Pension contributors and retirees stand to get higher returns in coming years when Pension Fund Administrators (PFAs) and managers of the funds start to co-invest with private equity firms (PEs), operators have said.
Industry experts and players in the industry, who reviewed the recently released framework that allows PFAs co-invest with PE firms, said the key objective is better portfolio investment diversification, which will impact positively on owners of the funds.
According to them, this will allow better returns on investment, which directly and indirectly enhances the Retirement Savings Account (RSA) balances of contributors and owners of the funds.
Oguche Agudah, chief executive officer of Pension Fund Operators Association of Nigeria (PenOp), said the recent guideline on co-investment for pension funds would have a number of benefits for contributors and the industry in general.
“Because alternative investments typically have higher return characteristics, an increase in private equity and subsequently co-investments with these funds portends higher returns for PFAs which will lead to higher retirement savings balances for pension contributors,” Agudah said.
According to him, another benefit is that a higher allocation to private equity and co-investments will mean increased investment in local companies over time, which will lead to increased need to retain and hire workers by these investee companies.
“It will also lead to higher sales and ultimately higher taxes by these companies which will have an overall effect on the economy,” Agudah said.
Pius Apere, chairman/CEO of Achor Actuarial Services Limited, said this framework would have lots of opportunities that would impact positively on the players and pensioners.
Apere said the framework had created long-term investment outlets for PFAs to co-invest with PE firms, which will enable PFAs to diversify their investment portfolios for RSA holders with long-term investment horizons.
“This is particularly useful for lifestyle investment strategy required for scheme members who are not close to retirement age (e.g. Fund 1),” he said.
Apere, who is a chartered insurers and pension consultant, said: “The co-investment with PE is a risky investment and therefore it is expected to produce higher investment returns than returns from investment in federal or state government securities over the longer term. This would no doubt likely increase the RSA holders’ funds at retirement date which in turn will provide the retirees with a sustainable and decent standard of living in retirement.”
According to him, the framework will also create healthy competition in the pension industry in respect of transfer windows as RSA holders are likely to transfer to PFAs with enhanced investment returns over the long term.
“The risk appetite for a PFA having co-investment with PE is likely to increase to reflect high risk exposure of the diversified investment portfolio. Thus, the importance of an effective risk management process within the PFA cannot be over-emphasised,” Apere said.
Read also: Pension funds, PE firms get green light to co-invest
Pauli Prince, CEO of Samoa National Provident Fund, had said in a document on investment of pension funds in private equity that investors have a lot of work to do to be able to make a success of this kind of framework.
He said investors need to find structures that meet regulatory and operational requirements, and they often contend with skills shortages in originating, preparing, and executing such investments.
The National Pension Commission (PenCom), in a recent framework to PFAs, said Nigeria’s pension fund assets had remained concentrated in Federal Government securities as the rapid growth of the assets had not been matched by a corresponding increase in domestic investment outlets.
The commission said the current concentration of pension assets in government securities could lead to distortions in asset prices within the domestic market as pension funds continue to chase the same limited investible asset classes within the domestic market.
Averagely, about 70 percent of pension assets are domiciled with federal and state government bonds by PFAs, which continue to lament the dearth of investible assets.
Out of N13.9 trillion of total assets under management recorded by the PFAs at the end of March 2022, Federal Government bonds accounted for 58.7 percent or N8.16 trillion, according to figures from PenCom.
The commission said the framework would give PFAs more investment outlets and encourage the diversification of pension fund portfolios.
PenCom said innovative solutions had been required to address the dearth of investment outlets and encourage the diversification of pension fund portfolios.
It said: “One of the asset classes with the lowest asset allocation by pension funds is PE. This asset class has remained significantly below the maximum limits of 10 percent for Fund I and 5 percent for Funds II & VI Active, respectively.
“Consequently, investing in specific transactions under a Co-Investment arrangement has been identified as a viable option to improve pension funds’ allocation to this asset class.”
“Co-investing alongside the main PE fund is expected to provide PFAs flexibility and greater choice in the type of projects/companies in which pension funds are invested, thereby further enhancing returns and increasing exposure to PE.”
