The Central Bank of Nigeria (CBN) has revealed that the Federal Government spent N356.12 billion on pensions and gratuity in the 2021 financial year.

Apex bank revealed this in its report, ‘Federal Government recurrent expenditure’. The amount was N3.48 billion below the N359.6 billion recorded in 2020.

However, in spite of the huge yearly allocations, federal retirees have said they were being owed, among other issues.

Pension Transitional Arrangement Directorate (PTAD) in charge of the Defined Benefits Scheme under the Federal Government, had earlier claimed it inherited pension liabilities of  N129.48 billion.

In a capacity workshop where a presentation titled ‘Parastatals Pension Department’ was delivered, it said PTAD inherited an estimated amount of N32.77bn, N28.96bn and N67.75bn owed pensioners of the Treasury Funded Parastatal, Ex-PHCN and defunct agencies respectively.

Dr. Chioma Ejikeme, the Executive Secretary of PTAD, held a meeting with the executive members of the Nigeria Union of Pensioners and the Federal Civil Service Pensioners Branch.

The directorate said in a statement that, “PTAD boss informed the union executives that following the expanded computation project embarked on by the directorate in 2020, and going through the career documents submitted by pensioners during verification, it was discovered that 14,836 pensioners in the Civil Service Pension Department were being overpaid.

“At the end of the meeting, both parties agreed that the affected pensioners will be contacted and informed of the directorate’s plan to properly place them on the right monthly pension from the month of July 2022, while the modalities to recover the overpayment will be worked out in due course.”

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.

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.”