Renaissance Capital, an investment and financial advisory firm, has predicted that Pension Fund Administrators (PFAs) are likely to invest more pension assets in shares of companies quoted on the Nigerian Stock Exchange from next year.
The organisation, which hinged its predictions on the continuous increase in private sector debt, also stated its conviction that going by regulatory limitations the sector might not invest more than N400 billion in shares in the short run.
It also predicted that pension operators would, in line with the thinking of the National Pension Commission (PenCom), invest more in corporate bonds going forward.
These predictions were documented in its latest report titled, “Thoughts from a Renaissance Man: Nigeria’s Pension Funds – An Unsung Story”.
“What we assume is that pension funds will now begin to turn more to equities. The most important long-term reason in our view is of course that private sector debt in Nigeria (34 per cent of GDP in 2011) has tremendous room to rise and the economy has decades of strong growth ahead of it. Both suggest that a higher allocation to equities makes sense.
“In the short term, we still assume that lower bond yield. The 10-year local yield is down from 17 per cent to 12 per cent in the past few months, will encourage banks to start lending, as investing in local securities offer less yield,” Renaissance Capital stated.
“There is a limit in the ability of pension funds to make the switch. They cannot invest more than 25 per cent in domestic ordinary shares, so we estimate no more than N400 billion could switch in the short term,” the organisation stressed.
The firm also predicted that PFAs would allocate more funds to corporate debt securities, which is currently 3 per cent of funds under management.
“In 2011, the regulators raised the cap from 20 per cent to 30 per cent, evidently in a bid to boost interest in this asset class. More demand for corporate bonds will give companies a new source of funding, aside from bank loans, and perhaps encourage banks to lend now, to discourage a possibly permanent shift towards funding from this new source,” it explained.
Renaissance Capital maintained that the above scenario would augur well for the country saying: “Assuming pension funds continue to grow by $2.5 billion a year, and that roughly 20-25 per cent are allocated to equities, this is a constant $600 million annual bid for equities, and one that is only likely to increase in the coming years and decades.”
The firm noted that PenCom was working on a proposal to bring workers in the informal into the contributory pension scheme and that government efforts at creating an enabling environment for businesses to thrive would help this course.
The firm said Nigeria’s pension system was modelled after that of Mexico, which the country felt was an improvement on Chile’s version of contributory pension scheme, adding that government reform effort has started yielding the desired results.
“Growth is expected to be around 6-7 per cent in 2012-2013, the currency is expected to be broadly stable, the 2013 budget may contain an average rate of N160 to US$1, and inflation may end the year at around 12 per cent in 2012 before falling in early 2013, though later in 2013 that may reverse,” Renaissance Capital projected.
It recalled that Pension Reform Act, 2004 provided that every worker in a company employing five people or more must contribute 7.5 per cent of their salary to a Pension Fund Administrator (PFA). The company itself also pays 7.5 per cent of the salary, transport and housing costs of an employee to the PFA.
In addition, it said 5 million people have registered under the contributory pension scheme and pension fund assets having grown tremendously, going up from N265 billion and 1.4 per cent of country’s Gross Domestic Product (GDP) in 2006 to N2.74 billion or almost 1 per cent of GDP and soared tenfold, N700 billion in 18 months.
The firm said the development in the sector was a good omen for the country saying: “The benefits of this are significant, eventually such schemes allow countries like Chile or South Africa to become safe havens during global turbulence due to the size of the pension funds investing in local assets, or in the case of the US and UK, they enable countries to retain AAA ratings from some credit rating agencies because private pension funds are sufficient in size to fund a country’s debt.”
The group also reflected on variations in the allocation of funds to various asset types by PFAs in the past few years, noting that in 2007 when equity prices rose sharply and 30 per cent of pension fund were in invested in equities.
It confirmed that as at June 2012, the rate was 10 per cent, no thanks to the fall in equity markets in 2008 and 2009.
“From 2007 to mid-2012, the biggest shift the other way was into federal government securities, from 34 per cent of total assets to 64 per cent. Given how well bonds have performed in recent months, such a large allocation has been very profitable for the PFAs,” the group further stated.