Nigerian pension funds are consistently failing to
deliver inflation adjusted returns to Retirement Savings Account (RSA)
contributors, leaving them exposed to losses on assets accumulated over time.
On a real return basis (returns adjusted for
inflation), the value of PFA returns have been declining, while Net Asset
Values (NAVs) have been growing on a nominal basis.
According to a working paper received by
BusinessDay, which shows the results of the performance of pension fund
administrators from 2006 to 2014 and the impact of inflation on the RSA
returns, RSA holders have been losing an average of three percent on their savings every
year, for the last seven years.
The pension fund administrators which the study
covered, include: AIICO pensions, ARM Pensions, FUG, IEI, Legacy Pensions,
Penman, Pal Pensions, Stanbic IBTC Pensions, Trust Fund, and Sigma Pensions
The study collected publicly available data on the
Net Asset Values per share, of 10 out of the 21 public PFAs between December
2006 and December 2014.
The results of the paper showed that on average, PFAs
returned about 9.95 percent between years 2006 – 2014, with 2007 showing the
highest rate of return (22.06 percent) and 2008 showing the worst rate of
return (0.62 percent).
Inflation however stood at an average
of 10.3 percent for the review period.
“In the guidelines instructing the investment
universe of PFAs, it seems that the impact of inflation on RSA returns has not
been fully considered,” says Oladayo Oduwole, author of the working paper, and
an alumnus of the Center for Computational Finance and Economic Agents, United
Kingdom and the Imperial College London.
“The priority of pension fund administrators should
be to keep returns well ahead of inflation at most times,” he said.
The Sharpe ratio of PFA returns, which shows the
average returns earned over and above the risk-free rate stood at
-0.81 for the review period.
The Sharpe ratio is an industry standard in
examining the performance of an investment by adjusting for its risk.
The ramification of the Sharpe ratio is that a
portfolio engaging in zero-risk investment, such as the purchase of government
bonds (for which the expected return is the risk-free rate), has a Sharpe
ratio of exactly zero.
Therefore, by subtracting the risk-free rate
from the mean return of the investment, the performance associated with
risk-taking activities can be isolated.
This means that PFAs returns even underperformed the
returns on government securities.
“Based on this result, one can conclude that
considering the underlying interest being served, the pension industry is not
adequately delivering the right level of returns to Nigerian workers and their
savings are being depleted by inflation,” the paper said.
“Year on year, each naira saved by workers is worth
less than it was the previous year. The industry therefore needs to change to
deal with ‘inflation eating into workers’ pensions,” it said further.
Boosting their equity stakes could help PFAs
outperform inflation; however they are doing the exact opposite and moving
cash in treasury bills and bonds.
“You know most of them got their fingers
burnt in 2008-2010, so you wouldn’t expect a sharp rise in equities investment
by PFAs,” Kayode Omosebi, an analyst at United Capital Plc said.
Total pension fund assets were equivalent to
N4.6 trillion in December, 2014, according to data from Pencom, the industry
regulator.
The Retirement Savings Accounts active fund
account for 62.78 percent of all PFA assets.
The PFA assets invested in domestic ordinary
shares fell to 11.79 percent in December, from 12.95 percent in October, while
allocation to FGN securities rose to 62.77 percent, latest data from Pencom
show.
“I understand that fears attached to equities
holds sway, but the trick here is the timing,” Abiodun Keripe Head, Research
& Strategy Elixir Investment Partners Limited said.
“An easy way to boost PFA returns will be if
they are encouraged to take on more risk.”
PATRICK ATUANYA & IFEBI EDOZIE
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