Why PFAs shun investments in foreign securities


Mrs Anohu-Amazu and other PenCom’s executives

The Contributory Pension Scheme (CPS) has yielded N5.3trillion, but Pension Fund Administrators (PFAs) are shying away from investing contributors’ and retirees’ funds in foreign capital and money market instruments. Instead, pension funds in Retirement Saving Accounts (RSA) of active contributors and retirees are being invested in domestic shares and money market securities. OMOBOLA TOLU-KUSIMO writes on the reasons and implications of this development.

For long, Nigeria’s Pension Fund Administrators (PFAs) have given foreign shares and money market securities a cold bath. They have restricted themselves from investing pension funds in Retirement Saving Accounts (RSA) of active contributors and retirees beyond the nation’s shores in foreign ordinary shares and money market securities. What they have actually done was to invest the N5.14 trillion funds accumulated under the Contributory Pension Scheme (CPS) in the domestic capital and money market instruments.

This,according to The Nation’s findings, has been the case since the enactment of the Pension Reform Act (PRA) 2004. Although, the PRA 2014, which repealed the (PRA) 2004, allowed foreign investment, the National Pension Commission (PenCom) is yet to give PFAs the nod to invest the funds in foreign capital and money market instruments because of perceived lack of capacity by the PFAs and the need to encourage the use of the funds to solve Nigeria’s local problems, especially building of infrastructure.

Besides, the Central Bank of Nigeria (CBN) Foreign Exchange (forex) policy, it was learnt, has also frustrated move by the pension managers to invest in foreign assets. This is because access to forex to procure these foreign assets has been prohibited following the CBN’s June 23, 2015 circular excluding some imported goods and services from the forex market.

Under the CBN circular, Eurobonds, foreign currency bonds and shares were number 40 on the prohibition list. But some experts, who spoke with The Nation, said by refusing to invest retirees and workers’ fund in foreign assets, the PFAs’ may have inadvertently denied contributors the opportunity of getting more returns on their investments.

They pointed out, for instance, that investment in foreign assets is aimed at improving diversification, given the possibility of higher returns and meeting pension benefit payments in foreign currency. To them, it therefore, means that the pension managers are not maximising returns for contributors and retirees.

A senior official at PenCom, who does not want his name mentioned, also said the situation has implications on retiree’s savings and investment. He pointed out that the primary objective of the Commission’s supervisory philosophy is to ensure safety of the pension assets and fair return on investment.

He, however, noted that: “To allow foreign investment would require safe custody of the assets offshore and clear understanding of the foreign assets and investment climate. We need to build these capacities particularly the custody aspect of the assets.”

The PenCOM official described as correct the position of some experts who said PFAs have continued to invest the bulk of pension funds in Federal Government securities and money market instruments relative to equities, leading to having investment portfolios that are too risk averse.

“This is correct given the high volatility of the Nigerian stock market and the encouraging returns from the FGN securities and other fixed assets. This, however, was exclusively the investment decisions of the PFAs,” he said.

But the PFAs appear hamstrung, despite the fact that the regulation allows them to invest the funds offshore. For instance, a Stanbic IBTC official, Mr. Melvin Awolowo, said going by the regulation of investment for pension fund assets, PFAs in Nigeria are allowed to invest in foreign denominated securities such as global depository receipts/notes and Eurobonds of Nigerian entities as well as private equity.

“We believe that some PFAs in line with their investment strategy have invested in these foreign assets in the past,” he recalled. He, however, lamented that in recent times, access to foreign exchange to procure these assets has been prohibited since the CBN policy that excluded some imported goods and services from the Nigerian forex market. He said Eurobonds, foreign currency bonds and shares were number 40 on the CBN prohibition list.

Awolowo said the implication of this is that PFAs, who plan to increase their stake in foreign assets, can no longer buy the foreign currency needed through official channels to pay for their investment. In other words, an investment in this asset class has been limited and it is no surprise that there is no investment in foreign securities.

While confirming that it is true that PFAs are not investing retirees and contributors’ fund in foreign securities, the Managing Director, Premium Pension Limited, Mr. Wilson Ideva, noted that it is because everything PFAs are doing comes under regulation and the regulation does not allow them to place money market outside Nigeria.

He stressed that this can only be done when the regulation permits them. “We know where we are coming from. It was a situation where pension was seen as a big problem hence, the need for regulation to be tough to ensure that we do not go outside the bounds. So, for now, the guideline does not allow us. So, we can’t do it,” he said.

On maximising returns for contributors, Ideva said people need to understand that the country needs the funds more than the outside. “We have huge infrastructure gap. We have roads, rail, and education among other areas that we need to bridge the gap. Everywhere you go you will see that the country is crying for funding. We need to use the pension assets to develop Nigeria first instead of taking the funds to people, who are already developed and help to drive their cost of funds,” he added.

