A report from the National Pension Commission (PenCom) has revealed that Federal Government of Nigeria (FGN) securities dominate the asset portfolios of pension funds, making up the largest asset class.

Specifically, FGN bonds account for up to 96 percent of total FGN securities and over 60 percent of the overall asset mix of fund administrators.

The report reveals that investment in FGN securities reached N12.96 trillion in June 2024, marking a substantial 19.4 percent year-on-year growth from the N10.86 trillion in June 2023.

The surge is attributed to the rising yields and high interest rates environment as well as the increased supply of FGN papers by the Debt Management Office (DMO) to meet the Federal Government’s domestic funding targets, amounting to N6.12 trillion in the financial year (FY) 2024 budget.

Notably, despite a 750 basis points increase in the monetary policy rates to 26.25 percent in May 2024 by the Central Bank of Nigeria (CBN), pension fund administrators (PFAs) continued to invest in FGN securities, driven by the relatively safe and stable returns and the prevailing attractive yield environment.

The report revealed that Nigeria’s pension funds industry experienced substantial year-on-year growth, with total assets under management (AUM) witnessing a remarkable 22.21 percent year-on-year increase and a 1.27 percent month-on-month growth.

The AUM soared to N20.48 trillion by the end of June 2024, reflecting a 4.14 percent uptick from the figure recorded in December 2023 and showcasing the industry’s robust trajectory.

Breaking down the AUM by asset class and fund type as at June 2024, the report highlights that a significant portion, 63.3 percent, was invested in Federal Government of Nigeria (FGN) securities.

Corporate debt securities followed at 10.8 percent, with domestic ordinary shares making up 9.6 percent and money market instruments eating 9.3 percent of the total AUM.

Experts from Cowry Assets Management Limited said despite this growth, the industry is deemed underpenetrated, with its total AUM equivalent to only 8.9 percent of Nigeria’s FY 2023 GDP, a notable disparity when compared to the global average of 29.4 percent in 2020, according to World Bank data.

The report also highlights the high growth in pension fund investments in domestic ordinary shares, experiencing a 55 percent year-on-year increase to N1.91 trillion. This surge is attributed to the robust performance of the Nigerian Stock Exchange (NGX), however, hampered by the negative market internals that have continued to buoy weaker investors’ sentiment.

During the first six months of 2024, the local bourse performed well with the All Share Index (ASI) accelerating up 33.81 percent year-to-date, amid second-quarter-end window dressing which resulted in N15.68 trillion worth of gains for equity investors.

On a monthly analysis, the major asset categories, such as treasury bills, registered the highest gain in June, rising by eight percent m/m to roughly N400 billion.

Treasury instruments have benefited from the prevailing elevated yield environment due to the CBN’s restrictive monetary stance and tight market liquidity.

Also, pension fund holdings in domestic equities continue to rise. In absolute terms, the total value of domestic equities increased by 4percent m/m to N1.9 trillion, while FGN bonds, which make up more than half (60 percent) of overall pension assets, amounted to N12.2 trillion in June, implying an increase of almost N141 billion relative to the previous month.

For Cowry Research, “We see the pension industry’s positive growth trajectory playing a pivotal role in Nigeria’s economic development in the mid to longer term. Also, the sustained interest of pension managers in bond securities can be attributed to the MPC’s hawkish posture and the DMO’s increased issuance of FGN paper.

“This is expected to continue with more allocations to Federal Government securities and will be driven by higher yields due to the elevated interest rate environment, sustained by the MPC’s recent modest hike rate of 50 basis points (bps).

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