Nigeria’s pension fund managers are renewing their push to be allowed to invest more abroad to shield their assets under management from the volatile naira.
Assets in dollar terms drop 55% on naira devaluation
The renewed push comes as pension assets in dollar terms have dropped by 54.6 percent over a five-year period to $18 billion due to devaluation of the naira.
Pension assets declined to $15 billion at an exchange rate of N1, 309 per dollar as at April 2024 from $33 billion at N306 per dollar in 2019
In naira terms, pension assets show misleading growth, rising from N10.21 trillion at the end of December 2019 to N19.78 trillion at the end of April 2024, according to data from the National Pension Commission.
Dave Uduanu, managing director, 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 has been challenging.
Uduanu said that if PFAs had invested even just N5 trillion of pension funds in dollar-denominated assets over the past five years, the impact of the naira devaluation would have been less significant.
Seek indexed bonds to hedge inflation
“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 practised in other parts of the world to track inflation rate.”
“In other countries, there are bonds that the government issues 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 that pension funds can invest in, particularly 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.
Sa’ad Jijji, managing director of PAL Pensions Limited said pension assets have continued to grow but because of lack of access to foreign exchange to the Pension Fund Administrators (PFAs), it has been difficult to manage the volatility from devaluation of the naira.
He said between 2018 and 2023, the pension industry achieved average annual growth of 16.3 percent to N18.36 trillion, and by March 2024, the asset had grown by 7.14 percent 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 allow PFAs 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 percent 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.
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.”
