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Debt Securities

Nigeria’s Pension Fund Asset Value Crosses the N9 trillion Mark

As more and more Nigerians begin to take their retirement planning more seriously thanks to growing awareness campaigns, the total asset value of pension fund assets has hit a new all-time high.

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Nigeria’s Pension Fund Asset Value

As more and more Nigerians begin to take their retirement planning more seriously thanks to growing awareness campaigns, the total asset value of pension fund assets has hit a new all-time high. For the first time since PenCom began publishing its ‘Summary of Pension Fund Assets”, the asset value of pension funds hit and crossed the N9 trillion mark; ending the month of March 2019 with a value of N9.03 trillion. This represents an increase of N393 billion for the first three months of 2019 in absolute terms or a growth of 4.6%.

Pension Asset Growth Dwarfs GDP Growth: The Q1 2019 growth in pension assets as noted above, is more than twice the GDP growth recorded by the Nigerian economy in the first quarter of 2019. Nigeria’s GDP grew by 2.01%, a growth which was hailed by the National Bureau of Statistics as the “strongest first quarter performance since 2015”. With aggregate GDP standing at N31.7T in nominal terms as at the end of the first quarter, pension fund asset value now represents 28% of the GDP.

Although this is definitely an improvement worthy of note and worth repeating, more needs to be done both by the government and the people to place Nigeria on the pedestal of countries with high ratio of pension assets to GDP.

Netherlands tops World Pension to GDP Ratio: According to available information from The Statistica, The Netherlands has the highest pension asset to GDP ratio of 166.7%, followed by Australia’s 130.7% and then by Switzerland’s 126%. The United States of America where the consciousness of the people regarding their pension savings is in red alert, surprisingly, has a pension asset to GDP ratio of 120.5%. South Africa has the highest pension asset to GDP ratio in Africa with a ratio of 56.4%. Malaysia, and Chile, countries that are characterized like Nigeria as emerging market economies have ratios of 65.4% and 65.5% respectively. As a note of encouragement, Nigeria’s 28% ratio is better than those of countries like Germany (15.4%), Brazil (12.7%), Italy, (9%), and France (5.5%), just to mention a few.

Low Rate of Return: One factor that has not helped the increase in pension assets in Nigeria is the low return and low-interest rate environment that the pension funds operate in. Although most pension funds have consistently been making positive gains year in year out, the percentage returns are not high enough to propel the value higher.

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The major reason for the low rate of return is the “ultra-conservative” investment strategy of pension fund managers who invest almost exclusively in Treasury Bills and FGN bonds. The fund managers are not to blame so much for this, as the regulation requires them to allocate a sizable portion of their assets to fixed income securities while forbidding them from investing in alternative asset classes and equities. While one agrees that it is a risk management strategy, the government and the fund managers should work together to ensure that pension asset growth is not sacrificed at the altar of capital preservation.

Voluntary Contribution to the Rescue: The government, through section 4(7) of the Pension Reform Act of 2014, allows employees to voluntarily contribute to their Retirement Savings Accounts (RSA) in addition to the mandatory contributions required under the act. Similarly, the act allows those “exempted” from participating in the contributory pension scheme (CPS) like the members of the armed forces and retirees, to voluntarily participate in the scheme. By so doing, the government has and is doing its part to encourage people to contribute and grow their pension assets. However, there are a few restrictive parts of the voluntary contribution scheme that may work contrary to increasing pension fund contributions and assets.

For example, one of the provisions of the Guidelines for the administration of Voluntary Contributions is that not more than one-third of the contributor’s salary should be allowed into the voluntary contribution scheme and that voluntary contributions should be allowed only once a month. Understandably, this restriction was put in place to counter tax evasion or avoidance, pension funding laws should be made to encourage people to save towards their retirement given the effect such savings have on old age poverty alleviation.

There is a virtue in taking advantage of all available avenues to save for retirement, therefore, for those who can, make voluntary contributions as much as is permissible and tax advantageous to do so. By so doing, you are letting the government help you fund your retirement with the tax benefits.

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Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.

1 Comment

1 Comment

  1. Taiwo Akinpelu

    May 28, 2019 at 3:39 pm

    if pension funds could be loan to the state so as to embark of a long terms project and the loan is not recouped how then do the contributors benefited from providing basic necessary amenities for their live as the govt did not think of how to better the life of the worker in the area of housing and investment encouragement.

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Companies

Flour Mills moves to diversify funding sources with N29.8 billion bond listing

Flour Mills Nigeria Plc lists N29.8 billion bonds to diversify funding sources from the Nigerian capital market.

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Flour Mills makes one of the largest contributions to COVID-19 relief fund

Flour Mills Nigeria Plc’s fresh N29.8 bond listing will help the nation’s leading food business company to explore diversified funding sources from the Nigerian capital market, with the hope of enhancing growth and the development of the company.

This statement was made by the Group Managing Director of FMN, Mr. Omoboyede Olusanya, at the listing of the Tranche A and Tranche B bonds valued at N29.8 billion on the Nigerian Stock Exchange (NSE).

The food and the agro-allied company which has remained Nigeria’s largest and oldest integrated agro-allied business with a broad profile and robust Pan-Africa distribution issued these bonds under its N70 billion Bond Issuance Programme.

Olusanya said that the company would continue to explore funding opportunities inherent in the capital market to ensure business growth and continuity.

