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Pension Funds downsize investments in states by 36%

Raise stakes in FGN securities by 13%

Analysts blame states’ weak finances, non-compliance with pension law

By Nkiruka Nnorom

Pension Funds Administrators (PFAs) are now downsizing their investments in state governments’ bonds amidst fears that the states’ financial stability and their commitment to pensions are questionable.

Financial Vanguard’s findings in the data from the National Pension Commission, (PenCom) shows that the PFAs’ investments in state government securities fell by a huge 36 percent to N97.89 billion in the first half of 2021 (H1’21) from N152.93 billion in the corresponding period in 2020 (H1’20).

But the PFAs’ interest in Federal Government of Nigeria (FGN) securities spiked during the period with their total allocation in the asset class rising to N8.475 trillion, representing about 13.67 percent year-on-year (YoY) growth against the N7.5 trillion allocated to the FGN securities in H1’20. This also represents a 4.6 percent year-to-date (YtD) increase from N8.102 trillion invested in FGN securities as at January 2021.

Moreover, while PFAs’ investments allocation to state government securities accounted for mere 7.7 percent of their total investments during the period, the allocations to FGN securities accounted for a whopping 66.96 percent of the total PFAs investments within the period.Total PFAs investment for the six month period stood at N12.66 trillion.

Additionally, the Pension Funds allocation to the state governments’ securities fell by 26.7 percent YtD from N133.57 billion in January, 2021. 

States’ pension status

As at second quarter of 2021, Q2’21, only 24 states of the federation and FCT Abuja had enacted pension laws on Contributory Pension Scheme (CPS), while seven states were at the bill stage, 17 years after the initial Pension Act mandated them to do so.

Five states are operating other pension schemes, four of which have adopted the Contributory Defined Benefits Scheme (CDBS), while one, (Yobe State) operates the Defined Benefits Scheme (DBS). 

Financial Vanguard check shows that Akwa Ibom, Bauchi, Borno, Cross-Rivers, Gombe, Jigawa, Kano, Katsina, Kwara, Plateau, Yobe and Zamfara are yet to key into the contributory pension scheme as at the end of June,  2021.

PFAs investments in FG securities

Meanwhile, Financial Vanguard’s findings in the profile of PFAs commitment to the FGN securities showed that FGN bonds accounted for a chunk of the investment stake, representing 92.21 percent of the PFAs’ investment and 61.7 percent of total PFAs investment in the review period. A total of N7.8 trillion was invested in FGN bonds during the period.

Treasury Bills (TBs) followed, accounting for 6.5 percent of the PFAs investment in FGN securities at N548.13 billion, while FGN Sukuk ranked third in the scale of their investment with N86.1 billion, representing 1.02 percent of PFAs investment in the federal government’s securities.

Agency bonds (Nigeria Mortgage Refinance Company) and Green Bonds placed fourth and fifth with N13.6 billion and N12.88 billion total investments, representing 0.17 percent and 0.15 percent of FGN securities respectively.

Analysts’ observations

The PFAs’ downsizing in States’ bonds, according to financial investment experts, was due to the failure of many of the states to key into the CPS as well as the high rate of default by the state governments to fulfill their debt obligations, a situation they linked to their financial stress. 

According to them while the federal government securities have higher advantage over the state government securities being risk free,  the states would need to address their weak financial positions and also comply with the pension laws to be able to attract more investors,  including the PFAs. 

According to Victor Chiazor,  Head of Research,  FSL Securities, investments in FGN securities by PFAs would continue to rise as it remains not only a risk free investment but it also has a low chance of restructuring the repayment obligations. 

“Over the years, we have seen most of the state governments restructure some of their debt obligations because of their inability to make payments as at when due.

‘‘Furthermore, the PenCom amended investment regulation note 2.8 under its general principles, restricts PFAs from investing in corporate entities or state/local governments that have not fully implemented the contributory pension scheme. 

“As of today, most states are yet to implement the scheme and this makes it impossible for any PFA to invest in such states.

‘‘For this to change, state governments must effectively comply with this scheme as well as improve on the states’ finances as no PFA will invest funds in any state yet to comply or with a weak financial standing.” 

Agreeing with him, David Adonri, Managing Director/CEO, Highcap Securities, affirmed that pension fund administrators are concentrating more resources in FGN securities and reducing exposure to that of the state governments due to the deteriorating financial state of most of the states.

In his Words: “Pension fund is invested to generate appropriate profit, meet liquidity parameters and be safe. To attain these objectives, the regulatory body, PENCOM, set rules and guidelines prescribing the maximum exposure of pension funds to various investment assets.

“Based on risk factors, the safest instruments to invest in are sovereign or national debt instruments like Treasury Bills and FGN bonds. Sub-national instruments like state and local government bonds are much riskier and PENCOM guidelines limit the exposure of pension funds to them.

“PFAs are shifting more resources to FGN bonds and reducing their exposure to state government debt because of their deteriorating financial fundamentals. Risk of default by state governments in servicing their debt has heightened. Hence, the reluctance of PFAs to invest in Sub-national debt.”

In his views,  Mallam Garba Kurfi, Managing Director/CEO, APT Securities and Fund, said: “Most PFAs are not investing in state bonds because it is either that most of them have not implemented pension policy in their states or the Act has been established but not implemented. The whole North Eastern states have not started implementing the CPS, yet they came to the capital market to borrow like Yobe, Bauchi, Adamawa and Gombe states. The same with North Western states. 

“The other reason is due to default or extension of the repayment period as in the case of Niger and Osun states at the time of maturity.”

Kurfi stated that investors are more likely to invest in federal government securities because of the high yield or high interest and they are generally easy to trade. He added that FGN securities have the Central Bank of Nigeria (CBN)  guarantee. 

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