Nigeria’s N3.7 trillion ($23.2 billion) pension fund is growing faster than available asset classes to invest the funds in, stoking fears about the emergence of an asset bubble in the near future.
Pension assets in Africa’s second largest economy have surged twelve-fold from N265 bn or about 1.4 percent of Gross Domestic Product (GDP) in 2006 to today’s level, equivalent to 8.5 percent of GDP.
Assets are currently growing at $2.5bn a year, or roughly 1 percent of GDP, per annum.
The explosive growth in pension assets means that fund managers are increasingly chasing the same few stocks, bonds and treasury bills that are currently available as investment options.
Dangote Cement and the banks make up 50 percent of stock market capitalisation, with no listed telecoms name or utility, while avenues to invest in corporate bonds, infrastructure bonds, private equity, commodities and real-estate investment trusts are limited to nonexistent.
“The problem is that when yields normalise, Pension Fund Administrators (PFAs) will be hard pressed to find what to invest in,” Sadiq Mohammed, MD, ARM Pension Managers, whose firm manages N264 bn in pension assets said in a conference in Lagos last week.
“Pension assets are projected to hit $100 bn by 2020, if you struggle with $23 billion today, what will happen then? I presume this may lead to asset bubbles.”
The share of equities in PFA portfolio is capped at 25 percent by the regulator PENCOM, while they are allowed to hold up to 70 percent in government fixed income securities. In 2007, when equity prices were rising rapidly, 30 percent of pension fund assets were in equities.
The fall in equity markets in late 2008 and into 2009 caused a rotation from stocks to bonds and, as of June 2013, less than 10 percent of pension fund assets were allocated to equities and 62 percent in government securities.
However with October inflation at 7.8 percent its lowest level in five years, bond yields are expected to adjust lower narrowing the real rate of returns for PFAs invested in bonds while making equity investments more attractive.
The yield on 10-year benchmark bonds due 2022 is down from 17 percent last year to 12.5 percent today.
The low free float in most listed Nigerian stocks suggests that a modest movement by PFAs towards increased equities allocation would have an outsized impact on stock prices.
“Assuming pension funds continue to grow by $2.5bn a year, and that roughly 20-25 percent are allocated to equities, this is a constant $600mn annual bid for equities,” said Charles Robertson, global chief economist at Renaissance Capital, in a note released September 2012.
Mohammed says the actual free float of stocks available to invest in on the NSE is closer to the N4 trillion mark, than the markets total capitalisation of N12 trillion.
“If you count what the PFAs already hold, it reduces it further,” he said. The fear of a bubble in pension assets is compounded by the fact that the industry is still in a young and growing phase.
It has only 5 million people (10 percent of the working age population) contributing to the scheme with a wall of liquidity (about N5.9 trillion) sitting in bank accounts outside of pension assets.
The worry is that as PENCOM moves to bring the informal sector into the pension scheme, some of that liquidity in the banks will hit the system further driving up asset values.
“The free float in the market is tiny…50 stocks control 90 percent of the NSEs total market capitalisation,” said Michael Oyebola, MD, FBN Capital Asset Management.
“The PFAs buy and hold strategy means too few stocks are being chased by too much capital.”
The dearth of new stock market listings or products has left fewer choices for investment managers to find suitable investments to match future obligations to Nigerian retirees.
“I will have problems in the next couple of years with my asset deployment,” Tunde Alao – Olaifa, Investment Manager at Leadway Assurance, said. “Hopefully we would be allowed to invest in offshore assets or new firms get to list in our markets by then.”