The lack of investible assets to deploy growing pension funds has confined Pension Fund Administrators (PFAs) to allocate a substantial proportion of their funds to fixed income securities month-on-month/year-on-year.
This lack of asset class for investment the pension managers complained is not allowing them to grow their assets in a way to yield greater returns to the benefit of the contributors and retirees.
National Pension Commission’s (PenCom) monthly report of October 2021 shows that out of N13.2 trillion in Assets Under Management by the PFAs 71.2 percent is in fixed income securities.
Analysts at FBNQuest Capital say the asset allocation of Nigerian pension funds has generally been biased toward government debt.
According to the agency, this is due to the scarcity of good investible securities available to them.
Given the further breakdown of the report as released by PenCom, assets under management of the PFAs grew by 9 percent year-on-year to N13.2 trillion, equal to $31.7 billion and 1 percent month-on-month as at the end of October 2021.
“When we include corporate and state government issuance, we find fixed-income exposure equivalent to 71.2 percent of the industry’s AUM. FGN bonds accounted for over 60 percent of PFAs’ asset allocation,” according to FBNQuest.
Making a comparison with a similar scheme in Kenya, FBNQuest Capital notes that in its June ’21 report, the Kenyan Retirement Benefit Authority recorded that government securities accounted for 44.1 percent of its KES1.48 trillion, which is N12.97 billion AUM of the Kenyan pension industry.
“The value of domestic equities in PFA portfolios increased by 29 percent over the 12-month period, bringing the share of equities in the portfolio up to 6.9 percent from around 5.8 percent a year earlier.”
FBNQuest Capital says with respect to equities, Nigerian PFAs have adopted a cautious approach, having taken some losses during the stock market meltdown of 2008 to 2009.
Another noteworthy point is that despite the NGX market capitalisation of over $60 billion, selecting high-quality, liquid shares that fit the investment criteria of PFAs are extremely limited, FBNQuest states.
The agency says it has seen that over the course of a year, PFAs have cut their holdings of Nigerian Treasury Bills (NTB) from N653 billion to N280 billion, stating that it is due to depressed (low-single-digit) yields on the NTBs.
This is as yields on FGN bonds retraced by well over 500bps across the curve between Q4 ’20 and Q3 ’21.
“Looking ahead, the Debt Management Office (DMO) has an onerous domestic borrowing target of N2.57 trillion this year. This target does not take into consideration the supplementary budget meant to cover the N3 trillion for subsidy payments by the NNPC.”
As such, we see yields rising again this year on account of increased supply of paper from the DMO, FBNQuest Capital states.
Wale Odutola, chairman, Pension Fund Operators Association of Nigeria (PenOp) giving operators focus for 2022, says PFAs are committed to diversifying their investment portfolios for increased returns on investment and greater impact on the economy.
“Conversations are ongoing in these areas with identified segments, and these will be deepened in the New Year,” Odutola states.
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African Private Equity & Venture Capital Association (AVCA) and PenOp in a recent report identified desire, and how diversification of asset classes will continue to drive investment in private equities (PEs), over the next five years.
According to the report, 75 percent of the pension fund managers that participated in the survey plan to accelerate or maintain their current pace of capital commitments to African PE in the next five years, citing a desire for portfolio diversification and performance as the most important factors driving their investment plans.
Although there has been a concerted effort by both sets of industries to increase the level of pension allocation to private equity, the allocation of Nigeria’s pension funds to the asset class has traditionally been low when compared to their allowable limits.
The release of this flagship report, according to the partners, aims to bridge the gap between these two complementary industries by investigating and assessing the role of Nigerian pension funds in empowering local investors in Nigeria’s PE industry.
Speaking on the publication, Abi Mustapha-Maduakor, CEO of AVCA, says increasing interest in Africa’s PE industry from domestic and international investors alike underscores the need to analyse the perceptions and concerns of institutional investors to promote an open dialogue on the continent’s unique business environment.
Oguche Agudah, CEO of PenOp, states that local pension funds have expressed a desire to increase their allocation to PE and more impactful investments.
