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.”