Yields from fixed income market help contributory pension assets grow 16% in 2016

Nigeria’s pension industry’s assets under management bucked all micro-economic headwinds thrown at it in 2016 and grew to about N6.15 trillion, a rise of 16% compared to the N5.3 trillion posted in 2015. The growth was chiefly driven by higher yields offered on the fixed income market, a factor that kept it resilient against contraction recorded in monthly contributions, a May 2017 survey by Agusto & Co shows.

About 80 percent of pension assets are invested in treasury bills and government bonds, which have attracted high yield recently as government turns to the fixed income market to fund its budget deficit. This, according to analysts, has been salutary to the outcome of the industry assets in view of the improved returns.

Typically, pension funds administrators are encouraged only to invest in less risk instruments and were particularly advised to invest in eligible bonds, sukuk or other debt instruments issued by state/local governments and corporate entities that are fully implementing the contributory pension scheme.

Businessamlive investigations indicate that in recent times, treasury bills rates have hit double digits, with rates ranging from 18-18.6% for maturity dates of 364 days. This is as a result of the CBN trying to drive economic activities by offering high rates to attract offshore flows into Nigeria, since a continuous drop in oil prices have affected government revenues.

Analysts say the impressive performance of the treasury bills segment may have to do with the high yield and the relative risk in the investments, which may have benefited pension funds, despite declining contributions on the back of job losses in the year under review.

The CBN has been selling bills more than projected at yields below inflation in recent months to curb borrowing costs as government aims to fund half of this year’s forecast budget deficit of N2.36 trillion through the domestic market. Nigerian government fiscal policies are also encouraging more investment in treasury bills at the detriment of the productive sectors, where the public sector is crowding out the private sector from the loans market.

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Specifically, attractive yields have pushed treasury bills investment in the fixed income market to account for as high as 88.67% in May 2017, according to FMDQ OTC monthly report for the same month. Equally, FGN bonds’ outstanding value increased by 1.62% (₦0.11trillion), month-on-month, to close at ₦6.93 trillion in the period under review.

Treasury bills are short-term debt instruments issued by the Federal Government through the Central Bank of Nigeria to provide short-term funding for the government. They are by nature, the most liquid money market securities and are backed by the full faith and credit of the FG. They are usually issued for tenors of 91, 182 and 364 days at the primary market auction held fortnightly by the Central Bank of Nigeria.

Figures contained in the Agusto pension industry survey also revealed 12.1% of respondents have decided to move to another PFA when the transfer window opens whilst 35.4% remain undecided. The level of competition amongst PFAs is set to intensify.