Beyond PFAs’ perceived lack of capacity and patriotic sentiment that appeared to have encouraged the use of the funds to bridge Nigeria’s wide infrastructure gap, CBN’s forex policy is also a pain in the neck of PFAs.

Apparently taking a swipe at the forex policy, which he believes has implications for investment of pension fund, an Actuarial Scientist and Chartered Insurer, Dr. Pius Apere, admonished the regulator, PenCom, to exercise the requirements of Section 87 (2) of PRA 2014 to protect pensioners’ exposed future loss by the forex policy.

He noted that Section 87 (2) of the Act provides that a PFA may invest the pension funds in units of any investment outside Nigeria within the categories of investments set out in Section 86. Section 85 of PRA 2014 provides that the safety and maintenance of fair returns on the amount invested are the main investment objectives of the PFAs operating under the CPS. The regulator, PenCom issues from time to time, regulations and guidelines on investment of pension funds and assets in order to achieve the investment objectives.

Sections 86 and 87(1) of PRA 2014 specifies the types of financial assets and instruments pension funds can be invested in, either in Nigeria or outside by PFAs, while Sections 88 and 89 of the same Act place restrictions on assets and or securities pension funds cannot be invested in.

Subject to the subsisting CBN forex rules, PenCOM may seek approval of portfolio limits for investment of pension fund or assets outside Nigeria from the appropriate authorities.

Meanwhile, PenCom summary as at end of October 2015 showed that only Closed Pension Fund Administrator (CPFA) Funds was invested in foreign ordinary shares and foreign money market securities, while it showed the concentrated investment of the funds in Treasury Bills and Federal Government Bonds. The funds are largely invested in equities and bonds including state government Securities, Corporate Debt Securities, Supra-National Bonds and Local Money Market Securities.

The CPFA Funds are mainly Defined Benefits final salary pension schemes. Section 51 of PRA 2014 requires that new employees of sponsor companies with CPFAs shall join the CPS and open RSAs. Thus, CPFA Funds are closed to new entrants after the enactment of PRA 2014, which means that membership of CPFA Funds, is likely to decline over time.

For instance, in October last year, 13.97 per cent amounting to N719, 240m of the Total Pension Fund Assets. N5, 149,652m was invested in CPFA Funds. Out of the total CPFA Funds, 9.78 per cent was invested in both foreign ordinary shares and money market securities totalling N70, 313.58m, while 9.93 per cent, 45.35 per cent and 17.12 per cent were invested in ordinary shares, FGN securities and Real Estate Properties in the domestic market, respectively.

In the latest report of last October, total assets under the CPS rose to N5.14t. The summary noted that 56.28 per cent of the money totalling N2.8t, was invested in Federal Government of Nigeria bonds, while 10.27 per cent or N528.76b was invested in treasury bills. A total of N514.28b, which is about 9.9 per cent of the total pension assets, was invested in domestic ordinary shares within the period under review.

According to the figures, 10.41 per cent or N535.90b was invested in local money market securities, while 4.08 per cent totalling N209.87b, was invested in real estate properties. Similarly, N162.03b or 3.15 per cent and 3.05 per cent or N156.877b of the growing funds was invested in state government securities and corporate debt securities, respectively.

The operators invested about 0.42 per cent each, amounting to N21.5b and N21.8b in open/close end funds and cash and other assets, while 0.34 per cent or N17.3b and 0.22 per cent or N11.55 billion were invested in private equity funds and supra-natural bonds, respectively.

Apere, who is also Deputy Managing Director of Linkage Assurance Company Plc, said the basic investment principles of pension schemes are to minimise the risk of failing to meet the liabilities of pension schemes, having considered the nature, term, currency and certainty of the liabilities, and also to maximise the investment return within an acceptable level of risk.

He said based on this, every PFA needs to invest the employees’ contributions prudently, having considered the individual circumstances in terms of risk profile. He reiterated that the CBN’s forex policy has effect on only the CPFA funds because of the investment in overseas financial instruments mainly ordinary share purchase.

The policy’s impact on the industry, according to him, include but not limited to exposure to currency risk unless it is hedged for a fee, resulting in volatile returns from overseas investments due to the devaluation of the naira. There is also the risk of inability to invest new contributions from existing employees and or funds injected by sponsors to bridge funding gaps as determined by the actuarial valuation of the schemes in overseas assets in order to meet future pension liability payments in foreign currency. This is because of the extra cost to be incurred in order to obtain foreign currency outside Nigeria’s forex market.

Apere said the impact also include sales of foreign assets of pension schemes to meet expected pension liability payments in domestic currency and to realise higher returns because of the devaluation of the naira.

“The CBN forex policy has also created uncertainties in the domestic capital market, which would lead to volatility of market value of domestic equities and hence, have a second order effect on pension fund investment,” he added.


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