By Chuks Emele
Friday, 25 September 2020
Nigerian pension funds are in a quandary. They’re fighting a lost battle to keep ahead of inflation, but with their hands tied.
Pension funds administrators were among those excluded by the central bank late last from the lucrative Open Market Operations bills, along with individual investors and other non-bank companies. All have been forced to swim in the low-yield waters of bonds and treasury bills.
Pension-fund administrators, whose primary responsibility is to preserve and extend value for their clients, find themselves losing ground with no immediate remedy in sight.
“Finding a place to make enough to keep ahead of inflation is almost impossible now,” said a treasury manager for a Lagos-based pension fund, who spoke on condition of anonymity as he wasn’t authorized to speak. “Bonds and treasury bills are our staple, and now their yields have hit the floor. We don’t know how to face our clients.”
President Muhammadu Buhari’s government has been the primary beneficiary of this market anomaly. An administration desperate to borrow in the face of low prices for oil, its main export, is being regaled with cheap funds it doesn’t deserve.
The situation for the pension funds is made worse by the central bank’s decision to cut interest rate by 1 percent. At 11.5 percent, the low yields on savings will get worse after the regulator pegged it at a minimum of 30 percent of the MPC rate as the monetary authorities push for more funding of production.
In August Nigeria’s annual inflation stood at 13.2 percent, maintaining a steady upward trend. Inflation is expected to quicken in the coming months, driven by food costs, likely reaching a high of around 18 percent by the second quarter of next year, according to analysts at the international investment banking group, Goldman Sachs.
This makes the prospect of pension funds’ earnings beating inflation even less likely. Fixed income earnings are at their lowest in more than a decade, with the 10-year bond at a yield of 9 percent and one-year treasury bills earning just 2.7 percent.
The monetary policy stance that has created the current low-yield environment “will likely be sustained till the end of 2020,” Tajudeen Ibrahim, an analyst at Lagos investment bank, Chapel Hill Denham, said in a September 25 note to clients.
However, Chapel Hill Denham is advising investing clients on the way out. It believes that this is the time to make a pivot to the stock market, where it identified a number of shares that pay good dividends and likely to beat returns offered by fixed-income investments.
“The valuations of the high-dividend yield stocks are cheap, presenting attractive entry, re-entry points,” Ibrahim said.