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Funds Management

This is how much Federal Government borrowed from Pension Funds in 2019

A few weeks ago, many news media organizations published articles on the plan by FGN to borrow a whopping N2 trillion from the pension funds.

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You are working for Nigeria, not for personal interests, Buhari warns MDAs, This is how much the Federal Government borrowed from Pension Funds in 2019, Increased productivity and higher employment rate required for inclusive growth - IFC , Of visions, plan and budget,FG to review petrol price in April

In a not too distant past, many news media organizations published articles on the plan by the Federal Government of Nigeria to borrow a whopping N2 trillion from the pension funds.

The need for borrowing, according to the articles, is to finance infrastructural developments in Nigeria. While some saw it as a step in the right direction, many others, like the Nigeria Employers’ Consultative Association, NECA, saw it as “a threat to the Contributory Pension Scheme.”

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According to NECA, “It is unthinkable for Government to borrow from the Pension Fund when the citizens have not felt the impact of the mounting debt of Government at all levels.

“What is paramount to contributors, and other stakeholders alike, is the safety of the Fund, which, unfortunately, Government cannot guarantee. The action of Government has the potential to threaten the Scheme and erode Contributors’ confidence.”

NECA urges FG to expand tax net, Unemployment to hit 33.5% in 2020, NECA warns, NECA seeks data of unemployed Nigerians to effect FG’s stipends payment  

Mr. Timothy Olawale, DG, NECA

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Though the discontent about the plan to borrow from the pension funds is not out of place, it comes at a time when Federal Government borrowing from pension funds is not new.

The Federal Government of Nigeria, directly or indirectly, has been borrowing from pension funds. When pension funds buy Federal Government-issued bonds, the pension funds, are by implications, lending money to the bond issuer, which happens to be the Federal Government.

What is a bond?

A bond is a loan contract issued by the bond issuer (the borrower) to the bond purchaser (the lender) promising to return the money at the bond’s maturity and promising to pay interim interests on the borrowed money.

Given the shortage of investible financial instruments in Nigeria and the regulatory impediments that compel pension funds to invest in liquid and less risky financial instruments, it is almost a sine qua non, or self-evident, that the pension funds in Nigeria will invest in Federal Government-issued bonds.

In the first place, such investments are almost risk-free given that the FGN bonds have the backing of the Federal Government of Nigeria and the fact that such bonds offer interest rates that are scarcely obtainable elsewhere.

How much was borrowed in 2019

The Nigerian Pension Fund asset is worth N10 trillion, according to the December 2019 edition of Pension Fund Asset Summary report released by the National Pension Commission, PenCom. Out of that N10 trillion, about N7 trillion is invested in Federal Government-issued securities, comprising N5.3 trillion in FGN Bonds and N1.9 trillion in FGN Treasury Bills.

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In 2019 alone, pension funds lent to the Federal Government, by way of investment in FGN issued financial instruments, amounted to about N1.6 trillion, with N1.04 trillion going to FGN bonds while N0.62 trillion went to Treasury Bills.

In fairness to those frowning at the increased “borrowing” by the Federal Government from pension funds, compared to 2018, Federal Government borrowing from pension funds increased by about tN200 billion.

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[READ MORE: Infrastructure: Tapping into pension fund – a step in the right direction?)

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Judicious use of funds

There is hardly any government that does not engage in borrowing to finance its developmental initiatives unless you are in an Idi Amin type of government where money is supposed to be printed with ease.

By and large, it is the economy and the people that suffer from such fiscal profligacy by way of inflation and other economic woes. The US government is neck-deep in debt even as the Americans are, as a people, yet from time to time, the US congress raises the debt ceiling to keep the government afloat.

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Therefore, borrowing is not all that bad, especially domestic borrowing where the interest rate gets paid and channelled back to the economy with its multiplier effect. What is bad about borrowing and that is what I would like such organizations like NECA to hammer on, is the judicious use of the borrowed money.

Nigeria is in need of infrastructural developments that can be of great help towards economic development. Many Nigerian roads are impassable, the traffic deadlocks that hamper movement calls for alternative modes of transportation, like the railroad system which is almost non-existent in Nigeria.

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Electricity supply, a must-have for economic development, is in limited in Nigeria, calling for attention. Writing about the developmental need of Nigeria is a topic that will cover pages, not the topic of this piece. Suffice it to say, however, that in as much as the Federal Government borrows from pension funds, they should invest such money judiciously, derive the desired results and payback as at when contracted and agreed.

Pension plan participation among Nigerians increases

Lack of investment opportunities

Even the pension fund managers will be glad that the Federal Government is in a position to create investment opportunities for them because, as noted already, there are little or no alternatives open to them to invest the contributions being made by the Nigerian workers.

