There is no doubt that pension fund management is not an easy task. Pension fund managers face challenging tasks and juggle differing and oftentimes competing objectives. In the first place, they have a fiducial duty to fulfil, which entails that they must provide a secure retirement for their retirement savings account holders.
In doing so, the fund managers come face to face with the question of how to profitably sustain the financial health of the funds under their management, both in the short and long term. They, therefore, make the hard decision of allocating pension assets to asset classes that not only can provide the desired returns but also meet the risk parameters relating to total loss of capital and liquidity.
However, in an attempt to generate more returns and ensure the long-term sustainability of the funds, pension fund managers have had to over-allocate their assets to risky investments. More often than not, the government through various regulatory authorities and policy or investment guidelines, try to curb, restrict or minimize the risk by stipulating the extent to which a pension fund can be invested in a particular asset class. The problem with such government codifications is that they are oftentimes set in stone and therefore not reviewed or revised in line with changing circumstances.
Analysis of the various pension asset summary reports released by the National Pension Commission, PenCom, gives an indication of the asset allocation of pension funds. According to the analysis, pension fund managers have consistently shifted from Treasury bill investments to Bank Placements and FGN Bonds over the last eight months or so. As at the end of 2019, for example, 18.4% of pension fund assets were allocated to Treasury Bills while 10.3% and 52.4% were allocated to Bank placements and FGN Bonds respectively.
Fast forward to April 30th 2021, pension fund asset allocation to Treasury Bill fell to 5.6%, while allocation to Bank placements and FGB Bonds rose to 13.2% and 60.1% respectively. The same quest for better returns saw fund managers slightly increasing their allocation to domestic equity securities.
De-risking and asset allocation
Though the analysis, as conducted by Quantitative Financial Analytics Ltd indicates that Nigerian pension fund managers are quite aware of what is expected of them in terms of the profitability of the funds under their management, it is expected that fund managers should follow strategies that focus more on hedging their liabilities and less on higher returns.
Fear of bank failures
It is often said in proverbial terms that a child who has been stung by a bee runs away at the sight of a housefly. Nigeria had witnessed bank failures in the past. Failures that resulted in the loss of fortunes. Bank failures are not peculiar to Nigeria, they are universal and can happen anywhere and at any time. During the first four months of the great depression of 1929, 11,000 banks became insolvent in the US leading to consumers and savers losing their savings. The good news is that since the great depression, measures have been put in place to curtail the incidence of bank failures.
The question then is, should anyone be worried about the increasing allocation to bank placements by pension fund managers? I would say not necessarily, at this point, but there may be need for an eye on the trend. The investment committees of the pension fund administration companies in Nigeria should ensure that the bank placements are with banks that can stand the test of time. If possible, they should conduct a periodic stress test of such banks using the methodologies specified by the Basel 3 stress testing principles.
The pension commission, should also independently stress test those banks to ensure that the about N2 trillion of pension assets placed with the banks are safe and recoverable, because as they say, “when it rains, it pours.”