Despite last week’s launch of Nigerian Exchange Limited (NGX) Exchange Traded Derivatives (ETDs) Market, with the listing of two Equity Index Futures Contracts, NGX 30 Index Futures and NGX Pension Index Futures, poor participation of the Pension Funds Administrators (PFAs) in Nigeria’s stock market is a major factor responsible for liquidity challenge in the market.
NGX had on Thursday announced the launch of West Africa’s first ETD market to drive innovation and respond to stakeholders’ needs, while using the milestone as a critical step towards consolidating its place as the sustainable Exchange championing Africa’s growth.
In specifics, the ETDs market will complement existing asset classes by providing investors and other market players with the necessary tools for tactical asset allocation. In addition, the market is expected to attract foreign capital flow, reduce the cost of capital and deepen the market.
However, at less than 15 per cent of the country’s Gross Domestic Product (GDP), the NGX has continued to trail behind those of other countries in volume, liquidity and depth.
Operators are worried about the market’s inability to secure a substantial amount from the Net Asset Value (NAV) of the country’s pension funds, which was ₦13 trillion as at last year.
The total assets under the Contributory Pension Scheme gained ₦340 billion in two months and rose to N13.76 trillion at the end of February, as contained in the National Pension Commission’s latest report, titled ‘Unaudited report on pension funds industry portfolio for the period ended February 28, 2022.
The funds, which ended December 31, 2021 at ₦13.42 trillion rose to ₦13.61 trillion as of the end of January 2022. The data showed that ₦8.51 trillion of the total funds was invested in Federal Government securities, comprising bonds and Treasury Bills, in February.
Other investment portfolios where the funds were invested include domestic and foreign ordinary shares; corporate debt securities comprising corporate bonds, corporate infrastructure bonds, corporate green bonds, and supranational bonds.
PenCom also disclosed that the total number of workers with Retirement Savings Accounts (RSA) rose slightly to 9,589,721 by February ending from 9,529,127 as of end of December 2021. The Pension Reform Act inaugurated in 2004 provides a contributory arrangement in which the employer and employee contribute to workers’ RSAs.
The total pension fund invested in the market was ₦913 billion as of November last year. The amount is seven per cent of the total fund, which is 23 per cent less than the 30 per cent permissible investment set by the Regulation on Investment of Pension Fund Assets issued by PenCom in 2019.
This suggests that there is still unleveraged approximately ₦3 trillion in the pension pool. When tapped, experts have suggested, the amount would provide the much-needed liquidity to stimulate the market. The potential investment fund is about 12 per cent of the current total market capitalisation.
While pension assets have become a major source of domestic capital formation, with a large chunk of it invested in treasury bills and bonds, findings have suggested that PFAs have continued to distance themselves from the equities market. This is said to have been partly responsible for the low level of liquidity. A total of ₦11.36 trillion or 88.9 per cent of the assets is invested in public debt instruments.
Under the Multi-fund Investment Structure introduced by PenCom, PFA pension assets can be invested in six categories: public debt instruments, mutual funds, infrastructure, real estate and private equities.
As equities suffer neglect, the financially starved FG sees contributory pensions as cheap source of funding its programmes. But anxiety has continued to mount over relentless moves by the Federal Government to dip finger into retirement savings accounts of Nigerians. This is as trust in government has waned following governance failure in the public system for lack of transparency, corruption and non-accountability of public resources.
The fear of contributors is aggravated as the 2023 political activities gather momentum, fueling suspicion that such credit could be used to finance politics rather than infrastructure development.
This coincides with the decision of the Chinese government to stop further loans to the Federal Government. Specifically, government is seeking to obtain the facility to finance transport sector projects between 2021 and 2025, hoping that the pension sub-sector would provide a leeway.
Speaking on the development, Ogunmoyebi Olusegun, who retired from civil service in 2017, said the trouble with government is the doubt that it may not honour repayment schedules.
“Going by experience, it is usual for public funds to disappear without any trace of the projects they were supposedly expended upon. If this happens again, not only will repayment become difficult, the future and welfare of pensioners may be compromised. Surely there is a need for serious consultation before subjecting retirees to such a risky venture,” he said.
Another retiree, Opeyemi Ibitoye, also condemned government’s regular recourse to pension funds. According to her, the present administration has failed Nigerians, and there is nothing to show that it has changed.
On PFA’s apathy for the equities market, president of Standard Shareholders Association, Godwin Anono, said the increased volatility and illiquidity witnessed in the stock market since the global financial crisis of 2008 and 2009, followed by PFAs’ poor patronage of the equities market have continued to trigger a persistent downturn in the NGX, raising more questions regarding the timeframe for the end of the weak performance.
According to him, the persistent apathy and waning investor confidence that have bedeviled the nation’s stock market in the past few years have continued to reflect on market indices and trigger a fall in share prices of listed firms as most blue-chip stocks have fallen to a 10-year low.
Head of Equity Trading, Planet Capital, Paul Uzum, said: “As a result, the market becomes very fragile and susceptible to trading activities of foreign portfolio investors and their reactions to events taking place in other markets,” he explained.
He insisted that the positive performance for the stock market does not need to rely on foreign portfolio investor participation to have a thriving market, noting that the market would be liquid to consistently hedge against the prevailing volatilities, if the pension industry will increase their exposure in the stock market.
Unfortunately, this has been the case and the main reason for an underperforming state of the nation’s stock market.