The equity market has been anything but stellar, the international market is a no-go area for the pension funds due to the regulations governing pension fund investments in Nigeria, and corporate bonds are almost nonexistent in Nigeria.

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At the current low-interest-rate in Nigeria, which is in the middle single-digit, at best, I wonder how the pension fund managers will be able to make out any positive performance in 2020. I will let you know how they perform when we get there. Stay tuned.

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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.

3 Comments

3 Comments

  1. Chukwuemeka

    February 17, 2020 at 8:22 am

    Thank you for this analysis, my question is why can’t we also borrow from our own money to fund personal project. Case study I have huge amount of Funds in my pension account but can’t access it and I’m still far from retirement. I try to balance it , why Government can come borrow my money but I can’t because I’m still working. My submission is a review where the contributor can access his/her funds while still working and alive. Regards.

  2. E.S Olorunaiye

    February 18, 2020 at 6:06 am

    No one should borrow from it becauseasy that will defeat the purpose of setting the program up in the first place.

  3. Iguan

    February 19, 2020 at 7:49 am

    Thanks for the analysis. Yes governments across the world borrow to finance infrastructure projects, the US government a key example. However the US government not only ensures judicious use of funds borrowed, it also ensures that such funds go into projects for which “Cost Recovery” is key to their conception and implementation. That is the Achilles heel of government borrowing to finance infrastructure projects in Nigeria. Are our public institutions strong enough to ensure cost recovery on infrastructure projects? Do we have governance intelligence positive enough to ensure public project cost recovery? Take a cue from the gate of the the success of the effort to recover cost on the Lagos – Epe Express Way project and the current experience of the Abuja -Kaduna rail project where yours have take over the ticketing system. For me, workers life savings must be lent only into projects with sound and resilient COST RECOVERY mechanisms, not just judicious use of the funds.

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Funds Management

Nigeria’s pension assets rise to N10.8 trillion in May 2020

PenCom’s Acting DG said pension fund managers have been very cautious about where they invest.

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Nigeria’s Pension Asset increased by N228 billion in October, PFAs increase investment in infrastructure to N40.52 billion   

Nigeria’s National Pension Commission (PenCom) disclosed that the country’s total pension assets increased to N10.8 trillion as of May 2020, up from N10.6 trillion in April this year.

The report, which was published Monday on PenCom’s website, also revealed that the total number of Retirement Savings Account (RSA) holders had increased from N8.8 million as it was last reported, to more than 9 million as of May this year.

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

Further details

The report went further to break down the various asset classes in which the pension funds have been invested. For instance, a bulk of the funds (about N7.2 trillion representing 66.7%) was invested in Federal Government’s Securities. The table below contains the complete breakdown.

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READ ALSO: Is the pension asset just another cookie jar?

Meanwhile, PenCom’s Acting Director-General, Aisha Dahir-Umar, said pension fund managers have been very cautious about where they invest. She also offered further explanation, saying:

“Since the introduction of the Multi-Fund Structure that created four different funds, the investment of the funds has varied from one another. Fund 1 has a maximum limit of 30 percent, Fund II has a maximum of 25 percent and Fund IV allows maximum of five percent.

“The allowable exposures to variable income instruments have been designed such that Fund I has the highest allowable limit, followed by Fund II, III and IV. This reduces the risk and uncertainty of contributors in line with their ages.’’

READ MORE: Private Sector drives industry growth, as PenCom remits N7.4bn into RSA

Recall that a recent article by Nairametrics mentioned how the COVID-19 pandemic had caused a drastic reduction in the rate at which new Retirement Savings Accounts (RSA) is being opened. Apparently, many companies have been unable to recruit new employees since the pandemic hit Nigeria and wrought economic challenges on different sectors. Unfortunately, PFAs’ failure to open sign up new RSA accounts could affect the total pension assets in the long run.

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Best Mutual Funds in Nigeria

These are the best mutual funds in Nigeria to invest in based on performance.

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Best Mutual Funds in Nigeria

Mutual Funds are a great form of investing especially if you are a passive investor. According to data from the Security and Exchange Commission, Nigeria has about 107 Mutual Funds cut across several Fund Types. Here is a breakdown of the Fund Types available for investors according to SEC.

TYPES Number
BOND FUNDS 9
EQUITY BASED FUNDS 13
ETHICAL FUNDS 6
EXCHANGE TRADED FUNDS 10
FIXED INCOME FUNDS 21
INFRASTRUCTURE FUND 1
MIXED FUNDS 21
MONEY MARKET FUNDS 23
REAL ESTATE FUNDS 3
TOTAL 107

To determine the best performing Funds, we looked at the Fund Prices as of the last business day in December 2019 and compared to the fund prices as of the last trading day of June 2020. These are the top 5. We also included profiles of the funds as described in their websites.

