay anonymous because he needed approval to speak.
Agreeing that a deep capital market can serve as a catalyst for economic growth and stability, the investment bank Vice President averred that, “A lot of things are happening. It is not only equities and bonds that are available in the market.”
Analysts have stated that a deep capital market encourages efficient capital allocation, financial stability and generally enables pension funds to maintain a well-diversified portfolio and better manage their risks.
“These are products that pension funds can invest in because we have them in mind when we create these products. We are currently working with one of the fund management companies on an infrastructure fund. This has been sent to the Nigerian Securities and Exchange Commission (SEC). We have obtained approval and will provide further details as soon as possible,” the investment bank VP said.
If the decline in real pension value continues on the current trajectory, it means that contributors are actually saving to be poor in future, a departure from the spirit of the Pension Reform Act 2004 as amended.