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Pension Schemes Brace for Dramatic Inflation Increases

Almost six in ten (57%) pension fund managers are predicting further dramatic increases in inflation over the next 12 months

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New research from Ortec Finance, the leading global provider of risk and return management solutions for pension funds and other institutions, reveals almost six in ten (57%) pension fund managers are predicting further dramatic increases in inflation over the next 12 months. A further quarter (26%) predict a slight increase over the next 12 months.

The international study with pension fund managers responsible for a collective $1.946 trillion assets under management reveals that they have already taken steps to protect their schemes against inflation by increasing allocations to specific asset classes. Over half (56%) have switched investments to commodities, inflation linked bonds (56%) and infrastructure (51%).

The action taken means almost all (98%) pension fund managers interviewed in the US, UK, Australia, Canada, the Netherlands, Switzerland and the Nordics believe their scheme is already well hedged against inflation with over half (54%) saying they are ‘very well hedged’ against this risk.

Pension fund managers say schemes are set to further change allocations in the year ahead to continue to help hedge against inflation. Over half (53%) plan to increase allocations to inflation linked bonds while nearly half (49%) will switch to commodities and 49% to real estate investment trusts (REITs) over the next 12 months.

The table below shows action taken by pension fund managers on asset allocation to hedge against inflation over the past 12 months and plans for the next 12 months.

ASSET CLASS PERCENTAGE THAT HAS ALREADY INCREASED ALLOCATION TO HEDGE AGAINST INFLATION PERCENTAGE THAT PLAN TO INCREASE ALLOCATION IN THE NEXT 12 MONTHS TO HEDGE AGAINST INFLATION
Gold 29% 24%
Commodities 56% 49%
Equities 40% 43%
Inflation linked bonds 56% 53%
Infrastructure 51% 44%
Real Estate Investment Trusts (REITs) 45% 49%
Direct investment into real estate 20% 28%

Marnix Engels, Managing Director, Pension Strategy, Ortec Finance said “It’s impressive to see how confident pension fund managers are about the impact of inflation on pension schemes over the next year, particularly as so many predict that inflation will continue its dramatic rise.

“Many schemes have already reallocated to certain asset classes in order to help inflation-proof their portfolio, and more are looking to do so in the next 12 months, as they predict future turbulence and inflation rises in the next 12 months. By modelling and mapping ahead, schemes are able to weather the storm, and overcome any short-term risks while still achieving their long-term objectives.”

Ortec Finance models and maps the relevant uncertainties in order to help pension funds monitor their goals and decisions. It designs, builds, and delivers high-quality software models for asset-liability management, risk management, climate scenario modelling, portfolio construction, performance measurement and attribution, and financial planning.

 

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Pension

Nigeria’s Pension Fund Value Plummets by 29% to $14.39bn Amid Naira Depreciation

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Nigeria’s pension fund value has declined by 29% to $14.39 billion in January 2024.

This drop attributed primarily to the ongoing depreciation of the naira against the dollar represents a contrast from the $20.41 billion recorded in December 2023.

The latest unaudited report on the pension funds industry portfolio revealed that the conversion rate of the naira to the dollar played a pivotal role in this decline.

In January, the naira was converted at a rate of N1,356.88/$, a significant deviation from the N899.39/$ rate observed in December.

This depreciation trend in the naira has been persistent since June 2023, following adjustments made by the Central Bank of Nigeria.

The continued weakening of the national currency in 2024 further exacerbated the erosion of the pension fund’s value when measured in dollar terms.

While the dollar value of the pension fund experienced a substantial downturn, in naira terms, the total assets under the Contributory Pension Scheme witnessed an increase to N19.53 trillion from N18.36 trillion at the end of 2023.

A significant portion of these assets, estimated at N12.14 trillion, was invested in Federal Government securities, reflecting a strategy to navigate the challenging economic landscape.

Amidst concerns over the impact of naira depreciation on pension funds, stakeholders have emphasized the need for prudent financial management and diversification of investment portfolios to mitigate risks associated with currency fluctuations.

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Pension Fund Administrators Channel N130 Billion into Infrastructure Investments

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Pension Fund Administrators (PFAs) have strategically invested N130.18 billion from the Contributory Pension Scheme into infrastructure projects by the end of September 2023.

The data from the National Pension Commission reveals the commitment of PFAs to diversifying their investment portfolio while maintaining compliance with the Pension Reform Act of 2014.

As of the reporting period, the total assets under the Contributory Pension Scheme amounted to N17.35 trillion.

In addition to infrastructure investments, PFAs directed funds into various avenues, including domestic and foreign ordinary shares, federal and state governments’ securities, and money market instruments.

The investment strategy aligns with the amended investment regulation introduced by the commission.

The regulation outlines stringent requirements to ensure prudent and compliant investment practices in line with the provisions of the Pension Reform Act.

It emphasizes that pension fund custodians should adhere to written instructions from licensed PFAs regarding the investment and management of pension fund assets.

The regulation also sets guidelines for allowable investments outside Nigeria, and PFAs are cautioned against contracting out the custody of pension fund assets to third parties without prior approval.

This strategic approach not only upholds regulatory standards but also serves the long-term interests of contributors, ensuring a balanced and diversified investment portfolio.

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Federal Government Completes N1.02 Billion Payment to Power and Transport Pensioners

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The Federal Government announced the successful disbursement of N1.02 billion to 7,091 pensioners from the Power and Transport Sectors of the Parastatals Pension Department.

This vital step to fulfill pension obligations was revealed by Olugbenga Ajayi, the Head of the Corporate Communications Unit at the Pension Transitional Arrangement Directorate (PTAD), in a statement released on Sunday.

The allocated sum accounts for 39% of the accrued pension arrears owed to retirees in these sectors for the period spanning from August 2015 to September 2023.

The process involved a meticulous calculation of each pensioner’s monthly pension based on their career details, salary structure, and applicable pension increments.

This commendable initiative stemmed from the realization that 7,091 pensioners in the power and transport sector were receiving inadequate pension payments due to discrepancies within the inherited payroll system managed by PTAD.

Dr. Chioma Ejikeme, the Executive Secretary of PTAD, reiterated the government’s commitment to upholding fairness, equity, and justice, ensuring that every pensioner receives their rightful pension under the Defined Benefit Scheme.

Dr. Ejikeme also assured federal pensioners that the payment of accrued pension arrears would continue until all obligations are satisfied, subject to the availability of government funding.

This announcement underscores the government’s unwavering dedication to the welfare of retirees and is a significant milestone in addressing outstanding pension liabilities in the country.

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