The rapid growth in pension assets over the years is not only attributed to monthly pension contributions of workers across the federation, investment returns is also crucial to the soaring pension fund.
In fact, findings shows that out of the over N14.3trillion pension pool, over N3 trillion are accrued profits from the investment of pension assets.
The introduction of Multi-Fund Structure into the pension scheme in Nigeria in July 2018 is meant to ensure that there is further growth in returns on investment of the pension fund in the country.
The new initiative is expected to increase investment returns to pension contributors and retirees.
Similarly, pension fund operators had earlier said they are eyeing other alternative investment options aside from the government bonds and treasury bills to increase returns on investment.
The CEO of the Pension Fund Operators Association of Nigeria (PenOp), Mr. Oguche Agudah, noted 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.
“Currently pension funds cannot invest in foreign bills because there are regulations which need to be approved by the government. 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.”
Looking to optimise investment returns on pension assets for Retirement Savings Account (RSA) holders, the Pension Fund Administrators (PFAs) diverted over N900 billion from the proceed of the matured Open Market Operations (OMO) bills into the equities market in 2020.
Investigation revealed that increased investment by PFAs in the equities market in 2020 was as a result of the crash in treasury bills rates, which was chiefly due to the several expansionary monetary policies aimed at stimulating economic growth. The operators, in their proactive nature, had always pulled out from investment portfolio that is going bad into a lucrative one which was responsible for this move.
Investment returns, amounting to over N3 trillion of the pension fund assets, were largely driven by investments in bonds market, with 70 per cent of the assets invested in bonds.
But a drastic fall in yields 2020 has got pension operators think twice before reinvesting their matured Funds in the bonds, hence, found investment haven in the capital market.
Capital Market Investment
According to Mr. Wale Odutola, who is also the managing director/CEO, ARM Pensions, “Pension fund operators have always invest in the equities market, even though, one needs to be careful. Capital market is a volatile environment with price fluctuation. Just as you can make huge profit, so also, you can make huge loss if care is not taken.
“So, each PFA has different investment strategies and they always invest in investment outlets according to what suits their investment strategies. So, capital market is an investment outlet that we are looking at, so also is fixed income, government securities, money market instruments and so on.”
He said, though, the safety of the pension fund assets is germane to operators, they are also concerned about investment returns to pension contributors, adding that, the growth of the pension assets in recent years was attributable to investment returns rather than contributions.
This, he said, shows that operators are investing wisely, by adhering to the pension industry investment guidelines as stipulated in the Pension Reforms Act (PRA) 2014.
However, this year, emphasis of investment has been in the Bank Placement for better investment returns.
Bank Placement
The pension funds managers have invested N2.27trillion from the 14.3trillion into money market instruments comprising of fixed deposits in banks, commercial papers as well as foreign money market instrument, as at the end of July, 2022, NATIONAL ECONOMY learnt.
While investment of pension fund in fixed deposits took the larger chunk of this investment accounting for N2trillion, commercial papers accounted for N157.7billion even as foreign money market instrument was N39.9billion as at the end of July, 2022.
In June 2022 where Money Market instruments accrued N2.14trillion, Fixed Deposit attracted N1.89trillion and in May, 2022, this instrument accounted for N2.20 trillion of the pension assets as Fixed Deposits amounted to N1.95trillion of this fund.
However, money market instrument was N2.25trillion in April, 2022, even as Fixed Deposit amounted to N1.99trillion.
At the end of the first quarter of the year, that is, March 2022, the investment in bank placements rose by N110billion to hit N2.14trillion.
However, fixed deposit in January, 2022 rose significantly to N2.23trillion, having moved from N1.96trillion in December, 2021, even as the interest of pension fund operators in banks was N2.03trillion as at February, 2022.
