How pension funds reel from negative real interest rates

MICHAEL ANI & OLUWAFADEKEMI AREO

Acollapse in yields on Nigerian assets is leaving pension fund administrators ( PFAS) with no choice but to plough back pensioners’ funds into assets offering rates below inflation.

Nigeria’s biggest institutional investors, the PFAS, are reeling from a negative real interest rate environment, after a host of Central Bank of Nigeria’s (CBN) policies aimed at boosting growth in a fundamentally weak economy, restricted them alongside other local investors from investing in high yielding short- term OMO bills instruments.

That sparked a massive influx of liquidity into other asset classes, particularly T-bills and Bonds, sending the yields on these assets to lower lows below the rate of inflation.

Even though the PFAS are making a killing for now, from the bond rally, by trading a part of their already invested long-dated bonds, and using capital gains from these bonds to reward clients with interest above inflation; they are still faced with huge ‘reinvestment risk’ when they make a new purchase, forcing them to reward pensioners with returns far lower than inflation.

“The biggest challenge for most institutional investors, particularly the PFAS, is reinvestment risk,” said Yomi Sadiku, head of investment, Lagos-based pension firm, AIICO Pension.

According to Sadiku, as PFAS investment in OMO matures, they have to look for where to invest that money but they definitely

FINANCIAL REPRESSION SERIES

cannot go into T-bills anymore because the rates are too low. “The bond markets that we could have gone to as well, the interest on the bond market is also very low. So, unfortunately, there is nowhere we can go.

“This year, a lot of the PFAS have classified their bond as available for sale, it would appear they have outperformed everybody else, because of course, as yields continue to go down, the price of these bonds go up, but next year, there is nothing they can do,” Sadiku said.

Average interest rates on short-term T-bills have tumbled to 1.3 percent from the high of 14 percent some two years ago, while yields on bonds are sitting as low as 7 percent, according to data from securities trading platform, FMDQ.

While the low-interestrate environment has become a major win for both the Federal Government and large corporates, providing them soft landing to borrow at low cost, it has come with so much pain for pensioners whose funds are collected largely by the government but are rewarded with returns below the country’s inflation.

Between April and July this year, the Federal Government raised N7.74 billion in bonds, down by 3