THE latest unaudited report from the National Pension Commission (PenCom) has underscored the dominance of Federal Government of Nigeria’s (FGN) securities, constituting the largest asset class for pension funds.
FGN bonds, in particular, make up 96 percent of total FGN securities and more than 60 percent of fund administrators’ overall asset mix. The report reveals that investment in FGN securities reached N11.92 trillion in December 2023, marking a substantial 24% percent year-on-year growth.
This surge is attributed to increased supply by the Debt Management Office (DMO) to meet the Federal Government’s domestic funding targets and address the budget deficit in the N23 trillion budget for Financial Year (FY) 2023.
Notably, despite a 225 basis points increase in the monetary policy rates to 18.75 percent by the Central Bank of Nigeria (CBN) in 2023, pension fund administrators (PFAs) continued to invest in FGN securities, driven by the relatively safe and stable returns and the prevailing yield environment.
The report revealed that Nigeria’s pension funds industry experienced substantial growth, with total assets under management (AUM) witnessing a remarkable 22.5 percent year-on-year increase. The AUM soared to N18.36 trillion by the end of December 2023, reflecting a 2.43 percent uptick from the figure recorded in November 2023 and showcasing the industry’s robust trajectory.
Breaking down the AUM by asset class and fund type, the report highlights that a significant portion, 64.9 percent, is invested in Federal Government of Nigeria (FGN) securities.
Corporate debt securities follow at 10.4 percent, with domestic ordinary shares making up 8.6 percent of the total AUM.
Despite this growth, the industry according to PenCom, is deemed underpenetrated, with its total AUM equivalent to only nine percent of Nigeria’s 2022 Gross Domestic Product (GDP) — a notable disparity when compared to the global average of 29.4 percent in 2020, according to World Bank data.
The report also highlights the significant growth in pension fund investments in domestic ordinary shares, experiencing a remarkable 70%lpercent year-on-year increase to N1.57 trillion.
This surge according to dealers from Cory Assets Management, is attributed to the robust performance of the Nigerian Stock Exchange (NGX) in 2023, where the all-share index reached an unprecedented 74,000 index points—a milestone not seen in 15 years since March 2008.
“The market’s resilience is attributed to various factors, including robust corporate earnings, dividend declarations, government led market reforms, and increased interest from both domestic and foreign investors,” the firm stated.
Foreign transactions on the NGX increased by an impressive 113.94percent in November 2023, reaching N71.37 billion, indicating positive investor sentiment.
The domestic investor
segment outperformed foreign investors by approximately 52percent, showcasing a robust performance in the local market.
While real estate and private equity have seen year-on-year growth, they remain a small portion of the overall portfolio.
Other alternative investment classes, such as foreign ordinary shares, infrastructure funds, mutual funds, and real estate, have not gained significant traction in the Nigerian market.
Examining fund types, the report indicates steady growth in Retirement Savings Account (RSA) funds, as more Nigerians participate in the Contributory Pension Scheme.
However, the Retiree Fund accounts for the largest share, representing 58.02%lpercent of total AUM, followed by RSA Funds at 30.59%lpercent, and Closed Pension Fund Administrators (CPFAs) at 1.39percent.
Looking ahead, “we see the pension industry’s positive growth trajectory playing a pivotal role in Nigeria’s economic development in the mid to longer term. The strong performance of the equities market is anticipated to contribute significantly to the growth of total AUM.
“Additionally, expectations for the Central Bank of Nigeria (CBN) to adopt a dovish stance in 2024 and beyond could lead to a tapering of interest rates, encouraging investments in government securities such as bonds and other money market instruments, “Cowry Assets Management stated in a note to clients.
This may particularly benefit fund administrators with longer investment horizons. The firm also anticipate more attractive opportunities for increased penetration into the pension fund space, thereby promoting higher pension savings in Nigeria above the current level.
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