The adoption of the International Financial Reporting Standards (IFRS) by Nigerian Pension Fund Administrators may never come at a better time than now, experts say, as the recent bond rally helps PFAs to book some N1.1 trillion in capital gains.
The one-year return on government bonds, the asset class with the most PFA exposure, was 30.6 percent as of Tuesday, January 8, according to the Standard and Poor’s sovereign bond index.
This implies that the current value of the PFAs’ bond holdings which comes to 55.7 percent of their total assets or N3.7 trillion, according to data available on the website of regulator, Pension Commission, is up N1.1 trillion to N4.8 trillion.
“This is the best time for PFAs to mark their bonds to market and adopt the IFRS, because they would have booked significant gains on their bond portfolio last year,” said Wale Okunrinboye, head of fixed income at Ecobank Group.
Bond prices have rallied as yields sink on the back of Nigeria’s move to rebalance its debt mix in favour of external borrowing and at the detriment of local debt. The government’s ballooning debt service to revenue ratio necessitated the move.
Average bond yields declined by 0.09 percent to close at 13.60 percent, January 8. Ten tenors recorded yield declines, four (4) tenors traded flat, while the JUL-2021 and MAR-2027 were the only bonds with yield advancements.
Similarly, the secondary T-bills space was characterized by buying pressures, as yields on all tenors declined in the day, save for the 12-month tenor which advanced by 0.42 percent. Consequently, the average T-bills yield closed at 14.39 percent, after paring by 0.14 percent in the day.
“We ran a simulation to mark our bonds to market and it looks even better than expected,” a member of the Investment Committee of a major Pensions Fund, told BusinessDay on condition of anonymity because he wasn’t authorised to speak publicly.
“This is the time to adopt IFRS, as interest rates are low. I hope PENCOM won’t let this opportunity pass,” the source added.
Nigeria’s N6.5 trillion Pension Funds industry has been mandated to adopt International Financial Reporting Standards (IFRS), for preparing its financial statements, a move industry sources said was fraught with risk and benefits.
Nigeria’s Pensions regulator PenCom and its Financial Reporting Council (FRC) told Pension Fund Administrators (PFAs) that 2017 shall be the latest year of adoption of IFRS by all duly registered Pension Funds.
“The previous accounting style engendered lack of accountability and made PFAs prefer bonds to every other asset class, but the IFRS will instil discipline, promote transparency and make PFAs circumspect over how they handle their assets,” said Okunrinboye.
As part of industry reforms unveiled to prevent a repeat of the 2008/2009 home grown financial crisis, International Financial Reporting Standards (IFRS) became Nigerian Generally Accepted Accounting Principles (NGAAP) for all corporate entities in Nigeria since January 1, 2012.
The framework was to come into effect for Pension Funds in 2013 as specified by the Roadmap for Adoption of IFRS in Nigeria.
However, various complexities and the need for regulatory clarifications have led to non-compliance with PenCom and FRC blaming the delayed adoption on the “practical expediency and…peculiarities faced by Pension Funds in Nigeria.”
Data from the National Pension Commission or PENCOM shows that as at April 2017, the net asset value of total pension fund assets stood at N6.49 trillion with 7.4 percent invested in domestic ordinary shares or stock, 55.7 percent in FGN bonds, 15.66 percent in Treasury Bills, 6.26 percent in banks money market securities, 4.79 percent in corporate debt securities and 3.38 percent in Real Estate properties.
Together these asset classes make up 93 percent of pension fund investments.
The data shows that at least 71.3 percent of Pension assets or N4.63 trillion as at April, 2017 is invested in fixed income securities issued by the sovereign or Federal Government.
PenCom in the new directive advised PFAs to ensure that where a measurement basis other than fair value is applied to fund holdings of government securities, the underlying business model of such funds align with the conditions specified in IFRS as the relevant PenCom Guidelines.
Experts tell Businessday that under IFRS rules PFAs can apply hold to maturity (HTM) rules to assets they don’t have an intention of selling, but the rest have to be marked to market (MTM).
The new guideline for PFAs to adopt IFRS was issued following the stakeholders meeting of 18 May 2017 that included the FRC, PenCom and External Auditors of Pension Funds.
LOLADE AKINMURELE
