How pension fund administrators can leverage savings for national infrastructure development

In March 2022, the assets under management of the Nigerian pension fund industry were valued at the equivalent of $33.4 billion. Representing 19% of Nigeria’s GDP, these funds, properly invested and deployed, represent an opportunity for the country to address its $100 billion annual infrastructure deficit.

Despite recent Nigerian legislation revising pension fund allocation to allow for a wider range of investments, Nigerian pension fund trustees continue to make only limited allocations to infrastructure funds. Even when combined with private equity and real estate investments, recent infrastructure allocations have fluctuated between 1.5% and 2.1% of assets under management. In contrast, pension fund administrators in Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom and the United States allocate well over 26% of funds to real estate, capital -investment and infrastructure.

A combination of misunderstood regulation, limited knowledge of alternative assets and the perceived risk-free returns offered by fixed income investments has kept Nigerian pension fund administrators away from alternatives in general, and from infrastructure in particular.

To date, the allocation of pension investments to fixed income instruments (issued by Nigeria’s federal and state governments) has averaged 67% over the past 10 years, in line with government borrowing backed by decisions monetary policy in a volatile environment. Just as historically the large allocation to government instruments was driven by regulation, so too has the recent introduction of a multi-fund structure, a welcome legislative attempt to redress the concentration of fixed income investments. in state securities.

Admittedly, the preponderance of fixed income investments in Nigerian pension funds produces mixed results. While the top five Nigerian pension fund administrators generated positive inflation-adjusted returns in 2019 and 2020 (averaging between 1.6% and 3.0%), actual returns in 2018 were negative 7. 2%. In 2021, the average returns of the top five pension fund administrators were 9.9% below inflation, underscoring the fact that average returns over the past four years have been largely negative when adjusted for inflation, for the top five pension fund administrators.

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With that in mind, it’s surprising that more pension fund trustees haven’t seized the opportunity to increase their allocation to investment opportunities in energy, transport, communications, real estate and technology. drinking water that abounds. These domestic opportunities provide a hedge against a volatile global macroeconomic environment by providing the ability to generate consistent positive domestic returns over the long term.

The most recent changes to Nigerian pension fund legislation allow fund administrators to aggregate age and risk profiles, allocating investments across four levels of risk and return appetite. Fund One, for example, is an optional fund, requiring contributors to formally sign up — in writing — to the fund. This fund caps alternative investment at 20%, depending on the composition of the assets. Fund Two (with a 10% cap) is aimed at younger contributors, aged under 49, with a greater appetite for risk. As such, among this segment and in line with what is seen globally, one would expect higher levels of investment in more revenue-generating alternatives.

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Instead, if Nigerian pension fund administrators use recent legislation to differentially invest for different age groups and risk profiles, as the legislation now allows, they can channel more of their investments in pension funds towards potentially more profitable investments in national infrastructures. This will provide Nigerians under the age of 49 with the opportunity to earn more during their younger, more risk-resilient years. It also represents a huge opportunity for Nigeria to actively leverage its vast pool of pension fund assets to address the country’s infrastructure backlog.

Thus, Coronation Asset Management’s vision describes how Nigeria can independently mobilize national pensions, rather than global debt, for national development, unlocking sustainable growth by leveraging the country’s risk-managed long-term funds. .

Dolores W. Simon