The introduction of the Pension Reform Act 2004 (“Old Act”) led to the creation of a new class of money managers in Nigeria. An objective review of the performance of these money managers hasn’t occurred so far due to the inadequacy of information in the public domain and the infancy of the scheme. This article, discusses the results of the performance of the pension fund administrators, the impact of inflation on RSA returns and the results of a test on the impact of reporting on the performance, in line with the guidelines of the Pension Reform Act.
Pencom is the regulator for the Nigerian pension fund industry and prepares reports annually, quarterly and monthly on the state of the industry. In the third quarter report for 2014 issued by Pencom, the total value of pension assets in Nigeria was N4.6 Trillion. The RSA’s active fund accounted for 62.78% of all PFA assets. The Pension fund management industry has four different categories of accounts, RSA active (”RSA”), RSA Retiree (”Retiree”), Closed Pension Fund Accounts (”CPFA”) and Approved Existing Scheme (”AES”). The focus of this article is the RSAs. According to Pencom, there are 21 PFAs, 7 CPFAs and 4 Custodians. Individuals invest in RSAs and the aggregate investment and returns thereon generated determine the NAV. Individuals therefore purchase of units of the RSA at Net Asset Values (NAVs). An NAV is the value of the assets held by a PFA after running expenses are deducted.
To assess the performance of RSA active funds and invariably the pension fund administrators, data of all the NAVs per share available publicly on the websites and annual reports of 10 of the 21 public PFA’s between December 2006 and December 2014 was collected. The fund managers in the study include;
Aiico Pension Managers Limted, ARM Pension Managers Limited, Future Unity Glanvils Pensions Limited IEI-Anchor Pension Managers Limited, Legacy Pension Managers Limited, Penman Pensions Limited, Pensions Alliance Limited, Sigma Pensions Limited, Stanbic IBTC Pension Managers Limited, and Trust fund Pensions Plc.
Analysis shows that on average, PFA’s have returned about 10% between years 2006 – 2014, with 2007 showing the highest rate of return and 2008 showing the worst rate of return. These results seem good for a fund and could be heralded as a success when compared to the 8% delivered by the Nigerian all share index (“NSE ASI”) within the intervening time. The NSE ASI has however returned a higher rate since the 2000, year on year.
In the guidelines instructing the investment universe of PFA’s, it seems that the impact of inflation on RSA returns has not been fully considered. The priority of pension fund administrators should be to keep returns well ahead of inflation at most times. When inflation is taken into account, the average real rate of return is -3.12% between 2006 and 2014. Put differently, when inflation is taken into account, pension fund assets have been declining in value by 3% year on year since 2006. Inflation in this case is the consumer price index published by the Nigerian National Bureau of Statistics.
Based on this result, one can conclude that considering the underlying interest being served, the pension industry is not adequately delivering the right level of returns to Nigerian workers and their savings are being depleted by inflation. Year on year, each naira saved by workers is worthless than it was the previous year. The industry therefore needs to change to deal with “inflation eating into workers’ pensions”.
The returns stipulated by the guidelines have not delivered above inflation returns; therefore we have to look for an alternative allocation of capital to improve returns.
Impact of PFA reporting on RSA returns
Since the RSAs have not delivered above inflation returns, an attempt was made to decipher the underlying cause of this underperformance. The expected explanation would be from the portfolio structure or the weights of the RSA funds. A simple regression analysis was performed on the annual returns for each RSA on the following proxies for equities, bonds, and rates. The proxies used were;
1.) The NSE ASI,
2.) Access Bank total return FGN bond index,
3.) The continuous bank open buy back rate (OBB) since 2008.
The NSE ASI was collected from the Nigerian Stock Exchange Data team, Access Bank total return FGN bond index (“Bond Index”) was collected from the Access Bank website and OBB rates were collected from the FMDQ OTC website. The NSE ASI and the Bond Index were transformed into returns and OBB rates were taken at their reported levels.
The results of the simple regressions showed that the three factors stated above do not explain the returns of the RSA NAVs. None of the factors were statistically significant at 95% or 90% confidence levels. Therefore it is difficult to decipher how the performance of the RSA’s could be improved in line with the three factors listed above.
A further review of the basic statistics, show that the RSA returns reported by the PFAs show less variation than that for the bond index. The Access Bank bond index had a standard deviation of 8.5% whilst the average RSA varied by 6.2% over the period.
PFA RSAs returns are hence less volatile than the returns of Nigerian Federal Government Bonds. The Old Act allows PFA’s to invest as much as 80% of their assets in Nigerian Naira denominated bonds. If this is the case, then it’s not probable that RSA returns should vary less than the returns to government bonds.
A possible reason for the lower variability is the interpretation of IAS 39, an accounting standard under the International GAAP. IAS 39, guides the presentation of financial instruments in audited financial statements and provides guidance on how instruments are to be classified. If Bonds are classified as held to maturity, there is no requirement to mark their value to current market prices (Mark to Market). If assets are not marked to market, they do not exhibit a similar level of volatility as assets that are marked to market.
The absence of marking to market of RSA bond portfolios is a potential reason for the lower variability in RSA returns and difficulty to proffer new portfolio weights in line with historical performance of the RSA’s.
To ascertain whether in reality the returns are significantly skewed away from the realities of the market, a two tailed t-test for statistical significance was performed to test the null that the returns generated by the PFA’s are not statistically different from what one would expect if the RSA’s followed Pencom’s guidelines and marked to market accordingly. The results of the t-test showed that the returns were statistically different from what one would expect if the RSA’s marked to market their portfolio per accounting best practice. Therefore, it seems PFA’s do not mark to market some of the instruments in their portfolio. The implications of not marking the value of RSA assets to current market condition will generally only manifest if there is a forced sale of RSA assets.
In summary, RSA Navs over the last 8 years in nominal terms have grown, however in real terms they have declined due to inflation and low rates of return. RSA’s returns variability seem to be different from what the underlying portfolio constituents would dictate, therefore making it difficult to proffer different portfolio weights that might improve performance. The simple statistical test confirms that the variability is statistically significant. The Pension fund industry therefore needs to review its recording of NAV performance and adjust its portfolio weights and constituents to deliver above inflation returns to RSA unit holders. The new yardstick should be positive inflation adjusted returns.
Oladayo Oduwole and Edozie Ifebi