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New Gold ETF

Vetiva’s The NewGold Exchange Traded Fund (NewGold) is an Exchange Traded Fund that was listed on The Nigerian Stock Exchange (NSE) in December 2011. It tracks the price of gold and offers institutional and retail investors the opportunity to invest in a listed instrument (structured as a debenture) that is fully backed by gold bullion. Each NewGold security is equivalent to approximately 1/100 ounces of real gold bullion held in a secured stockpile of gold bullion. All gold is kept in the form of London Gold Delivery Bars and Good Delivery Standards are prescribed by LBMA.

December 27th

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Fund Price – N5,220

June 26th

Fund Price – N8,000

Return –  53.3%

Ranking – First

Commentary: Gold prices have been on the up since the Covid-19 pandemic took hold of the global economy. Investors are uncertain and as history shows gold prices are always up during market uncertainty. If you are looking for protective investment in times of uncertainty then this is the best performing fund so far.

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READ ALSO: FOCUS: These companies aren’t generating wealth for shareholders


FBN Nigeria Smart Beta Equity Fund

FBNH owned The FBN Nigeria Smart Beta Equity Fund is a pure equity fund that invests money predominantly in a portfolio of Nigerian companies, using a rigorous, research-based and tested evaluation system.

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The fund provides long-term capital preservation by investing at least 75% of the fund’s assets (excluding cash and cash equivalents) in a diversified portfolio of high-quality companies listed on the Nigerian Stock Exchange. In order to manage liquidity, the fund may also invest up to 25% in short-term money market instruments and deposits with financial institutions.

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December 27th

Fund Price – N129.17

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June 26th

Fund Price – N197.29

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Return –  52.7%

Ranking – Second

Commentary: For a fund that is predominantly focused on equities, this a pretty much impressive performance by all standards. For example, the NSE All-Share Index is down 9.8% year to date. If you are worried about investing in stocks and don’t have the heart for it and you are looking for a mutual fund, then this is the best performing fund out there.

READ ALSO: How to build a portfolio fit for 22nd Century

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Vantage Balanced Fund

Investment One’s Vantage Balance Fund (launched in 2002) is a fund focused on long term capital appreciation, which is achieved by maintaining a flexible diversified portfolio of equities, fixed income, money market, and real estate investments. Assets are high-quality equity instruments quoted on The NSE while the bond issuers have an investment-grade rating from a credit rating agency registered by SEC.

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December 27th

Fund Price – N2.21

June 26th

Fund Price – N2.87

Return –  29.9%

Ranking – Third

Commentary: This is a Mixed fund as it invests in a diverse pool of assets. Interesting to note that the managers of this fund also have an Equity-Based Fund, a Dollar Fund, and a Fixed Income Fund. But none of them come close to the Balanced Fund. If you are looking for a portfolio with a good mix of investment assets then this is the best performing as of June 2020.

READ ALSO: Why interest rates on treasury bills, bonds crashed


Legacy USD Bond Fund

FCMB Asset Management Owned Legacy USD Bond Fund (launched in 2018) is a SEC-registered US Dollar-denominated Collective Investment Scheme, structured as a high-yield mutual fund. The Fund seeks to generate stable income over the long-term. Legacy USD Bond Fund invests in credit-rated US Dollar-denominated fixed income securities issued by the Nigerian Government, Supranational bodies, and Corporate entities.

December 27th

Fund Price – N306.5

June 26th

Fund Price – N360.5

Return –  24.4%

Ranking – Fourth

Commentary: The Legacy Bond Fund is the best performing mutual fund if you are looking for dollar-denominated fixed-income debt securities like Eurobonds. At 24.4% they seem to be holding bonds with good yields and market values respectively. Apart from the Bond Fund, managers of the Legacy Bond Fund also manage a Fixed Income Fund, a Money Market Fund and an Equity Fund. If you are looking to invest in Eurobonds then this mutual fund is the best performing.


Vantage Dollar Fund

Investment One’s Vantage Dollar Fund (launched in 2018) is a SEC registered open-ended Unit Trust Scheme in Nigeria. The Fund seeks to provide investors with a bias for Dollar-denominated securities access to such securities, which ordinarily would be inaccessible to them by virtue of the minimum amount typically required to make such investments. It will invest primarily in Corporate and Sovereign Eurobonds.

