Expert at Coronation Insurance conference fears erosion of pension assets over high inflation

Bode Augusto, a renowned economist and owners of top rating agency; Augusto& Co has raised concern over rising inflationary trend and impact on the country’s pension assets.

Augusto during a webinar organized by Coronation Insurance in partnership with Access Bank Plc said the short, medium and long terms inflationary trends in the Nigerian economy, which has been hovering around 12 percent over a period now, may jeopardize pension investable funds in the long term, spanning 20 years if the trend is not put under control.

Pension assets he said are classified as monetary assets which returns on investment is tied to the rate of inflation and the strength of a country’s currency.

Classifying pension funds as monetary assets, Bode Augusto said by saving and investing pension assets the investor should think high returns on investment which will be equal to the inflation rate.

“Managing our monetary assets, particularly our savings and pension assets, we need to try to earn a return at it, at least, equal to the rate of inflation. But this is going to be extremely difficult in these climes because the risk-free rate itself is significantly below the rate of inflation and the fixed income securities are priced using the risk-free rate plus a risk premium. So some strong companies in Nigeria today are borrowing at 6,7per cent when the true rate should be much higher than that.” He said.

He said key macroeconomic risks and how it impacts your business’ at a webinar organized by the Coronation Insurance Plc in partnership with Access Bank Plc noted that the macroeconomic three key prices in the economy which would determine investment decision are the rate of inflation, interest rates and exchange rate.

He pointed out that inflationary trend in Nigeria has been hovering around 12per cent over a while and that the analogy suggests that it may continue unabated in short, medium and long term spanning 20 years.

According to him, long term rate of inflation of a dollar is under 2per cent which implies that a dollar loses less than 2per cent of its purchasing power every year while the naira loses 12per cent of its purchasing power every year, stressing that the naira should devalue by that difference in inflation to keep purchasing power parity.

The renowned economist added that any currency that has the rate of inflation significantly below Nigeria’s 12per cent is a stronger currency against the naira. He advised that the country or individual should avoid having net liabilities in dollars or any hard currencies saying that the naira will devalue itself against the currencies and that would mean the need for more and more Nigerian naira to repay debts.

“The Nigerian naira is a weak currency because the rate of inflation of the Nigerian naira is very high. Therefore, we should not owe in hard currencies that is the hard currencies that have a significantly lower rate of inflation like the United State dollars, the United Kingdom pounds, the Euro, the Japanese pounds and so on,” posited Augusto.

“The first one and the most important one, in my opinion, out of the three is the inflation, the rate of inflation currently in Nigeria is around 12per cent but the long term rate is also around about that number. If you take a five-year average, a 10-year average, a 15year average and even a 20-year average are around about that number. So this means that the long term rate of inflation in Nigeria is about 12per cent.