Unease as PFAs Fund Banks Balance Sheet with Retirement Savings
Analysts have expressed concern over the use of retirement savings account by Pension Fund Administrators (PFAs) in the country to fund banks’ balance sheet as operators shunned investment in Treasury Bills for bank placements as the industry’s asset expands.
In a review Cowry Asset Limited, a leading investment banking firm see the move as risky, citing that the move exposed retirement savings to the whims of banks, and a possible economic downturn that could trigger increased non-performing loan in the sector.
In a report for last year performance, the National Pension Commission (PenCom) said the net value of pension assets inched up by 9.09% to hit N13.42 trillion as of year-end 2021 from N12.31 trillion as of December 31, 2020.
According to the report, a sizable chunk of the pension fund assets was invested in FGN securities. In its market commentary note, Cowry Asset Limited said it saw renewed interest in bank placements given the weak appetite of the fund managers in consolidating their positions in treasury bills securities.
Specifically, the share of FGN bonds to total assets increased to 62.01% (or N8.33 trillion) in the period under review, from 60.00% (or N7.38 trillion) it printed in December 2020.
However, PFAs’ investments in T-bills shrank year on year on year by 59.30% to N255.70 billion in 2021 from N628.22 billion recorded in 2020 amid crystalizing interest rate risk – treasury bills rate for 364-day rocketed to 9.15% in June 2021 before settling at 4.9% in December 2021 from a very low of 1.21% printed in December 2020.
As investment in treasury bills plunged, Cowry Asset noted that the share of FGN Securities to total assets moderated to 65.35% in 2021 from 66.07% recorded in 2020.
“We observed that money moved out of T-bills securities to Local Money Market Securities (LMMS), especially bank placements”.
Hence, total funds invested in this investment category rose by 20.04% to N2.03 trillion in December 2021 (lifting its share of the total assets to 15.09%), from N1.69 trillion in December 2020 (or 13.71% of total assets).
A further breakdown shows that the total invested funds placed with banks as a percentage of total pension fund assets stood at 14.64% (or N1.97 trillion) in 2021, rising from 12.44% (N1.53 trillion) in 2020. Meanwhile, investment in commercial paper that accounts for 0.44% of investment in pension fund assets decreased to N59.41 billion from N156.69 billion (constituting 1.27%).
For corporates debt securities, analysts at Cowry Asset stated that the amount invested in this space increased by 12.93% to N943.34 billion in 2021 from N836.34 billion in 2020. Read: PFAs Reduce T-Bills Holdings, Pump Funds into Banks, Stocks
Also, its proportion to the total pension fund assets rose marginally to 7.03% from 6.80%. Similarly, investments in Sukuk and Green Bonds improved as their respective shares of allocated pension assets stood at N118.31 billion and N59.32 billion in the year under review, increasing from N93.55 billion and N13.81 billion respectively 2020.
Cash and Other Assets which constituted 0.53% (or N71.37 billion) of the total pension fund assets in 2021 fell from 0.99% (or N122.80 billion) in 2020. Funds invested in Real Estate Properties as a fraction of the total pension fund assets decreased to 1.17% (or N156.79 billion) from 1.30% (or N159.70 billion) in the period under review.
Meanwhile, pension fund assets investment in the domestic equities market rose to N915.31 billion in 2021 from N858.46 billion in 2020; albeit, the weight of total pension funds in the local equities market decreased marginally to 6.82% from 6.98%.
The equities market received better “patronage” from “RSA FUND II” and “RSA FUND III” as their total invested funds increased to N629.10 billion and N130.05 billion respectively in 2021, from N571.17 billion and N126.95 billion respectively in 2020.
“We note that the increased risk appetite of PFAs for Bank Placements was essentially to access better yields in the short-term. This is in addition to their increased participation in the equities market in 2021 amid sustained economic recovery, although still considered fragile”, according to Cowry Asset analysts’ note.
In Q1 2022, Cowry Asset expects pension fund managers’ to stay invested in bank placements and the equities market even as they renew interest in T-bills as yields become better.
“We are however wary of PFAs’ increasing appetite for funding the banks’ balance sheets with retirement savings, thus exposing them to the possible whims of the banks and which might also be at risk in the event of an economic downturn which tends to result in higher non-performing loans”, Cowry Asset said in a note. #Unease as PFAs Fund Banks Balance Sheet with Retirement Savings
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