As of June 2020, pension funds in Nigeria had a total of ₦524.7 billion invested in the stock market representing 4.73 per cent of gross asset value. By September, the end of the third quarter, it was just ₦585.7 billion, increasing by about ₦60 billion. But by the end of the year, total pension fund investment in the stock market had catapulted to ₦858.4 billion, 6.9 per cent of gross asset value.
The three months of persistent rally from PenCom investment resulted in an unprecedented rebound that lifted the index by 50 per cent by the end of 2020, making Nigerian stock the best performing globally.
Therefore, Uzum suggested that government initiates a policy directive that would cause fixed-income yields to decline precipitously to offer a respite to equities and boost the patronage of these segments of investors in the stock market. He also tasked government to create incentives that would attract more quality companies like Globacom and Dangote Refinery to be listed on the stock market.
Further, he called for the review of the PenCom regulation on investment of pension fund assets, which pegged 30 per cent as a maximum cap that will go into the nation’s bourse, whereas some countries permit PFAs to invest as much as 50 per cent of pension assets in equities.
According to a recent OECD report, pension funds were mostly invested in equities and bonds at the end of 2019. “Pension funds held more than 75 per cent of their portfolios in equities and bonds in 16 out of 36 reporting OECD countries and in 17 out of 28 other reporting jurisdictions,” the report stated.
This is quite huge compared to Nigeria at just seven per cent. He cited lack of depth and presence of investible securities as part of the reasons for the PFAs low patronage of the market.
Uzum argued that pension funds will rather channel most of their funds into risk-free investments like FGN Bonds, Treasury Bills and other FGN Securities, which make up a combined 67 per cent gross asset value.
Most of the funds end up in government coffers and are used to fund recurrent expenditure and some of the capital projects slated in the budget, thereby starving the Nigerian economy of capital market activities in the stock market, which is a key source of capital formation in any economy.
“This is because our market is too small and semi illiquid, if they put in so much, they stand a chance of losing so much due to illiquidity. Secondly, fixed-income investments are more attractive in Nigeria than equities.
“For instance, if I can earn 12 per cent to 13 per cent on a 10-year government bond without any risk, why should I buy a risky asset? Mind you, these PFAs must render periodic returns to PenCom on the performance of assets under management,” he said.
For Vice President of Highcap Securities, David Adonri, the period when the yield on debt fell drastically in 2020 due to the expansionary monetary policy of government was when pension assets invested in equities rose sharply. However, he noted that in 2021, most of those assets migrated back to debt due to the rising yield on debt.
Consequently, to attract investment of more pension assets to equities, he noted that the yield must surpass the one on debt. According to him, the fundamentals of equities must be sound to increase their profitability and safety.
Adonri argued that from the breakdown of both the regulatory investment limits and the 2021 investment pattern, it is clear that the goal of investment of pension assets is safety, coupled with the maintenance of fair returns.
In their quest to minimise risks attendant to capital market investment, PFAs can only invest pension assets in eligible equities with a consistent record of profitability and dividend payment.
He also noted that PFAs are not allowed to trade in financial instruments with pension assets at prices that are prejudicial to the pension fund assets. This is to discourage speculation in volatile and junk equities.
MEANWHILE, PFAs invested ₦74.54 billion in infrastructure from the ₦13.76 trillion under the Contributory Pension Scheme as of the end of February 2022. This was contained in the latest figures obtained from PenCom.
Investors have continued to lobby operators of the scheme to pump more of the funds into infrastructure development. Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, said the bank was seeking to access part of the pension funds for infrastructure projects. He said this at the InfraCorp term-sheet signing event in Lagos.
According to him, InfraCorp is a government-backed infrastructure investment vehicle established and co-owned by the CBN, Africa Finance Corporation, and Nigeria Sovereign Investment Authority (the promoters) and managed by its own board and management.
He said InfraCorp would mainly leverage public-private partnerships to unlock assets for the development and completion of projects.
THIS is as enrolment of new members into the Contributory Pension Scheme fell by 38 per cent in five years to 257,462 in 2021 from 411,258 in 2017, driven by persistent non-compliance in 22 states.
Analysis of yearly PenCom reports shows that new membership into the scheme, as reflected by the number of new RSA created, declined during this five years period with the exception of 2018.
According to PenCom data, new membership into the CPS fell by 11 per cent, year-on-year (YoY) to 411,258 in 2017 from 462,632 in 2016.
While new membership rose by 57 per cent to 645,346 in 2018, it however fell by 26 per cent to 480,279 in 2019. The downward trend continued in 2020 and 2021 as new membership fell again by 33 per cent and 20 per cent respectively to 322,129 and 257,462.
The above trend led to a steady slow down in the growth of total membership under the CPS, in five years from 2017 to 2021.
Among other things, a major cause for the downward trend in membership enrollment is the persistent non-compliance by 22 states, which is in spite of agitations from workers, coupled with efforts of PenCom to bring all workers into the scheme.
The states are Kebbi, Rivers, Plateau, Borno, Akwa Ibom, Cross River, Bauchi, Katsina, Ondo, Niger, Ogun, Kwara, Bayelsa, Kogi and Abia.
Others are Taraba, Imo, Sokoto, Adamawa, Ebonyi, Nasarawa and Enugu.
Further analysis of the status of compliance by the 22 states shows that 16 states have enacted pension laws but are yet to commence implementation, while six states still have pension bills pending in their various state Houses of Assemblies. The six states are Plateau, Cross River, Borno, Akwa Ibom, Bauchi and Katsina.