The overreliance of Nigerian Pension Fund Administrators (PFAs) on low-risk/ low-yielding assets might provide a level of security, but a look at its reports for the last decade reveals a string of negative real returns – and it could get worse.
If there’s any way to define the potential outcome of having a pension account, it is that in spite of all of life’s possible curveballs, there will be light at the end of the tunnel upon retirement. To this end, it is the role of pension fund owners to make investment decisions that will do well to provide a level of safety to pension contributors whilst also creating more value for relevant stakeholders.
The National Pension Commission (PenCom) over time has put in place systems and structures to facilitate this – the last being the July 2018 introduction of the multi-fund structure matching investment risk appetite to the profile of pension contributors amongst other things.
As opposed to the usual Retirement Savings Account (RSA) ‘Active’ Fund, the multi-fund structure comprises of 3 RSA funds – Fund 1, Fund 2, and Fund 3 – each having varying risk exposures with Fund 1 having the highest percentage of variable income instruments and Fund 3 having the least percentage. This is also together with the Retiree fund also regarded as Fund 4.
The current pension fund scheme is undoubtedly designed to perpetuate capital accretion for contributors. Yet, with a current weight of 71.87% of the overall pension fund assets as at the year ended 2019, the difference is not so clear.
Whilst having a bulk of the pension funds in fixed income securities might create the perception of the safety of financial assets, research has shown that it does very little to earn enough profit to mitigate the risks of inflation, let alone yield positive returns.
Analysis of returns from the last decade of the now over 10-trillion-Naira-asset fund reveals an overall loss in value.
If there’s any way to define the potential outcome of having a pension account, it is that in spite of all of life’s possible curveballs, there will be light at the end of the tunnel upon retirement. To this end, it is the role of pension fund owners to make investment decisions that will do well to provide a level of safety to pension contributors whilst also creating more value for relevant stakeholders.
The National Pension Commission (PenCom) over time has put in place systems and structures to facilitate this – the last being the July 2018 introduction of the multi-fund structure matching investment risk appetite to the profile of pension contributors amongst other things.
As opposed to the usual Retirement Savings Account (RSA) ‘Active’ Fund, the multi-fund structure comprises of 3 RSA funds – Fund 1, Fund 2, and Fund 3 – each having varying risk exposures with Fund 1 having the highest percentage of variable income instruments and Fund 3 having the least percentage. This is also together with the Retiree fund also regarded as Fund 4.
The current pension fund scheme is undoubtedly designed to perpetuate capital accretion for contributors. Yet, with a current weight of 71.87% of the overall pension fund assets as at the year ended 2019, the difference is not so clear.
Whilst having a bulk of the pension funds in fixed income securities might create the perception of the safety of financial assets, research has shown that it does very little to earn enough profit to mitigate the risks of inflation, let alone yield positive returns.
Analysis of returns from the last decade of the now over 10-trillion-Naira-asset fund reveals an overall loss in value.