In a year blighted by global pandemic and low-interest rates, Nigeria’s biggest institutional investors, Pension Fund Administrators (PFAs), remained upbeat with higher returns above inflations.
Yields (interest rates) on virtually all tradable instruments, particularly those in the fixed income space, tapered lower last year, sparked by excess liquidity in the system. One would have thought the year 2020 would not have been so good for PFAs who have more than 50 percent of their assets tied to bonds.
But that appeared different after PFAs tapped into the bond rally to book an average 25 percent in 2020, which offered higher returns to its contributors and retirees.
A chief executive officer of one of the PFAs, who prefers anonymity, stated that they were able to make 25 percent average returns due to long-term yields offered by bonds.
Idu Okwuosa, managing director/CEO, Access Pension Fund Custodian, who confirmed the growth in returns of PFAs, said some increased their allocation to equities that returned about 50 percent from an All Share Index perspective.
According to Okwuosa, fixed income rates declined, especially on the back of various measures by the CBN, and funds that had good exposures to these instruments in the fair value positions booked these profits because yields dropped, the prices of the bonds rose.
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She also noted that with reclassification of bonds from the adoption of International Financial Reporting Standards (IFRS) model, most fund managers marked the Bonds to market, and considering the low rates of 2019/2020, marking these old high yielding Bonds in their portfolios ballooned the profits automatically.
She however cautioned that there is need for fund managers to change their liability structure to justify these high returns, noting that the industry is going through a change process and so it is important to manage the process and expectations of contributors.
“Interestingly, rates for Bonds are going up again to attract Pension Funds. 2021 will be an interesting year,” she said.
According to Samuel Enuechusue, head of investment management, Investment One, as a firm we are still posting a positive real return for all of our funds, whether its RSA fund II, III and IV.
Enuechusue said as a PFA, we have stayed well positioned in the fixed income space at the longer end of the market; hence, as the rates were coming down, it was positive for us. We are enjoying the party as long as the yields continue to decline, Enuechusue said.
Yields tumbled to their lowest levels, after the central bank in an October 2019 directive barred non-bank domestic investors, like the PFAs and insurance companies from investing in short-term OMO bills.
That pushed liquidity that could have otherwise found its way into OMO bills, to be invested more into bonds and treasury bills, crashing down rates.
The interest rate on bonds averaged around 7 percent, while yields on treasury bills crashed to near zero.
But an inverse relationship exists between the price of an asset and the returns, meaning in a low yielding environment, particularly on bonds and fixed income assets like treasury bills, prices are expected to be high and vice versa.
Fund managers, who were existing bondholders, had a field day last year, enjoying the bond rally, staying at the longer end of the curve, trading a part of their already invested long-dated bonds, thereby using capital gains from these bonds to reward clients with interest above inflation, which climbed to 15.75 in December.
Data published by pension regulator, PENCOM, show that PFAs investment in Federal Government bonds at end of December 2020 stood at N6.83 trillion, an increase of 27.7 percent or N1.48 trillion from what they invested in the long-dated instrument in the same period in 2019.
Nigerian equities also benefited from the low rates in the fixed income space, with PFAs raising investments into stocks to N858.5 billion by end December, up from N552.9 billion in 2019.
On the other hand, pension fund managers reduced exposure massively in treasury bills, with investments in the short-term instrument, falling 69.7 percent to N628.2 billion at the end of December 2020 from N1.9 trillion invested in 2019.
The increased investment by PFAs in FGN bonds was essential to take advantage of the relatively high yields in the bond markets, according to Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited.
“As a result, we saw the demand pressure for T-bills spill over to the bond market as the CBN kept a focus on expansionary monetary policy aimed at stimulating economic growth,” Chukwu said in a note.
Pension funds invest in a variety of assets, but most, including defined benefit plans, use low-risk assets such as government bonds as the benchmark discount rate. While that means they have profited from the fixed-income rally, falling yields have also driven up future liabilities — in turn threatening their ability to meet oncoming obligations.
They also face what is called “reinvestment risk” when making new bond purchases, as that would mean coming into the market at a much higher price.
“The biggest challenge for most institutional investors, particularly the PFAs, is reinvestment risk,” said Yomi Sadiku, head of investment, Lagos-based pension firm, AIICO Pension.
According to Sadiku, as PFAs invest in OMO matures, they have to look for where to invest that money but they definitely cannot go into T-bills anymore because the rates are too low. “The bond markets that we could have gone to as well, the interest on the bond market is also very low. So, unfortunately, there is nowhere we can go.”
“This year, a lot of the PFAs have classified their bond as available for sale, it would appear they have outperformed everybody else, because of course, as yields continue to go down, the price of these bonds go up, but next year, there is nothing they can do,” Sadiku told BusinessDay late last year.
It’s 2021, and yields on bonds are gradually reversing higher.
At the last auction in January 2021, the Federal Government sold bonds across 10, 15 and 25 years tenors with average yields climbing to 4-month high at 8.6 percent.
While the upward reversal in rates would come as good news for new investors by bringing down the price of bonds, it would be the last thing existing bondholders would wish for.
Wale Odutola, president of the Pension Fund Administrators of Nigeria (PenOp) had said that the annualized industry asset under management (AUM) growth rate in 2020 was 16.5 percent, and just 5percent below the average annual growth rate between 2014 and 2019.
According to him, though it was a drop, the implication was that pension assets growth remained resilient despite macroeconomic headwinds & the Covid-19 pandemic.
He also hinted that industry registration growth rate was adversely affected by the introduction of NIN as a pre-requisite since July 2019.
“Furthermore, the slow adoption of the Micro Pensions and impact of Covid-19 all contributed to an YTD growth of just 2 percent, compared to a 7 percent average from 2014 – 2019.”
Third quarter 2020 report by the National Pension Commission (PenCom), saw the industry recording a 1.18 percent growth (107,158) in the scheme membership, moving from 9.10 million contributors at the end of the preceding quarter to 9.20 million at the end of the third quarter of 2020.
The growth in the industry membership was driven by the RSA Scheme, which had an increase of 107,312. However, membership of the Closed Pension Fund Administrator (CPFA) Schemes declined by 154 members to 16,971 while the Approved Existing Scheme (AES) membership remained unchanged at 40,951 as at the end of the third quarter of 2020.
Total pension contributions on the other hand grew by N184.68 billion within the third quarter of 2020. Out of this total, the public sector accounted for N117.70 billion or 63.73 percent while the private sector contributed N66.98 billion or 36.27 percent.
The cumulative pension contributions received from both the public and private sectors from inception to the end of the third quarter of 2020, therefore, amounted to N6.37 trillion, up from the N6.19 trillion as at the end of the second quarter, 2020, representing a growth of 2.98 percent.
