Pension Funds Take Advantage of High Interest Rates in Nigeria, Invest N9.9 Trillion in Federal Government Debt Instruments
Since the Central Bank of Nigeria (CBN) started raising interest rates to curb the rising inflation rate and ease economic hardship on citizens, investors have jumped on fixed-income investments to take advantage of the 600 basis points jump in borrowing cost.
As a result of the CBN’s actions, yields on one-month months rose to 7.56 percent in February from 3.57 percent in May 2022.
The interest rate on the Federal Government’s 3-year Savings Bonds also rose to 11.04 percent in February from 8.93 percent in May 2022.
Pension Funds in Nigeria have taken advantage of this high-interest rate regime, investing N9.9 trillion in Federal Government debt instruments (securities) in February 2023, a 16.5 percent increase year-on-year from N8.5 trillion in February 2022.
The Federal Government securities that the Pension Funds invested in include FGN Bonds, Treasury Bills, Agency Bonds, Sukuk, and Green Bonds.
The Nigeria Pension Commission (PenCom) reported a steady rise in Pension Funds’ investment in FG securities since the first quarter of 2022, with a slight dip in Q1 2023 by 3.1 per cent quarter-on-quarter (QoQ).
However, Q2 2023 saw a QoQ growth of 5.9 per cent, with the investment value reaching N9.007 trillion. The investment value increased further by 2.1 per cent QoQ to N9.192 trillion in Q3 2023, and in Q4 2023, the investment value rose QoQ by 2.7% to N9.644 trillion.
Although pension fund investment in government securities fell marginally by 1.0 per cent, month-on-month (MoM), it rose by 4.2 per cent, MoM, to N9.8 trillion in February 2023.
The Pension Funds have seen this high-interest rate regime as an opportunity to increase their returns on investment, which ultimately benefits the pensioners.
Commenting on this development, analyst and Head of Investment and Research at Fidelity Securities Limited, FSL, Mr Victor Chiazor, said: “The rise in PFAs’ investments in Federal Government securities over the last one year was triggered by the high interest rate regime following the increase of the MPR by the CBN to tame rising inflation.
“We expect PFAs investment in Federal Government securities in the first quarter of the year to continue to grow but investments in equities will be based on the yield environment, performance of the equities market during the year and the post political dynamics in the year.”
In his own part, analyst and Managing Director/CEO of APT Securities and Funds Limited, Mallam Garba Kurfi, said: “The Investment in FGN Bonds by PFAs is necessary because of its availability and risk free when compared with the other securities. “Most aged people prefer their money to be invested in less risky assets; more than N7.9 trillion in the Nigerian financial market were invested into bonds. There are no available instruments to invest like bonds with high interest rates.
“There is a need for more financial products that can give alternatives and provide high returns like Bonds in the financial markets in order to attract pension funds investments.”
PenCom Records N14.9tn Contributory Pension Fund in 2022
The total assets of the Contributory Pension Scheme grew by N1.56 trillion in 2022 as it recorded N13.42 trillion in 2021
The National Pension Commission has revealed that N14.99 trillion was recorded as a Contributory Pension fund at the end of year 2022.
This was contained in its latest report titled– Report on pension industry portfolio for the period ended 31 December 2022.
According to PenCom, the total assets of the Contributory Pension Scheme grew by N1.56 trillion in 2022 as it recorded N13.42 trillion in 2021.
Investors King reports that the members of the contributory scheme increased by 333,002 in 2022 as the number of contributors was formerly 9,529,127 as at 2021 ending. 9,862,129 members were recorded at the end of 2022.
The Commission gave the breakdown for 2022 as follows: N9.64 trillion or 64.33 percent of the assets was invested in the Federal Government securities, N1.66 trillion for incorporate debt securities, N1.98tn for money market securities and N82.8bn for mutual funds aside other investment figures.
The Director-General of PenCom, Aisha Dahir-Umar marveled at the increase in pension fund assets in the third quarter of 2022 despite the economic situation globally.
She averred that the Pension Scheme will diligently deliver good and quality services for the benefit of its contributors.
Dahir-Umar noted that the Commission has broadened its means of acquiring funds for the scheme and embarked on infrastructure projects amongst other forms of investments.
She said the efforts put forth are yielding much increase which makes the Commission ahead of the economic situation and inflation.
The Director-General hinted that steps have been taken to enable the commission’s annual average rates of return of pension funds in Retirement Savings Account and legacy funds to rise above inflation rates.
Her words, “This laudable performance, in the growth of the AuM, points to the fact that the pension industry will continue to deliver value and benefit to its stakeholders and the nation’s economy. Perhaps, the most significant achievement recorded in the third quarter of 2022 was the successful issuance of guidelines on accessing RSA.
“Balance towards payment of equity contribution for residential mortgage. The guidelines give effect to Section 89(2) of the Pension Reform Act 2014, which allows eligible RSA holders to apply a percentage of the balances in their Retirement Savings Accounts for payment of equity contribution towards residential mortgage for employees of the public, private and the informal sectors.”
You Can Now Use Your Pension for Mortgage; PenCom Tells Nigerian Workers
Nigerian workers can now use 25 percent of their Retirement Savings Account (RSA) as equity contribution for mortgages.
Nigerian workers can now use 25 percent of their Retirement Savings Account (RSA) as equity contribution for mortgages.
The National Pension Commission (PenCom) made the announcement in a statement made available to the press.
According to the commission, Nigerian workers can use 25 percent of their Retirement Savings Account as equity contribution toward their mortgage. The commission explained that the approval is in line with Section 89 Sub Section 2 of the Pension Reform Act, 2014.
Both salaried employees and self-employed persons can take advantage of the new service albeit after they have met certain conditions.
Part of the conditions require the applicant (RSA Holder) to be in active employment and must have an offer letter for the property which must be duly signed by the property owner and verified by the mortgage lender.
The Retirement Savings Account (RSA) of the applicant must also be active for at least five years with both the employer and employee making the mandatory contributions.
While any RSA holders with less than three years to retirement are not eligible, couples who are both RSA holders can submit a joint application subject that both individuals satisfy all the requirements.
Meanwhile, Investors King learnt that the news generated mixed feelings among the concerned workers. A number of people commended the new development while some pick hole in it.
Abiodun Bamiduro who commented on the official twitter handle of PenCom (@PenComNig) said ” This is long overdue. Better late than never though. Can you also look into the need of RSA holders who are over 50 years of age to access part of their balance for investment in Agriculture before they retire. Starting after retirement makes it more complicated”. Abiodun concluded.
Another commentator, David Ezennia said “Long awaited good news for developers in the real estate sector”. An elated commentator who goes by the name Proudly Nigeria said ” From Monday, I will storm my PFA to inform them and also meet with my mortgage banker to fashion out how to access the fund”.
The National Pension Commission otherwise known as PenCom was established by the Pension Reform Act 2004, to regulate, supervise and ensure the effective administration of pension matters in Nigeria. PenCom gives licence to Pension Fund Administrators (PFAs) and also oversees pension policy guidelines to protect the interest of the Nigerian workers.
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
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|
|Inflation linked bonds||56%||53%|
|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.
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