Real return on assets has remained largely below inflation after a policy by the Central Bank restricted non-bank domestic investors from investing in short-term OMO bills. In this interview, YEMI SADIKU, head, investment, AIICO Pensions, speaks with MICHAEL ANI on the implications of this policy on pensioners’ fund, savers and the economy. Excerpt:
How is the financial repression in the country affecting pension funds?
The way it will impact on pension funds is the reinvestment risk going forward. Before, we could do CBN OMO at relatively high rates, but now, we cannot do OMO anymore.
Even though the one-year OMO now is offering about 9 per cent. The one-year treasury bills which we can invest in are offering about 3.5 per cent.
As our OMO that we have matured, we need to look for where to invest that money but we definitely cannot go to the Treasury market anymore because the rates are low. The bond market that we would have gone to, the rates are also very low. Unfortunately, there is nowhere we can go. That was why I said Reinvestment risk is what is going to affect us going forward.
For this year, a lot of the PFAs that classified their bonds available for sale, it will look like they have outperformed everybody else because off-course as yields continue to go down, the prices of those bonds will continue to go up and vice versa. So if they sell today, they will make a killing, however, next year, there is nothing they can do next year. That was why I said it is the “reinvestment risk” going forward.
Where are the investment opportunities for PFAs amid this current environment of low yields on government securities?
With the maxim of higher risk higher returns, PFAs may have to take on more risk to improve their portfolio returns. With almost 70 per cent across the industry invested in FGN instruments, returns will be challenged as the FGN continues to drop its borrowing rates in its drive to manage its Debt Service to revenue ratio. Private Equity investments may be a veritable avenue to provide these higher returns, even though the choice of the fund manager is very important just as well as the sectors to be invested in and the gestation period of such PE investments. Listed equities would typically provide immediate yield upticks but this sector has also been challenged in recent times, thus driving PFAs to manage the downside risks of their investment in listed shares.
What impact does the reinvestment risk faced by PFAs have on pensioners?
With almost 70 per cent of Retiree Funds across the industry invested in FGN instruments, the impact would only be significant in the short term depending on how the manager has structured his portfolio in terms of what’s held to maturity or available for sale and the tenors of such instruments. Retiree Funds are hardly invested in volatile variable income instruments and have to hold a significant holding in bank placements to accommodate liquidity needs of the retirees/pensioners.
What impact does it have on the economy?
The declining rates may force “savers” to invest in Entrepreneurship, while also providing cheap loans to consumers and the real sector which should ultimately jump-start the economy for greater growth.
What impact does it also have on the growth of the pension industry?
The Pension industry may suffer an initial short term decline in returns on a portfolio as rates decline, but with the impact of improved activity in the real sector, it may increase the number of contributors in the pension industry which should hopefully increase the volumes contributed monthly.
