Pension funds are important players in capital markets because of the large amount of funds they hold on behalf of members. The long-term liability profile of pension funds affords them the leeway to invest in long-term investments that could directly impact a country's economic development.
The Nigerian pension industry has recorded exponential growth in recent years in terms of size and value. It has continued to play a significant role in developing the domestic capital markets. The total asset under the management of pension funds in Nigeria, which stood at N14.4 trillion (US$32.7 billion) as of August 2022, has consistently maintained an estimated average annual growth of 10%.
In local currency, total pension assets have over the last decade grown by over 400% from N3.25 trillion in 2012; however, when the official currency devaluation in Nigeria over the same period is factored in, the growth reduced to 83%. If the parallel market rates were to be considered, total pension assets would have recorded negative growth.
Pension managers have traditionally been investing a large proportion of their assets in government securities due to the relatively high sovereign yields, which have historically been above the inflation rate. The current macroeconomic challenges and the continued increase in the inflation rate have made it more difficult for pension managers to earn an inflation-adjusted return with their existing portfolio mix that is concentrated on sovereign investments.
To provide a hedge for pension fund assets against inflation and currency devaluation, thereby protecting the value of pension assets, the National Pension Commission (PENCOM), with the support of FSD Africa, developed the foreign (offshore) investment guideline for pension funds in Nigeria. This is also supposed to provide diversification benefits to pension funds by reducing market concentrations (only 0.1% of the PFA assets are currently invested in foreign markets). Due to FX illiquidity and the capital controls on foreign currency in Nigeria, the PFAs cannot access foreign exchange markets, which poses a challenge to implementing the offshore investment guideline.