Negative yields add to pension woes as returns lag inflation

The prospects of  seven million Nigerian workers who are paying into the Contributory Pension Scheme accumulating enough funds to retire comfortably might be turning into a pipe dream due to the negative inflation adjusted returns that Pension Fund Administrator’s (PFA) currently earn.

National Pension Commission (PenCom) data shows that as at June 2016 Nigerian PFAs held 75 percent of pension Assets under Management (AUM) in fixed income securities; including FGN bonds (58.98%), Treasury Bills (8.5%), State Government Securities (2.44%) and Corporate Debt Securities (4.71%), which currently mostly yield below inflation at 16.5 percent.

Results from the last Debt Management Office (DMO) sovereign bond auction of July 13, 2016 showed bids cleared at marginal rates of 14.5 – 14.9 percent.

The Rate of Return for Stanbic IBTCs Retirement Savings Account (RSA) Fund – one of the largest in the country – for 2015 was 8.52 percent, while the three-year average return for the RSA as at 31 December 2015 was 9.94 percent, according to data from the company’s website.

For Aiico Pension Managers, its three years rolling average Rate of returns on RSA Funds was 8.84 percent,ARM Pensions RSA fund delivered a 5.57 percent return in the half year period to June 2015 (its most recent data), Axa Mansard had three year rolling Average Rate of Returns for its RSA Fund at 8.26 percent.

Crusader Sterling Pensions with 259,000 RSA accounts had its RSA fund unit price at 3.0244 in January 2016, and 3.0139 in June representing a marginal fall in returns of -0.347 percent; while Leadway Pensions RSA fund has returned 5.12 percent this year.

Nigerian average year on year inflation which came in at 8.4 percent and 8.2 percent in 2014 and 2015 respectively will spike to 12.1 percent in 2016, according to data from Investment firm Renaissance Capital.

For Pension Fund Contributors it is essential that PFAs earn inflation adjusted returns on their contributions for benefits due in some cases, as long as decades from now, to maintain current standards of living when they retire.

“The job of a fund manager is to grow funds above selected/targeted benchmarks. Unfortunately, inflation is not one of those benchmarks for our PFAs. At the end of the day, most retires are left worse-off on an inflation-adjusted basis,” Abiodun Keripe, head of research at Elixir Investment Partners Limited, said.

“Probably exposing these funds to some infrastructure related projects may potentially offer superior inflation-adjusted returns. Still, that’s not a straight forward thing.”

The struggle to earn adequate returns highlights problems the pension industry is facing from a slumping stock market, soaring inflation, slowing growth and dearth of other asset classes.

Nigeria may record its first negative GDP print since 1991 this year, as the slump in oil prices hit growth and company profits.

The country’s main stock index slumped 16.39 percent in 2014, 17.35 percent in 2015 and is down 4.25 percent this year.

The bourse recorded only six initial public offerings (IPOs) in 2014 and Zero in 2015.

More equity listings might have helped to diversify the banking and Dangote Cement skewed index, helping to attract more PFA money.

Pension Funds are more committed to return of capital as opposed to returns on capital, according to Bola Ajomale, CEO of NASD an OTC exchange that eases secondary market trading of unquoted Nigerian companies.

“Pension Funds will wait until we get new products. NASD is in the process of creating a market that can trade private equity, where Pension funds can invest at the second stage,” Ajomale said.

Without a change in strategy by PFAs, the N5.7 trillion in Pension Assets which has already suffered a drop in dollar terms due to a recent devaluation of the naira, may continue to be eroded by inflation.

Pencom, the industry regulator should incentivise competition by licensing more PFAs, and publishing their year to date performances , according to Jude Uzonwanne, Principal at Bain and Company.

“Extreme conservatism is a problem in the Nigerian Pension Industry,” said Uzonwanne.

“If you are too conservative you erode capital over time.”

PATRICK ATUANYA