Nigeria: Escalating Transfer of Pension Funds Out of Nigeria Amidst Market Instability

Escalating Transfer of Pension Funds Out of Nigeria Amidst Market Instability
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Recent financial turbulence in Nigeria’s foreign exchange market has triggered a significant shift in pension fund management. Pension managers with foreign affiliations are increasingly relocating accumulated pension assets back to their home countries.

According to a recent report by Financial Vanguard, a staggering N416.4 billion was transferred out of Nigeria to overseas investment vehicles in January 2024. This figure significantly exceeds the N251.1 billion recorded in the last quarter of 2023. The sharp increase in outflows, which rose by N165.3 billion in January alone, suggests that the first quarter of 2024 could witness outflows exceeding N1 trillion.

The current structure of Nigeria’s pension industry includes 19 Pension Fund Administrators (PFAs) and five Closed Pension Fund Administrators (CPFAs), with three of these CPFAs linked to major international oil companies: Agip CPFA Limited, Shell Nigeria CPFA Ltd, and TotalEnergies EP Nigeria CPFA Limited. Under Nigerian pension regulations, local PFAs and two CPFAs are restricted from offshore investments, while foreign-affiliated CPFAs enjoy the liberty to invest internationally.

This regulatory disparity provides foreign-affiliated CPFAs with broader investment opportunities, allowing their pension assets to potentially resist depreciation against naira devaluation. In contrast, purely local PFAs face risks of asset erosion during significant devaluation episodes.

Data released by the National Pension Commission (PenCom) for January 2024 shows that PFAs increased their investments in domestic ordinary shares by 18.75% to N1.9 trillion. In stark contrast, CPFAs boosted their investments in foreign ordinary shares by 58.5% to N320.5 billion. Meanwhile, investment in local money market securities by PFAs slightly dipped by 0.61% to N1.61 trillion, whereas CPFAs’ investments in foreign money market securities nearly doubled, jumping by 96.1% to N95.86 billion.

These figures underscore a broader trend observed throughout 2023, where PFAs gradually increased their investments in domestic stocks and securities, while CPFAs significantly ramped up their foreign asset portfolios.

The stark differences in investment capabilities between local and foreign-affiliated CPFAs highlight the pressing need for regulatory adjustments to level the playing field. Industry leaders are advocating for all pension fund operators to have the ability to invest offshore, which would help safeguard the value of pension assets against currency devaluation.

Mr. Oguche Agudah, CEO of the Pension Fund Operators Association of Nigeria (PenOp), emphasized the importance of diversifying investments to protect against market volatility and preserve the purchasing power of retirees. Similarly, Mr. Olusegun Aganga, Chairman of Leadway Pension PFA, called for innovative approaches to allow pension funds to earn robust returns while managing risks effectively.

The ongoing dialogue among pension fund operators, regulators, and the government aims to revise the current framework to better meet the needs of all stakeholders and ensure the security and growth of pension assets.

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