With inflation rising and interest rates increasing, the outlook for some traditional fixed income markets remains poor. New research from Aeon Investments, the London based credit-focused investment company, reveals that because of this over the next 18 months 78% of pension funds and other institutional investors plan to reduce their exposure to traditional fixed income assets.
In a survey published today of pension funds and other institutional investors in Europe and the US who collectively have around $437 billion in assets under management, 19% said they expect to reduce their exposure to traditional fixed income assets by up to 10%. Some 46% said they would cut it by between 10% and 15%, and 13% said they would reduce it by more than this. Only one in five professional investors interviewed (20%) said they expect to increase their exposure.
In terms of where they will reallocate this capital, 73% of respondents said that at least 25% would go into equities. Some 55% said they would allocate this amount to private equity, and the same said this for real estate. Half (51%) said that at least 25% of the funds they plan to take out of traditional fixed income assets would be allocated to structured credit focused investments.
Oumar Diallo, Chief Executive Officer, Aeon Investments said:
“The traditional fixed income market has endured a difficult period and many investors clearly feel this is set to continue with rising inflation and interest rates set to increase.
“In the past 18 months, our research shows 88% of pension funds and other institutional investors cut their allocation to traditional fixed income assets, and our findings suggest the majority plan to make further cuts over the next year and a half.
“One investment area that has benefited from this is structured credit focusing on assets such as transportation, infrastructure, real estate and private debt. Investment vehicles here can deliver attractive returns on a risk-adjusted basis with lower levels of correlation to risk assets when compared to many traditional fixed income assets.”
Double-digit Growth in the Assets of PFAs
The latest monthly report released by Nigeria’s Pension Commission (PENCOM) report shows that the assets under management (AUM) of the regulated pension industry rose by 12.4% year-on-year to N13.8 trillion or USD57.3 billion in February and by 1.2% month-on-month.
We note that over the past five years, growth in AUM has averaged 17% year-on-year. Growth was highest in 2018 (26.1% year-on-year) while 2019 recorded the lowest (12.2% year-on-year). FGN debt securities accounted for 61.8% of the total AUM in February this year, compared with 66.4% recorded in the corresponding period of 2021. In the same period, other assets such as real estate, private equity and infrastructure funds accounted for 1.1%, 0.3% and 0.5% of total AUM respectively.
Typically, investments into these asset classes are hampered by the shortage of eligible instruments. As at end-February, total FGN debt securities held by Pension Fund Administrators (PFAs) increased by 1.9% month-on-month and 4.6% year-on-year to N8.5 trillion. FGN bonds held by PFAs increased by 2% month-on-month and by 10.8% year-on-year to N8.1 trillion. This category accounted for 59.1% of total AUM, compared with 59.9% recorded in the corresponding period of 2021.
The Debt Management Office (DMO) has raised N883 billion from bond auctions in Q1 2022 (including non-competitive bids from public agencies). Therefore, exceeding their borrowing target for Q1 by 84%. Furthermore, the DMO recently published its bond issuance calendar for Q2 2022 which shows the total volume on offer between N630-N720 billion.
We note that the FGN’s revised 2022 budget deficit financing from N6.4 trillion to N7.4 trillion results in an increase in the domestic funding target for this year to N3.5 trillion. Ideally, increased borrowing places pressure on yields, resulting in upticks. This bodes well for FGN bond holders. However, this is also dependent on liquidity level which could affect upward adjustment of the yields.
The PENCOM report shows that NTBs held by PFAs declined by -10.8% month-on-month and -74.3% year-on-year to N173.9 billion in February 2022. This represents just 1.3% of the total AUM. We note that in the corresponding period of 2021, NTBs accounted for 5.5% of total AUM.
We attribute the slight shift from NTBs to the decline in the average yield by -81bps in February 2022. Meanwhile, state government securities held by PFAs declined by -0.9% month-on-month to N168.8 billion. This asset class accounted for 1.2% of total AUM, compared with its share of 1.0% in February 2021.
Domestic equity holdings rose by 1.5% month-on-month and 14.3% y/y to N1.1trn and accounted for 7.9% of total AUM, compared with 7.8% in February 2021. This implies a slight shift towards domestic equities by PFAs. We note that the NGX All-Share Index (NGX-ASI) rose to 47,394.53 in February 2022. This marked a 1.7% month-on-month gain for the index.
Similarly, the NGX pension index increased by 2.9% month-on-month in February ‘22, outperforming the market benchmark index by 126bps. The PENCOM report disclosed that the AUM recorded in February also comprised of
N9.7 trillion in a retirement savings account (RSA) active funds, N1.1trn in RSA retiree fund IV, N1.5 trillion in closed pension fund administrator schemes (CPFAs), N1.4 trillion in approved existing schemes funds and N20.3 billion for RSA Fund VI (non-interest fund), active and retiree.
