Nigeria’s pension fund landscape is witnessing a robust investment strategy as Pension Fund Administrators (PFAs) diligently allocate pension fund assets to Federal Government bonds and other eligible securities.
This approach adheres to the guiding principles of pension fund investments set forth by the Pension Reform Act 2014 (PRA 2014). As of August 31, 2023, Nigeria’s total pension assets under management amounted to an impressive N17.29 trillion.
Pension fund assets in Nigeria are managed by licensed PFAs and safeguarded by Pension Fund Custodians (PFCs) in line with the provisions of the PRA 2014.
The primary guiding principle of investing pension funds is to ensure safety and maintenance of fair returns, with a prohibition on borrowing or lending pension fund assets.
The allowable instruments for investing pension funds, as outlined by the PRA 2014, include bonds, Sukuk, Treasury Bills, and other securities issued by the Federal Government of Nigeria and the Central Bank of Nigeria (CBN), or their respective agencies.
Additionally, Special Purpose Vehicles and Companies created or owned by the Federal Government of Nigeria are eligible, provided these securities are guaranteed by the CBN or the Federal Government.
Other allowable instruments for investment of pension funds include State Government Securities, Corporate Bonds, Money Market Instruments, Equities, Real Estate Investment Trusts (REITs), Infrastructure Bonds, Private Equity and Venture Capital as well as Open-End and Closed-End Funds.
At the end of August 2023, Nigeria’s pension assets increased by N530.79 billion (3.17%) from June 2023. Out of the net pension asset of N17.29 trillion, N11.47 trillion is invested in Federal Government Securities. This comprises N10.99 trillion in Federal Government Bonds, N211.77 billion in Federal Government Treasury Bills, N11.02 billion in Agency Bonds (Nigeria Mortgage Refinance Company), N154.76 billion in Sukuk Bonds, and N98.55 billion in Green Bonds.
The remaining investments are in money market instruments, corporate debt securities, quoted equities and other asset classes.
In line with global best practice, Federal Government Securities are considered safe and are usually a significant portion of pension fund investments. In Nigeria, Federal Government Bonds are considered the safest investment in the domestic debt market due to their backing by the ‘full faith and credit’ of the Federal Government. They are deemed risk-free, ensuring certainty in interest and principal payments.
Furthermore, the interest income earned from these bonds is tax exempt. Since the establishment of the Contributory Pension Scheme (CPS), the Federal Government has consistently met its obligation to repay pension funds invested in its bonds along with all accrued interests, without any defaults.
It is important to clarify that investments in Federal Government securities are not direct loans to the government; PFAs have the liberty to divest from these securities according to the Regulation on Investment of Pension Fund Assets. It is significant to note that investments in Federal Government bonds are not exclusive to PFAs as other institutional investors also invest in the bonds.
The PRA 2014 underscores that PFAs must manage pension funds in the best interest of retirement savings account holders. All investments in eligible securities and corporate entities are ‘ring-fenced,’ meaning they belong exclusively to the RSA holders and other pension beneficiaries and cannot be appropriated to any individual or related party of the PFA.
To ensure compliance with the PRA 2014, each PFA is required to establish an Investment Strategy Committee and a Risk Management Committee. These committees play a crucial role in formulating internal investment strategies and assessing acceptable risk profiles for investment portfolios, respectively. They are vital components of a comprehensive risk management system that ensures the safety and stability of pension fund investments.
It is noteworthy that pension funds invested in Federal Government bonds have aided in deepening the Nigeria’s financial sector and provided a platform for attaining strategic programmes of Government in the areas of infrastructure and real sector of the economy. It is evident from the vibrant pension industry in Nigeria today that the objectives of the pension reform have been significantly achieved in the areas of accumulation of long-term savings for Nigeria, as well as transparency and efficiency in funds management and benefits administration.
Generally, pension funds around the world invest in a diverse range of assets. In Chile, from where Nigeria adopted the CPS, Government bonds account for the highest investments using pension funds.
Similarly, Pension asset managers in many countries prioritise investments in defensive assets, including fixed interest securities such as bonds and treasury bills. These assets offer stable income at a lower risk level, which suit the moderate risk appetite of pension funds. Consistent with the investment culture in Nigeria’s pension landscape, countries such as Singapore, Korea and India have invested 90% of their pension funds in defensive assets, mostly Government bonds. Asset allocation decisions are made to achieve safety and fair returns.
In summary, the strategic investment of pension funds in Federal Government securities demonstrates a prudent approach by PFAs, aligning with the overarching goal of ensuring the safety and fair returns for the retirement savings account holders and other pension beneficiaries.