…as PFAs seek offshore investments
…indexed bonds to hedge inflation
Nigeria’s pension assets dollar value has dropped by 54.6 per cent equal to $18 billion on foreign devaluation of the naira over five years.
The pension assets dropped from $33 billion at the N306 per dollar exchange rate in 2019 to $15 billion at the N1,309 in 2024.
In naira terms, the total pension assets was N10.21 trillion at the end of December 2019 and currently standing at N19.78 trillion at the end of April 2024, according to data from the National Pension Commission.
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Sa’ad Jijji, managing director of PAL Pensions Limited said pension assets have continued to grow but because of the lack of access to foreign exchange to the Pension Fund Administrators(PFAs), it has been difficult to manage the volatility from the devaluation of the naira.
He said between 2018 and 2023, the total pension industry achieved average annual growth of 16.3 per cent to N18.36 trillion, and by March 2024, the asset had grown by 7.14 per cent to N19.67 trillion.
Jijji said the challenges confronting PFAs in the investment of pension assets are that they don’t have access to foreign exchange, even though investment regulations aallowPFAs to invest in dollar instruments.
“There is no access to FX even though investment regulations allows PFAs to invest in dollar instruments”
He also identified limited investment opportunities as among the challenges facing investment of pension assets.
Another challenge Jijji stated is the below-inflation investment returns
Chika Onwunali, partner at Premium Debate said the recent naira devaluation has sent shockwaves through the financial services industry including pensions that has taken a significant hit.
He said the naira devaluation has resulted in over a 50 per cent decline in the dollar value of pension assets, stating that this is a staggering figure, considering the importance of pension funds in providing financial security for millions of Nigerians.
Onwunali said since pension funds in Nigeria invest in dollar-denominated assets, such as foreign bonds, stocks, and mutual funds so significant devaluation of the purchasing power of the air decreases the value of these assets resulting in a loss in value.
While suggesting the need for PFAs to rebalance their portfolios to reduce their exposure to high-risk assets, he said “There may be no easy solutions, but stakeholders must work together to mitigate the impact of this decline and ensure the long-term sustainability of the pension system
Dave Uduanu, managing director, of Access Pensions Limited speaking at the 4th PenOp National Assembly Retreat organised for members of the House Committee on Pensions and members of the Senate Committee on Establishment and Public Service in Lagos said the erosion in the value of pension assets by inflation and foreign exchange gap is a common problem facing every product in the financial market.
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Uduanu said if PFAs had had the opportunity to invest substantially in dollar-denominated assets in the last five years, even if it is only N5 trillion of the pension assets, the impact of the current naira devaluation on the fund would have been less significant.
“Pension assets should be invested in offshore assets to help hedge inflation and currency devaluation”.
To manage the rate of inflation, Uduanu said, “Government should issue inflation indexed bonds to safeguard the country’s savings because this is what is practiced in other parts of the world to track inflation rate”.
“In other countries, there are bonds that government issue where the coupon tracks inflation rate. For instance, if you issue inflation indexed bonds, indexed at inflation plus two per cent, if inflation is 14 per cent, the bond will yield 16 per cent. If by government management or otherwise of the economy, inflation goes to 23 per cent, the bond will yield 25 per cent. That means the savings of the country is protected from inflation and devaluation.”
According to him, the government should create more infrastructure funds so that pension funds can be invested particularly in real estate because it can hedge inflation and create value in the long term.
“We are interested in investing in real estate, but it has to be properly structured to guarantee protection of investment, he said.
