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PFAs divest to hedge against fall in Fixed Income Securities

Having suffered a N51.30 billion decline in pension funds’ assets in February due to falling prices of Fixed Income Securities, Pension Fund Administrators (PFAs) are divesting to alternative investments to hedge against further losses.

Oguche Agudah, CEO, Pension Fund Operators Association of Nigeria (PenOp), says PFAs are eyeing other alternative investment options aside from government bonds and treasury bills to increase returns on investment.

Agudah says, “We know there are concerns about the decline in the pension value of assets, and the honest truth is that pension funds need to invest more in other assets classes outside of the government bonds and treasury bills, which are the safest. So, safety is the first option adopted when investing in any asset.”

Industry’s total Pension Fund Assets declined by N51.3 billion from N12.299 trillion in January to N12.248 trillion at the end of February 2021, according the National Pension Commission’s (PENCOM) February monthly report.

The PENCOM had attributed the decline, which is equal to 0.42 percent in pension assets in February, to the depreciation in the prices of Fixed Income Securities (FISs).

According to the Commission, this is from the trading portfolios of the Approved Existing Schemes (AES), Retirement Savings Account (RSA) Funds II & IV and Closed Pension Fund Administrators (CPFA), thereby creating unrealised losses on Marked to Market FISs.

“The values of the bonds in the trading portfolios fluctuate based on supply and demand of the underlying securities as well as the outlook of the financial market,” PENCOM said in the report published on its website.

Currently, pension funds cannot invest in foreign bills because there are regulations that need to be approved by the government, Agudah states. “However, we are looking out for other various outlets and areas where the funds can be invested; areas like private equity, but the honest truth is that we need to balance between safety and returns. Notwithstanding, the industry is looking at other alternative investment instruments,” he notes.

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Amaka Andy-Azike, head of media, communications and branding committee, PenOp, explains that the decline in the pension funds is unrealised losses according to the terms of the equity market, but pension funds operators are sourcing for other means to increase the yields.

“As operators, we focus more on the safety of funds when investing even as we try to also give fair returns on your investments. The decline in pension funds was because of the market volatility; the money market, bonds and treasury bills have been fluctuating due to the nature of what the economy experienced last year, and is still going through.

“Fortunately, as we speak, the yields have increased greatly. Before now, for instance, our money market yield was like 0.5 to 2 percent but now some banks are offering 10 percent,” Andy-Azike says.

“Indeed, the prices of bonds also decline; it was trending for 6 percent in some areas for long-term and 4 percent for short to medium term, but today yields on bonds have started trending upwards. So, if you do a revaluation of the previous loss on pension funds, you will discover that it is not up to the N51 billion,” she notes.

It is worthy to note that in the equity market most of these losses are not actual losses, they are unrealised losses because when the equity market goes up again, these yields will rebound and you will get much more, she states. “So, some of these losses are not realised losses and some have been corrected because there is increase in yield now in all our instruments; and we are currently looking out for other platforms that are safe to invest the funds. So, for us, the safety of your funds comes first in all investment we partake,” she states.

The objectives of the Contributory Pension Scheme are 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 provisions of the Pension Reform Act shall apply to any employment in the public service of the Federation, the public service of the Federal Capital Territory, the Public Service of the state, the public service of the local governments and the private sector.

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