Contributors and retirees are expected to see higher returns in coming years as pension fund administrators (PFAs) and fund managers start co-investing with private equity firms (PEs), the makers said. operators.
Experts and industry players, who reviewed the recently released framework that allows PFAs to co-invest with private equity firms, said the key objective is better portfolio investment diversification, which will positive impact on fund owners.
According to them, this will allow better returns on investment, which directly and indirectly enhances the balances of the Retirement Savings Account (RSA) of contributors and fund owners.
Oguche Agudah, chief executive of the Pension Fund Operators Association of Nigeria (PenOp), said the recent co-investment directive for pension funds would have a number of benefits for contributors and the industry at large.
“Because alternative investments generally have higher return characteristics, increased private equity and subsequent co-investments with these funds portend higher returns for PFAs, resulting in savings balances -higher pensions for contributors,” Agudah said.
Another benefit, he says, is that a higher allocation to private equity and co-investments will result in increased investment in local businesses over time, leading to an increased need to retain and hire. workers by these beneficiary companies.
“It will also lead to increased sales and ultimately increased taxes for these businesses, which will have an overall effect on the economy,” Agudah said.
Pius Apere, Chairman and CEO of Achor Actuarial Services Limited, said the framework would provide many opportunities that would have a positive impact on players and retirees.
Apere said the framework has created long-term investment opportunities for PFAs to co-invest with private equity firms, which will allow PFAs to diversify their investment portfolios for RSA holders with long-term investment horizons.
“This is particularly useful for the lifestyle investment strategy required for plan members who are not close to retirement age (e.g. Fund 1),” he said.
Apere, who is a licensed insurer and pension consultant, said: “Co-investing with PE is a risky investment and therefore is expected to produce higher investment returns than returns from investments in longer-term federal or state securities. This would arguably increase the funds of RSA holders on retirement date, providing retirees with a sustainable and decent standard of living in retirement.
According to him, the framework will also create healthy competition in the pension industry regarding transfer windows, as RSA holders are likely to transfer to PFAs with improved long-term investment returns.
“The risk appetite of a PFA having a co-investment with PE is likely to increase to reflect the high risk exposure of the diversified investment portfolio. Thus, the importance of an effective management process risks within the PFA cannot be overstated,” Apere said.
Pauli Prince, CEO of the Samoa National Provident Fund, had said in a paper on pension fund investment in private equity that investors have a lot of work to do to be able to pull off this kind of framework.
He said investors need to find structures that meet regulatory and operational requirements, and they often face skill shortages to create, prepare and execute such investments.
The National Pensions Commission (PenCom), in a recent framework on PFAs, said that Nigerian pension fund assets have remained concentrated in federal government securities as rapid asset growth has not been accompanied by a corresponding increase in domestic investment opportunities.
The commission said the current concentration of pension assets in government securities could lead to asset price distortions in the domestic market as pension funds continue to seek the same limited investable asset classes in the domestic market.
On average, about 70% of retirement assets are domiciled in federal and state government bonds by PFAs, which continue to bemoan the shortage of investable assets.
Of the N13.9 trillion of total assets under management recorded by PFAs at the end of March 2022, federal government bonds accounted for 58.7% or N8.16 trillion, according to PenCom figures.
The commission said the framework would give PFAs more investment opportunities and encourage diversification of pension fund portfolios.
PenCom said innovative solutions were needed to address the dearth of investment opportunities and encourage diversification of pension fund portfolios.
He said: “One of the asset classes with the lowest asset allocation by pension funds is private equity. This asset class remained well below the maximum limits of 10% for Fund I and 5% for Funds II and VI Active, respectively.
“Therefore, investing in specific transactions under a co-investment agreement has been identified as a viable option to improve pension fund allocation to this asset class.”
“Co-investing alongside the main private equity fund should provide PFAs with flexibility and greater choice in the type of projects/companies in which pension funds are invested, further improving returns and increasing the private equity exposure.”