December 27th

Fund Price – N401.02

June 26th

Fund Price – N469.2

Return –  17.0%

Ranking – Fifth

Commentary: This is the second dollar mutual fund on the list and the second from Investment One to make the list of best 5. It appears they have a hang on fund management. Dollar Mutual funds are a great source of investments and it is great to see another in the top 5. Thus, if you want another option, then this is one you can also go for. 


Bubbling Under: The following funds make up the rest of the top 5 on our list and in descending order.

6. AIICO Balanced Fund
7. VI ETF
8. Coronation Fixed Income Fund
9. CEAT Fixed Income Fund
10. United Capital Euro Bond Fund

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Funds Management

Why the NSE Pensions Index should be replaced

To what extent is the NSE Pension Index an appropriate benchmark?

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The Nigeria Stock Exchange recently announced that the Index Governance Committee of the Exchange “has reviewed the eligibility criteria for the NSE Pension Index (“The Index”) in line with changes in the regulatory and market requirements”.

According to the chairman of the committee, Mr. Abimbola Abdulazeez Babalola, “The review of the Index was made imperative by the need to ensure that it continues to represent the appropriate benchmark for evaluating the Pension Fund Assets equity portfolios and remain suitable for all market stakeholders. The review further takes into consideration the changes in guidelines as specified in the Pension Reform Act 2014 and Amended Regulation on Investment of Pension Fund Assets as advised by the National Pension Commission (PENCOM) as well as market requirements in the amendments”

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READ ALSO: Global pension assets rose to $32 trillion in 2019

About NSE Pension Index

According to the Nigeria Stock Exchange, “The Nigerian Stock Exchange in order to deepen the market introduced the Pension Index and exposed to the investing public in 2015. The creation of the NSE Pension Index has provided benchmarks tracking mechanisms for Pension Fund Administrators and other Users that follow the PENCOM guidelines. The NSE pension tracks the top 40 companies in terms of market capitalization and liquidity. It is a total return index and is weighted by adjusted market capitalization, a capping factor, and a free-float factor”

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Appropriateness of the NSE Pension Index

As noted already and as avowed by the chairman of the Index Governance Committee, “The review of the Index was made imperative by the need to ensure that it continues to represent the appropriate benchmark for evaluating the Pension Fund Assets equity portfolios”, however, the question that comes to mind is to what extent is the NSE Pension Index, as constituted, an appropriate benchmark for evaluating pension fund portfolios? To answer this question, I will be looking at what an appropriate benchmark should be and take a look into the constituents of the NSE Pension Index in comparison to the asset allocation of pension funds in Nigeria.

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What is a good Benchmark?

According to the CFA Institute, for a benchmark to be a valid and effective tool for measuring manager performance it has to be unambiguous, investible, measurable, appropriate, reflective of current opinions, and specified in advance. Without delving into the meaning and implications of all the qualities of a good benchmark noted above, I will be dwelling on the appropriateness of a benchmark. For a benchmark to be appropriate, it has to be in line with and account for the investment style or style characteristics of the fund or manager whose performance is to be evaluated by the benchmark. What that means is that, if a fund or manager invests in small-cap growth stocks, then the benchmark should be made up of small-cap growth funds. A benchmark that does not take into consideration the investment style of the manager or fund, will remain ambiguous when it comes to whether the fund or manager out or underperforms the index or benchmark.

READ ALSO: About 33% of pension funds, hedge funds now own digital assets such as Bitcoin

How to test a Benchmark for appropriateness

The taste of the pudding is in the eating, the saying goes, in the same way, a good benchmark can be tested by performing a correlation analysis of the bench mark’s return versus the return of the fund or manager’s return. The higher the correlation, the better the benchmark.  Analysts at Quantitative Financial Analytics carried out a correlation analysis of Nigerian pension funds and the NSE Pensions Index using beta, as a measure of correlation and the result is startling. The result indicates that there is very low correlation between pension funds and the NSE Pensions Index. The three pension funds with over 10% correlation coefficient happen to be those with the highest exposure to equities in their portfolio asset allocation.

Conclusion

The NSE Pension Index is made up of the top 40 companies and these companies full into the asset class of equities. However, 100% of the pension fund in Nigeria allocate less than 10% of their asset to equities and 90% to treasury bills and other fixed-income securities, therefore, using an index that is 100% equity-based to evaluate funds with less than 10% exposure to equities, is in my opinion inappropriate. It is akin to comparing apples and oranges. The NSE should come up with a customized index or Benchmark that lines up with the asset allocation or investment style of pension fund managers, otherwise, those fund managers will be charging pension funds for outperforming an index (especially during bad times for the stock market).

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