Here’s how pension fund assets are secured

Pension funds have emerged as a significant contributor to Nigeria’s financial stability and development. As provider of long-term funds for sustainable financing, pension funds continue to invest in government securities, treasury bills and other assets providing a stable and consistent source of capital for government projects and initiatives. The Pension Fund Operators Association of Nigeria (PenOp) in this report provides insight on how pension assets are secured. Modestus Anaesoronye brings the report.

In Nigeria, pension funds have emerged as significant contributors to the country’s financial stability and development. In recent times, there has been the misconception that the Nigerian government can just unilaterally tap into pension funds and borrow or take money from pension funds. On the contrary, pension funds invest in government securities like any institutional investor.

From time to time, government issue debt securities in the form of bonds or bills. A government bond is a debt security issued by a sovereign or government agency to meet its obligations and support public spending. It is generally accepted that sovereign securities or bonds are the safest forms of investment and are regarded as the risk-free rate.

Nigeria has never defaulted on this and that is why most financial instruments are benchmarked against Nigerian federal government bonds. The Nigerian government typically offers 1 Year (known as treasury bills), 5, 7-, 10-, 20- and 30-year bonds. These bonds are structured to cater to investors with different investment horizons.

Nigeria’s pension funds are major investors in these government securities, particularly federal government bonds and treasury bills. These investments provide the government with a stable and predictable source of funding for various critical initiatives, including infrastructure development, healthcare improvements, and educational programs. By purchasing government securities, pension funds effectively lend money to the Nigerian government, helping it meet its financial obligations.

Managing employee contributions in a contributory pension scheme involves a series of essential steps that ensure the effective handling of funds from deduction to investment. Let’s walk through the process:

During payroll processing, your employer deducts your contribution percentage (minimum 8 percent) from your salary, with an additional contribution of their share (minimum 10 percent), totalling at least 18 percent of your basic salary, housing, and transport allowances. This ensures that a portion of your earnings is earmarked for your future retirement.

Your employer doesn’t retain these deductions. Instead, they are obligated to promptly transmit both your contribution and theirs to your Pension Fund Administrator (PFA) within a specified timeframe. This timely transfer facilitates the seamless management of your pension funds.

Upon receiving the contributions, the PFA allocates them to your Retirement Savings Account (RSA), a personalized account identified by a unique Personal Identification Number (PIN). This individualized approach ensures that your contributions are accurately recorded and managed.

The PFA then strategically invests your contributions in a diverse range of approved investment options. The primary objective is to cultivate and grow your retirement savings over time, maximizing potential returns while managing risks effectively. As these investments generate returns, they are credited back to your RSA, further bolstering your retirement nest egg.

To keep track of your retirement savings journey, you have convenient access to your PFA’s online portal or mobile app. Here, you can monitor your RSA balance, review your contribution history, and assess the performance of your investments. This transparency empowers you to stay informed and engage in your retirement planning.

When you reach retirement age (minimum 50 years old) or encounter specific circumstances such as permanent disability, you become eligible to access your accumulated funds in your RSA. Depending on prevailing regulations and your individual situation, various withdrawal options are available to facilitate the transition into retirement.

Nigerian pension funds have typically allocated a substantial portion of their portfolios to government securities. As of Q1, 2024, these funds have invested approximately 62.43 percent in federal government bonds and treasury bills, contributing significantly to government financing. Subsequently, Pension funds have received competitive returns on these securities, with government bonds often returning double-digit yields for what is essentially a riskless asset. This has calumniated in pension funds recording one of the best investment performances in recent years.

According to data released by the National Pension Commission (PenCom), in the first quarter of 2023, a 54 percent of portfolio growth in the pension industry was attributed to investment performance. These underlines how well fund managers are doing.

Pension funds invest in a diversified portfolio of assets, including stocks, bonds, and real estate. These investments stimulate economic growth by providing capital to businesses, which, in turn, create jobs, generate tax revenues, and contribute to economic stability. As the Nigerian economy grows, government revenues also increase, reducing the government’s reliance on pension funds.

One of the profound impacts of pension funds in Nigeria is their role in reducing the future financial burden on the government. Retirees with well-funded pensions are less reliant on government social safety nets. This not only reduces government spending on social welfare but also allows resources to be allocated more efficiently to other essential services.

Nigerian pension funds have a long-term investment horizon, which aligns with the government’s need for sustainable financing. This long-term commitment ensures that pension funds will continue to invest in government securities, providing a stable and consistent source of capital for government projects and initiatives. In Nigeria, pension funds are protected by robust legal safeguards that prevent government interference or unauthorized access to these funds. These safeguards uphold the integrity of Nigeria’s pension system and guarantee retirement security for millions of citizens.

Nigeria’s pension funds are subject to rigorous regulatory oversight and transparency requirements. Governments must adhere to these regulations, ensuring that pension funds are prudently managed and protected from misappropriation. Pension funds are not a piggy bank for the government revenue but rather a critical component of the nation’s financial stability and economic growth. By investing in government securities, such as bonds and treasury bills, Nigerian pension funds support government operations, reduce future fiscal burdens, and contribute to long-term economic prosperity. Investments in government securities underscore the vital role that Nigerian pension funds play in financing government initiatives.