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EXPLAINER: These are where your pension funds are invested

Nigerians tap N208bn pension savings as job crisis worsens

Nigerian pension contributors often wonder where their pension contributions are being invested and if their funds are in safe hands. Hence, it becomes imperative to explain the Contributory Pension Scheme (CPS) and how pension contributions are being invested by the Pension Funds Administrators (PFAs).

The CPS is a mandatory scheme, backed by the Pension Reform Act 2014, which allows employees and employers in the public and private sectors to contribute a minimum of eighteen percent of an employee’s monthly emolument into his or her Retirement Savings Account (RSA).

These contributions are then invested by the PFAs with the objective of safety and maintenance of fair returns under strict regulation by the National Pension Commission (PenCom).

In the bid to give some flexibility to RSA holders on how they want their pension funds to be managed, the Multi-Fund Structure was introduced to align the age and risk profile (tolerance level) of RSA holders.

The multi-fund structure comprises Fund I, Fund II, Fund III, Fund IV (Retiree Fund), Fund V (Micro Pension Fund), Fund VI (Active and Retiree) – the Sharia Compliant Funds.

The main difference among the funds has to do with the various levels of exposure to variable income, conventional and sharia-compliant instruments. RSA holders are by default assigned to Fund II at the point of entering the scheme. Similarly, RSA holders are also moved to Fund III once they clock 50 years of age and subsequently to Fund IV when they retired from active service.

However, modalities have been put in place for RSA holders who desire to move from Fund II to Fund I or from Fund III to Fund II. At the introduction of Fund VI-sharia compliant Funds, RSA holders in either of Fund I, II and III who want their pension contributions in sharia complaint instruments can now move to Fund VI Active while those in Fund IV can opt for Fund VI Retiree. All the movements can be effected in line with the guidelines stipulated by PenCom.

Available investment windows are:

Shares/Stocks

Shares are essentially an exchangeable piece of value of a company, which can fluctuate up or down, depending on several market factors. There are many factors that affect share prices. These may include the global economy, sector performance, financial performance of the specific company whose shares are being traded, government policies, natural disasters, investors’ sentiment, and other factors. Over long-term periods, however, shares have historically provided better returns than other assets such as cash or bonds, although there are no guarantees.

According to PenCom’s regulations, pension assets in Nigeria can only be invested in ordinary shares of public limited companies listed on a securities exchange registered by Securities and Exchange Commission (SEC) or proposed to be listed and publicly quoted through an initial public offer.

Aside from being listed, the company must have an operating track record of having made taxable profits for, at least, three out of the five years preceding the investment; and paid dividends or issue bonus shares for at least one out of the five years.

Bonds:

A bond is a fixed-income instrument that represents a loan made by an investor to a borrower, typically, corporate or government, or government parastatals. A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payment terms.

Bonds are used by companies, municipalities, states, and sovereign governments for business operations and to finance projects. During the tenor of a bond, bondholders receive the agreed interest, and when the bond matures, they get the face value of the bond. Bonds are usually considered lower risk than shares because bondholders receive their fixed interest before shareholders are paid dividends (if any) and rank above shareholders in case of liquidation. Bonds and their Issuers are awarded credit ratings by recognized credit rating agencies. The highest quality bonds are rated as investment-grade bonds and sovereign governments and very stable companies mostly issue these.

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Money Market Instruments

A money market instrument is a short-term fixed-income instrument that represents a loan made by an investor to a borrower, typically, corporate or government. The tenor is usually not more than a year. Money market instruments include treasury bills, commercial papers, and fixed deposits with banks. They attract lower returns compared to bonds and shares because they are associated with lower risks.

Alternative Investments:

An alternative investment is defined as a financial asset that does not fall into one of the conventional investment categories – stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is often classified as an alternative investment. One typical feature of alternative investments is that they are variable income instruments and most time held by institutional investors or high-net-worth individuals because of their complex nature, low level of regulation, and degree of risk. Pension funds and other asset managers often allocate a small portion of their portfolios to alternative investments; typically, not more than 10 percent of their total assets.

Allocation of Pension Asset In Nigeria:

As of December 31, 2021, the published figures on PenCom’s website showed that the net asset value (NAV) of the pension assets under management in Nigeria stood at N13.42 trillion.

Out of it, 65.35 percent of the amount is invested in Federal Government of Nigeria (FGN) Securities -Bonds, Treasury bills, Agency bonds, Sukuk and Green Bonds. 1.27 percent of the assets is invested in Sub-national (States) securities, 7.03 percent in corporate bonds (including Corporate Infrastructure and Green bonds), 15.09 percent in local money market securities (bank placements and commercial papers) and 0.07 percent in foreign money market securities.

Domestic ordinary shares accounted for 6.82 percent of the NAV while foreign ordinary shares accounted for 0.91 percent (Note that only the Closed PFAs have foreign equity exposure as of December 31, 2021).

Other asset classes/instruments accounted for marginal portion of the NAV: Mutual funds -0.90 percent; Private equity funds – 0.29 percent; Infrastructure Funds – 0.58 percent; Cash and other assets -0.53 percent.

It should also be noted that Closed PFAs also have about 1.17 percent exposure to real estate properties.

It is important for pension contributors to understand the features and the risks associated with the different asset classes. They should also endeavour to track the performance of their pension fund administrators from time to time.

Source: Veritas Glanvills Pensions