While speaking about the Credit Rating of the Programme, he disclosed that FMN’s credit rating, as well as the operational financing of the Group, have improved considerably.

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According to him, the bonds floated by Flour Mill will help to strengthen the company’s capital base and provide the needed working capital required by the Company. He added that Flour Mills Group will continue to deleverage and replace short term financing with longer-tenured and lower price funding to optimize capital structure and reduce financing cost.

He noted that Flour Mills will continue to explore opportunities to raise fundings via the capital market as this enables the company to diversify its funding sources and continue to play a role in the capital market as a significant player in it.

What they are saying

The Group Managing Director of FMN, Mr. Omoboyede Olusanya, at the virtual event, said;

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  • “We are delighted with the response from the market, we are happy to be listed.
  • “We are introducing an N29.9 billion listing under an N70 billion bond issuance cover; we will continue to raise funding to diversify our funding sources.
  • “The company remains passionate about feeding the nation to improve the quality of living for Nigerians through increased production and investments in backward integration.”

What you should know

  • With the successful issuance of the new N29.8bn Tranche A and Bonds, FMN has utilized its bond issuance program registered in 2018.
  • It is important to note that the Senior Unsecured bond listing includes an N4.89bn under Series 4 Tranche A of the bond issuance programme, at a 5.5% rate for 5 years, due by 2025, and a 25bn under Series 4 Tranche B of the same program at a 6.25% rate for a tenure of 7 years, due by 2027.
  • The bond proceeds will be used to refinance existing debt obligations. It will also help the company take collaborative actions to diversify the company’s financing options beyond expensive short term debt.

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Debt Securities

January 2021 FGN Bond records oversubscription of N88.3 billion

FGN bond offer has received a total bid of N238.28 billion across all tenors.

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Debt management office, DMO,Nigeria's Debt to revenue ratio, DMO suspends April 2020 FGN savings bond offer

The January 2021 FGN bond offer has received a total bid of N238.28 billion across all tenors, indicating it was oversubscribed by approximately N88.3 billion.

This fact was implicitly revealed through a disclosure by the Debt Management Office (DMO), seen by Nairametrics.

Nairametrics had earlier reported the offering of N150 billion worth of FGN bonds by the Debt Management Office for January 2021. In line with the notice, the auction occurred on the 20th of January, 2021 (yesterday).

Key highlights

The following are the key highlights of the 2021 FGN bond auction;

  • A total of N91.84 billion was submitted for the 10-Year tenor worth N50 billion, implying that it was oversubscribed by N41.84 billion.
  • The 15-Year tenor recorded a total subscription of N106.37 billion, implying an oversubscription of N56.37
  • On the other hand, the 25-Year tenor was undersubscribed by N9.93 billion, after it recorded a total subscription of N40.07 billion.

What you should know

  • Recall that the December 2020 FGN bond offer was oversubscribed by more than N70 billion, as reported by Nairametrics.
  • Nairametrics learnt that the oversubscription is sequel to higher rates across all tenors for January 2021, at 7.98%, 8.74% and 8.95% for the 10-Year, 15-Year and 25-Year period respectively, compared to the rates of 6.945% and 7.00% for the 10-Year and 15-Year tenors at the last auction in December 2020.

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Debt Securities

Collapse in domestic bills and bonds yields forcing local funds into stocks

A collapse in yields on domestic bills (3 months at 0.35%) and bonds (five-year at 3.5%) is forcing local funds into stocks.

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Nigerian Treasury Bills falls to 3.05% per annum, Implications of the new CBN stance on treasury bill sale to individuals

EFG Hermes has stated that a collapse in domestic bills yield (3 months at 0.35%) and bonds yield (five-year at 3.5%) is forcing local funds into stocks.

This is according to a recent report by the company tagged: 2021 The Year Ahead — Is the Recovery in the Price?

The report notes that current fixed income yields, of which bills and bonds are a part, seem unsustainable – citing that real 12 month yields are -13.8%. Hence, the report suggests that the country is likely to remain a cautious market for foreign investors in 2021.

READ: CAC says defaulting lawyers to face 2 years imprisonment for filing false documents

Despite the awareness, the company is of the opinion that fixed income yields in Nigeria could stay higher than 2020 lows for the next few months, which may lead to heavy bond issues in early 2021, as precedent suggests.  

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  • The company believes that the macro context is weak and policy-making is unpredictable in the country – pointing that although the country is facing a slow-burning BoP and fiscal crisis, it appears the authorities are making little efforts towards the difficult decisions necessary to put the economy and market on a sustainable footing.
  • This may, according to the company, impact earnings growth negatively in 2021 and 2022.

Accordingly, the report contends that this is one of the reasons why foreign investors avoid investing in the country’s instruments – noting that foreign investors seem to be happy selling to the local institutional bidders so that current data on holdings and flows depicts there is not much foreign money left in the market – as illustrated by foreign and domestic portfolio investment.

READ: Nigeria’s GDP growth to rebound between 1.7% and 2.0% in 2021 – United Capital report

What EFG Hermes is saying

  • “While foreign portfolio investors are seeing some relief on the backlog, until we see serious policy changes, we do not think foreign investors will become net buyers of Nigerian stocks. There is no indication that such changes are in the pipeline.
  • “We, therefore, expect a rising share of future net contributions to go to stocks, as well as cash coming from bond and bill maturities. However, we note that PFAs remain reluctant buyers, and the list of stocks in which they are happy investors is short.”

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