As at end-February 2022, total schemes membership increased by c.37,000 to 9.59 million. This growth in schemes membership was driven by the increase in the RSA scheme on the back of increased compliance by the private sector.
PTAD Terminates 14,686 Ghost Civil Service Pensioners
The Pension Transitional Arrangement Directorate (PTAD) has eliminated 14,686 ghost civil service pensioners, Dr Chioma Ejikeme, Executive Secretary of PTDA disclosed this in a recent training for correspondents organised in Lagos.
The executive secretary was represented by the Director, Parastatals Pension Department, Kabiru Yusuf, who revealed that the Directorate has 107,785 civil service pensioners on its payroll. Over the years, the agency has made efforts to change the narrative of pension administration, especially under the Defined Benefits Scheme (DBS).
Dr Ejikeme also revealed that pension management is a sensitive subject and the Directorate has been making efforts to ensure that the welfare of pensioners under the DBS remained a priority.
The Directorate also charged the media, to help inform pensioners and the public on their various pension plans to ensure that the welfare of pensioners is sustained.
This update is coming on the heels of a recent update by The National Pension Commission (PenCom) where it revealed that 1,526 organisations had remitted a total of N4,047,499,080.64 into the Retirement Savings Accounts (RSAs) of their employees in the fourth quarter (Q4) of 2021.
Investors King recalls that according to the data from PenCom, the total number of employee savings accounts that were credited stands at 15,603. The report also revealed that at the end of Q4 2021, twenty-five (25) States of the Federation had passed pension laws based on the Contributory Pension Scheme (CPS), with seven (7) states in the process of doing so.
Speaking on the achievements of The Pension Transitional Arrangement Directorate, Director, Civil Service Pension Department (CSPD), Sulayman Shelleng, revealed that the agency has also created a reliable database for civil service pensioners and initiated a decent digital/physical archiving solution.
Sulayman also pointed out that there had also been a payroll clean-up through the Bank Verification Number (BVN) introduced in November 2016. He stated that this has led to the removal of ghost pensioners in April 2018 and the creation of automation of the benefit computation/payroll management.
This update is quite innovative for a sector that has struggled with poor data management, and lack of technical input to make processes easier for all stakeholders in the sector.
PenCom: Over N4 Billion Remitted to RSAs in Q4 2021
The National Pension Commission has disclosed that 1,526 organisations had remitted a total of N4,047,499,080.64 into the Retirement Savings Accounts (RSAs) of their employees in the fourth quarter (Q4) of 2021, data obtained from PenCom’s latest quarterly report showed.
According to the data, the total number of employee savings accounts that were credited stands at 15,603
The report also reveals that at the end of Q4 2021, twenty-five (25) States of the Federation had passed pension laws based on the Contributory Pension Scheme (CPS), with seven (7) states in the process of doing so.
Also, Four (4) of the five (5) states operating other pension plans have adopted the Contributory Defined Benefits Scheme (CDBS), while one (Yobe State) has implemented the Defined Benefits Scheme (DBS).
A Glance at the report
According to the report, 84.7% of applications were issued Pension Clearance Certificates (PCCs). The report read in part: “The Commission received 1,800 applications from private sector organizations for the issuance of Pension Clearance Certificates (PCCs). Out of this number, PCCs were issued to 1,526 organizations, while 274 applications were in the approval process as at end of Q4,2021. The records showed that the 1,526 organizations had remitted a total sum of N4,047,499,080.64 into the Retirement Savings Accounts of their employees totalling 15,603.”
PenCom also revealed that it carried out various workshops on the developments in the CPS for a number of organisations across the six geopolitical zones of Nigeria: “The commission participated at the 2021 Lagos International Trade Fair organised by the Lagos Chamber of Commerce and Industry in collaboration with the Lagos State Government. The fair provided the opportunity to sensitise members of the public on the workings of the Micro Pension Plan as well as respond to other inquiries on the CPS.”
Some Major Highlights
- The sum of N984,295,614.20 was recovered from 36 defaulting employers during Q4 2021. This is following the issuance of demand notices to defaulting employers whose pension liabilities were established by the Recovery Agents (RAs).Of the total amount, N406,421,486.65 represented the principal contribution and N577,874,127.55 represented the penalty. Also, legal action against 18 defaulting employers was advised.
- The commission also approved the reimbursement of N1,178,670.15 to 8 military and other security personnel who were exempted from the Contributory Pension Scheme during the quarter under review.
- The report also claims that the commission received applications for the transfer of NSITF contributions on behalf of 208 NSITF participants during the quarter under review. And approval for the transfer of N10,767,194.61 to 180 members’ Retirement Savings Accounts was granted.
- The commission, in the report, denied the request for the transfer of N2,389,145.53 to 28 NSITF donors due to discrepancies between the amount given by PFA and the balances in the NSITF database. In the same light, the commission approved N54,594,952.61 in monthly benefits for 2,305 NSITF retirees.
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