Introduction
The introduction of the Pension Reform Act of 2004, which was later replaced by the Pension Reform Act of 2014 (PRA), marked a significant evolution in pension fund investment in Nigeria. Serving as the regulatory backbone for pension fund administration, the PRA has facilitated substantial growth in the financial markets. Over the past five years, Nigerian pension funds have seen their total Assets Under Management (AUM) experience increase.
Current challenges
Despite the promising growth trajectory, the evolving investment landscape for pension funds is raising concerns about the long-term sustainability of this expansion. The devaluation of the naira has significantly eroded the value of these local pensions. There is a growing clamour for legislative amendments to allow pension funds to invest in foreign equities. While such a move would help preserve the value of pension funds, it risks further undermining an already fragile economy.
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Under Nigeria’s existing pension law, only the foreign-affiliated Closed Pension Fund Administrators (CPFAs) are allowed to invest offshore, while the local Pension Fund Administrators (PFAs) and other CPFAs not foreign affiliated are not permitted to invest offshore. CPFAs affiliated with international oil companies are investing more of their pension fund assets in foreign money market instruments for safety. The National Pension Commission (PenCom), in its unaudited report on the pension funds industry portfolio for the period ending May 31, 2024, revealed that CPFAs increased their investments significantly during the month. Furthermore, the report highlighted a notable increase in their investment in foreign ordinary shares compared to the previous month.
In light of this, the Pension Fund Operators Association of Nigeria (PenOp) has called for an amendment of the Pension Reform Act to allow PFAs to invest some of the pension funds offshore to hedge against inflation and naira devaluation. PenOp argues that this move is necessary to guard against financial hardship triggered by rising inflation and naira devaluation.
However, it can be asserted that allowing pension funds to invest abroad could precipitate capital flight, where significant financial resources are diverted out of the country, thus depriving the local economy of vital investment. If such capital were invested domestically, it could stimulate economic growth, generate employment opportunities, and bolster the overall economic stability of the nation.
With meticulous consideration and strategic planning, a balanced approach can be devised. A viable solution lies in securitization. By securitising assets that generate foreign currency receivables, local pension funds can invest in high-grade securities that are insulated from local currency fluctuations.
“If such capital were invested domestically, it could stimulate economic growth, generate employment opportunities, and bolster the overall economic stability of the nation.”
This strategy offers the best of both worlds. Pension funds can attain the stability and returns associated with foreign investments while simultaneously supporting the local economy. A good example of this is the Nigerian National Petroleum Corporation’s (NNPC) foreign receivables. It is quite understood that PFAs can only invest in AAA-rated notes; therefore, the notes can be enhanced such that these pension funds can invest in them. This could not have come at a better time, as pension funds can invest in these securities that will be insulated from naira fluctuations. This approach, however, necessitates robust regulatory frameworks to guarantee transparency, security, and efficiency in the securitisation process. Consequently, this approach would not only preserve the value of the pension funds but also ensure that investments remain within the country, thereby fostering economic development.
The strategy of securitisation
The strategy of securitisation can play a crucial role in sustaining the value of pension funds, especially when asset-backed securities (ABS) are issued against receivables denominated in foreign currency. While securitisation can be complex, understanding its intricacies is essential due to its undeniable benefits.
Investing in securitised notes backed by foreign currency receivables allows pension funds to hedge against local currency volatility and devaluation, ensuring investment stability and preserving purchasing power. Securitisation also opens up new investment opportunities for pension funds that might otherwise be restricted from direct equity or vanilla bonds. High-grade ABS provides a secure and reliable investment option with consistent returns.
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Despite being backed by foreign currency receivables, the funds remain within the local economy, thereby promoting economic growth and job creation. Moreover, securitisation helps pension funds comply with local investment regulations while accessing high-quality investment opportunities. By structuring these investments as asset-backed securities, they can meet legal requirements and investment goals effectively.
Additionally, with appropriate credit enhancement mechanisms, securitised notes can achieve high credit ratings, making them attractive to pension funds. This ensures that the investments are secure and align with suitable risk-return profiles. Thus, the strategy of securitisation offers a comprehensive approach to enhancing the value and stability of pension funds.
Conclusion
Securitisation of foreign currency receivables presents a strategic solution to the challenges posed by naira devaluation and inflation to Nigeria’s pension funds. This approach not only enhances fund stability and returns but also fosters local economic growth through prudent investment practices. Regulatory support is vital to unlock these benefits and ensure the long-term sustainability of pension funds in Nigeria. While permitting pension funds to invest in foreign equity has its advantages, it is essential to carefully consider the broader economic impacts. Securitisation offers a balanced and sustainable path forward, benefiting PFAs, pensioners, and the national economy alike.
Osaro Eghobamien, SAN (Managing Partner, Perchstone & Graeys), Tare Olorogun (Partner, Perchstone & Graeys).