In the review of the Monthly Unaudited Report on Pension Fund Industry Portfolio released by the National Pension Commission (PenCom) for the months under review, findings show that more than 90 to 92 per cent of the investments under Money Market instrument category went into Fixed Deposits, showing increased interest from pension fund operators as it gave better returns on investments of the N14.3trillion pension fund assets.
Fixed Deposits also known as Bank Placement or Acceptance is a short-term investment instrument used by corporate organisations, such as Pension Fund Administrators (PFAs) to place fund in banks or other financial institutions at an agreed interest rate and tenor.
The tenor, however, hovers between 30 and 360 days, depending on the choice of the firm doing the placement.
Findings show that pension fund operators are gradually divesting the proceed of their matured bonds into the bank placements due to volatility in the bond market.
The fixed deposit, according to findings, is giving better interest income to pension fund operators, as they get as high as 8, 9 or 10 per cent interest or more within 90, 120, 150, 180 and 360 days, depending on the terms of agreement, meaning that, there is possibility they can turn over such placement two, three to four times or more in a year, unlike bonds that is stereotype and has a longer cycle.
This invariably means that, Pension Fund Administrators (PFAs) can get between 10 to 40 per cent return on investment on its invested funds in a year, depending on the agreed tenor. This investment instrument, as it stands, remains the highest yielding investment outlet for pension fund operators.
Further investigation shows that, this was partly responsible for the growth of the pension assets to N14.3trillion as at July 2022, as investment income, of which bank placements contributed the highest, was one of the main drivers of the assets.
Experts’ Reactions
Responding to NATIONAL ECONOMY enquiry on the attraction of Pension Fund operators to bank placements in the current year, the managing director/CEO, Access Pension Fund Custodian (PFC), Mrs. Idu Okwuosa, said the increased investment in bank placements by operators was as a result of the lull in the bond market as the process of the matured bonds find their way into this investment class.
Stating that the significant growth in pension assets was majorly from investment returns, Okwuosa, who is also the head, Branding Committee of the Pension Fund Operators Association of Nigeria (PenOp) added that, interest from bank placements contributed majorly to the investment returns.
“Because of the issues in the bond market and a lot of attention on it, operators are increasing their stake in bank placements. It’s been profitable in terms of investment returns and the turnover is good. The growth in pension assets is also attributable to this. In the end, the major beneficiaries are the contributors who will continue to witness growth on the balance in their Retirement Savings Accounts (RSAs).”
Similarly, CEO of PenOp, Mr. Oguche Agudah, said while pension operators work assiduously to grow the pension fund assets contributed by Retirement Savings Account (RSA) holders, they are very keen in balancing between safety and returns on investments.
Noting that safety is the first option adopted when investing in any asset, he maintained that, as part of efforts to grow the pension fund assets, operators are eyeing other alternative investment options aside from the government bonds and treasury bills.
“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,” he said.
Earlier, the managing director/CEO of the ARM Pension, Mr. Wale Odutola noted that, apart from attractive interest rate that comes with bank placements, it is also short-term which gives room for reinvestment and make more income within a year.
He promised that operators will continue to look for profitable alternative investment windows as interest rate nosedive in other areas.
Meanwhile, the former managing director/CEO, Fidelity Pension, Amaka Andy-Azike, stated that, “as operators, we focus more on the safety of funds when investing even as we try to also give fair returns on your investments.”
Andy-Azike, who recently retired from the pension outfit, noted that, operators are currently looking out for other platforms that are safe to invest the funds, stressing that, safety of funds comes first in all investment the operators partake.
The director-general, National Pension Commission (PenCom), Mrs. Aisha Dahir-Umar, had said her commission is committed to ensuring the safety of pension funds, stating that, adequate structures have been established in this regard.
She also promised that the pension regulatory body will continue to develop and implement innovative polices to foster safety and fair returns on pension fund investment as the pension industry and financial system evolves.
“As the pension industry and financial system evolves, the Commission would also continue to develop and implement innovative policies to foster safety and fair returns on pension fund investment,” she added.
