Pension Fund Administrators (PFAs) in Nigeria are missing out on the opportunity to earn stronger returns on investment in permissible foreign assets as a result of two government policies that are hampering investment.
The policy requiring PFAs to get presidential assent before they can invest a certain percentage of pension fund assets offshore as well as the Central Bank of Nigeria’s restriction of access to foreign exchange for PFAs who need it to enable investment offshore, experts say, are having negative impact on long-term growth of pension fund assets.
The implication is that employees and retirees under the Contributory Pension Scheme (CPS) are not able to earn impressive returns on investment (ROI) on their pensions funds, whereas opportunities for higher ROI abound in the permissible offshore assets.
A further implication is that the employees retire with very little funds in their Retirement Savings Account (RSA), which also has adverse impact on their welfare at old age.
The objective of the Contributory Pension Scheme is to ensure that every person who worked in either the public service of the federation, Federal Capital Territory, states and local government or the private sector receives his retirement benefits as and when due and to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age.
The growth of PFAs has been further slowed down, particularly with the recent CBN policy restricting them from participating in the apex bank’s Open Market Operations (OMO), like other individuals and corporates.
OMO has been the major investment instrument for the PFAs, contributing significantly to their yields and returns on investment. Its restriction has meant significant drop in their investment returns.
Mohammad Ahmad, former director general, National Pension Commission (PenCom), said the investment of a portion of pension funds in permissible foreign assets is an issue that needs to be at the front burner.
In a position paper on how to move the pension industry forward presented to operators and legislators at a recent retreat in Uyo, Akwa Ibom State, Ahmad said a cursory look at the Pension Reform Act 2014, in Section 87 (1), shows that there is allowance for the investment of pension funds outside Nigeria, but this area has remained fairly non-operational with negative long-term implications for contributors.
Section 87 (2) of the Act states that the commission may, subject to subsisting CBN foreign exchange rules, recommend to the president for approval portfolio limits for investment of pension funds or assets outside the Nigerian territory, he said.
He said it was imperative for PenCom and the operators to engage the CBN to develop a workable framework to access foreign exchange for pension fund investment for the benefit of RSA holders in the immediate future.
In order to widen the opportunity for PFAs to earn stronger returns on investment in permissible foreign assets, Ahmad advocated the removal of presidential assent as a condition for such investment.
“Going forward, however, I will strongly suggest that the need for presidential assent be removed and replaced with the power of the Board of the commission to issue investment regulation for foreign investments as is done in a number of North and South American countries,” Ahmad said.
This, he said, can be achieved by collaboration between the operators, PenCom and the legislators.
Members of the Pension Fund Operators Association of Nigeria (PenOp) have in the past lamented the limited investment instruments, stressing why it should be expanded to enable them create more value for contributors and retirees.
Wale Odutola, head of brand committee of PenOp, said the OMO restriction was a concern to PFAs “because we get better yields from there than other instruments”.
Odutola, who is also managing director/CEO of ARM Pensions Limited, said the major challenge it poses for the PFAs “is reinvestment risks, because it puts us in a position whereby we will have to look for alternative investment instruments to sustain our returns target”.
Ronke Adedeji, president of PenOp, said that though OMO was not there initially, “for the time it has been in operation we have benefitted significantly as PFAs”.
Adedeji expressed hope that with the closure of OMO, other instruments would open up for PFAs.
Pension fund assets grew to N9.8 trillion as at the end of October 2019, adding N220 billion from the N9.58 trillion it was at the end of September this year.
PenCom, in its monthly summary of pension fund assets, equally noted that pension fund operators invested N4.58 trillion amounting to 46.66 percent in FGN Bonds, N2.23 trillion in Treasury Bills (22.82 percent), N5.40 billion (0.06 percent) in Agency Bonds (NMRC & FMBN), N71.13 billion in Sukuk (0.72 percent), and N15.85 billion in Green bonds (0.16 percent).
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