Nigerian Pension Fund Commission (PENCOM) continues to be slow to act as N14.4 trillion contributed by retirement savings account holders or RSAs (pension fund contributors) face the risk of losing value to currency depreciation and inflation.

Their investments stand the risk of being ravaged by a fast depreciating naira and soaring inflation rate affecting Africa’s largest economy. The situation has gotten worse recently with the exchange rate free-falling against the greenback.

Nigerian PFAs allocated about 99% of their net asset value in a mixture naira denominated assets made up of government securities, commercial bonds and other security instruments, domestic shares, real estate, and other forms of money market instruments.

PFAs Net Asset Value

August 2022 data from PENCOM show the Nigerian pension fund’s net asset value (NAV) was about N14.4 trillion up from N13.2 trillion at the end of last year.

• A huge chunk of the NAV is about N9.2 trillion invested in government securities up from N8.7 trillion as of December 2021.
• The investments they make in government securities include the purchase of FGN Bond holdings, Treasury Bills, Sukuk, and Green Bonds.
• Another 9.7% and 14.5% are invested in corporate debt securities and money market instruments respectively.
• Only 0.27% and 0.72% were invested in foreign money market instruments and foreign equities.
• The distribution of the net asset suggests the investments are mostly in naira matching the source of contribution which is also in naira. However, this poses a risk for contributors as the fast-depreciating naira now means their savings are worth less when converted to the dollar.

Currency Depreciation

As of the end of 2021, the naira exchanged against the dollar at the black market for about N565/$1. However, it is currently trading at N745/$1 with most projections indicating it could breach the N800/$1 ceiling by Xmas.

• In dollar terms, the N13.2 trillion in December was worth around $23 billion if converted at the rate of N565/1.
• The same N13.2 trillion is now worth around $17 billion while the current NAV of N14.4 trillion is worth $19.3 billion.
• The more the naira continues to lose value against the dollar the less valuable pension funds are to their contributors.
• The implication of this is that Nigerians who converted their savings into dollars or purchased dollar-based investments may have performed much better when compared to the value of their pension accounts.

Suffice it to add that most young Nigerians now prefer foreign currency earnings to local currency income. The exchange rate comparison in value is by far the biggest challenge for pension funds as they do not typically invest in foreign-based assets.

Soaring Inflation

Nigeria is facing a soaring inflation rate that is currently at a 17-year high forcing the apex bank to raise its benchmark monetary policy rate to 15.5% one of the highest in recent years.

The central bank’s decision to raise rates is to combat rising inflation, which it also recognizes was caused by an increased money supply and supply-side shocks.

But despite the rise in monetary policy rates, interest rates on risk-free government securities like treasury bills and FGN bonds still lag behind portending a negative return when the yields are adjusted for inflation.

A recent article on Nairametrics confirms all the  PFAs underperformed inflation and MPR based on returns in the first 9 months of the year.

They faired worst on their fixed-income Funds especially those invested in risk-free government securities.

PENCOM Needs to Step up

Most PFA cite section 87 of the pension reform act 2014 as one of the major reasons why they hardly own foreign assets. The provisions refer to section 86 of the act which mostly restricts PFAs the invest in assets or markets that are not regulated by Nigeria’s SEC. Several efforts are currently been made to rely on regulations to fix this issue but it is slow and time is running out.

• While they dither, most globally renowned pension funds focus on investing in assets outside of their country giving their pensioners better returns and a stronger hedge against inflation and exchange rate depreciations.
• For example, one of the world’s largest pension funds, Government Pension Investment Fund Japan (GPIF) valued at about $1.7 trillion has about 25% and 24% of its net asset value invested in foreign bonds and foreign equities respectively.
• The popular Norwegian pension fund, with about $1.4 trillion in assets has investments in 69 countries including Nigeria. The same goes for South Africa’s Public Investment Corporation (PIC) with over $163 billion in investment value. They are also globally diversified and also have stakes in some Nigerian entities.

While it is financially expedient for the government to rely on pension funds as a source of funding government securities, this comes at the expense of pension fund contributors. The interest rates offered by the government and local corporates are not just enough to cover the fast depreciating local currency as well as galloping inflation.

Pension contributors will be wise enough to find ways of stashing most of their excess income in foreign currency assets that are better yielding local assets than increasing their pension fund contribution.

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The post Sluggish PENCOM Drag as RSA Holders Face Loss of Value to Naira Depreciation first appeared in Nairametrics  on October 24, 2022