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Nigeria’s pension fund investors and pension savers should be afraid and worried in 2020. On the average, the RSA pension fund category netted about 13% return in 2019, so did the Retiree Savings Account category of pension funds.

While that is a commendable performance in a year where the Nigeria Allshare index lost about 16% of its value, that same feat may not be repeated in 2020. Did I hear you ask why?

Nigerian Pension funds

Falling Interest Rate

One thing that characterized the Nigerian Economy and the Nigerian capital market in 2019 was the fast decline in yield or interest rates towards the end of the year. The Nigerian 10-year Bond Yield, which opened the year 2019 at 15%, is poised to close the year at around 11% or less and other tenors are currently trending at single-digit interest rates.

Nigerian Treasury bills and Commercial Papers are even worse. According to the latest FMDQ Daily Quotation List, a Commercial Paper with 191 days to maturity traded at 6.19% while one with 282 days to maturity traded at 5%. A case of inverted yield.

An analysis of the most recent Pension Assets Report released by the Nigeria Pension Commission shows that 46.66% of total pension asset is invested in FGN Bonds, while 22.82% is invested in Treasury Bills, instruments that are directly impacted by trends in interest rate.

[READ MORE: Nigeria’s Pension Asset increased by N228 billion in October)

Lower interest rates mean lower returns from such investment types. Though the coupon rates on the FGN bonds that the pension funds are already invested in will not change, (unless the bond issuers decide to refinance such bonds), they, the pension funds, will be adversely affected if majority of the bonds mature in 2020.

In that case, the pension funds will have to face the reinvestment risk of finding bonds with similar coupons. A tall order indeed. Unfortunately, the inverse relationship between bond prices and interest rate will mean that at the point of reinvestment, such bonds will cost more to buy. With Treasury Bills and Commercial Papers being short-dated instruments, the effect of the falling interest will be felt more in those types of instruments as they are prone to mature within the year under the current low-interest-rate regime.

Rising Inflation

[READ ALSO: Pension funds are in trouble as inflation erodes asset values by 100%)

One statistic that means a lot to retirees and pension plan savers is real rate of return. Real rate of return is the nominal rate of return less inflation. In a layman’s language, it is the rate of return that shows what your investment return can purchase, given current price level.


With inflation inching upwards in Nigeria, and interest rate going the opposite way, pension plan savers may be subjected to double “punishment” or double jeopardy. According to economists, falling interest rates are prone to causing inflation, if that happens, pension plan savers may be in for the worse.

What to Do to Remain within Plan

In a situation like this, those saving for retirement should think of what to do to remain within their planned retirement objectives. There are two broad sources of pension plan asset: contribution and income. Those two combine to lead to increase in pension assets. When one falls, the other has to increase, otherwise, pension assets will decrease. Therefore, to maintain your retirement savings objective in light of the potential for a decrease in income or return, you have to increase your monthly contribution.

I did a piece, not too long ago, on the need for additional voluntary contribution; now is the time to embark on that if you do not want to be caught “pants down” with some deficit in your retirement savings account balance in 2020 and beyond. To double your money in 10 years, for example, you need about an average annual return of 7%. As the rate of return decreases, so does the number of years required to double your money increase, if you do not increase the contribution.

This is why you should make voluntary contributions to your pension fund

Eurobond Mutual Funds to the Rescue

Pension Plan Managers should go to work, by looking for alternative sources that can help them increase return for their clients and investors, as long as it is within the regulatory permission granted them by the Pension Reform Act of 2004, or the like.

One of such investments is Eurobond or Dollar denominated mutual funds. Though return on those mutual funds is driven by interest rate, they have the potential to insulate the effects of falling interest with changes in exchange rate. With the Naira slightly depreciating against the dollar continuously, investing in Eurobond mutual funds may be a way to stay afloat.



    • I think annuity is better. The initial percentage increase over programmed withdrawal is high and this value is earned for life. What happens to your fund is longer your business. Your business is how to manage the pension being paid to you.
      In the case of programmed withdrawal, the value may increase or decrease and this value also depends on the amount in pension account. As withdrawal is made, the total amount also reduces. So what happens if there is nothing to withdraw? There is likelihood that there may not be increase in amount of pension to be paid under program withdrawal in 10yrs.

        • In the case of annuity, after 10 years guarantee. The next of kin get nothing from the insurance company. Disappointment will be staring at him on his face.

      • I beg to differ. It is a question of choice and goals, peculiar to each situation.

        The initial percentage increase you refer to is only an apparent increase. One can also see such a spike in the programmed withdrawal structure by refusing to receive a lump sum but merging that with the monthly contributions.

        Also, while the annuity product is marketed to be earned for life, there is a guarantee period for receiving that value. After that period, which is 10 years, if the individual should pass on, there would be absolutely nothing left for the beneficiaries of the individual.

        Your supposition that value in the pension account decreases with each payment is quite right but is also one-sided. Pension funds do not sit idle, they bring in income on a regular basis and this is added to the contributions. Furthermore, there is a minimum pension guarantee to be put in place for those whose contributions run out before they pass on.

        So it depends on choice. The key thing is to strive to reach a point where either option provides only benefits to you. Contribute more. That can not be overstated. There was a post about Additional Voluntary Contributions. Read it and apply it to your life. Demand a better service from your PFA. Call them and demand to speak to someone knowledgeable. Discuss with that person and get clarification. They are obliged by every business metric to provide it to you. If they don’t, go to another PFA. Transfers should be possible soon enough.

        There is really no better option from an objective standpoint. They are both products that depend on what you have done. So do your part well and both products, whichever you choose, will serve you well.

      • The programmed withdrawal option is far the better option because there is death benefit for next of kin after 10 years unlike Annuity where the insurance company takes everything after 10 years, also Programmed withdrawal has higher rate of returns on investment and safety of funds

  1. The option of program withdrawal is flexible and transparent as you will still be in the know as to what balance you have per time I. e statement of account . After giving you a lump sum at retirement, the rest of the funds will be Reinvested and little by little your balance is topped up. The next of kin could also have access to the funds when the account owner passes on.

    Annuity gives a guarantee of 10years which means when the account owner passes on before 10 years, the next of kin will have access to the balance within the years. If after 10 years the account owner passes, then the rest of the funds will be for the insurance firm and not the next of kin. Annuity is a pull of funds where your money is being invested. Access to the account details is not given at anytime but you are likely to get about 5-20% higher pay on monthly basis than the program withdrawal.


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