Amid Attract Interest Rate, PFAs Investment in FGN Bonds Hit N12.4tn

Kayode Tokede

Pension Fund Administration (PFAs) exposure in Federal Government securities soared high to N12.4 trillion in first four months of 2024 amid attractive interest rate.

FGN Securities comprises of FG Bonds, Nigerian Treasury Bills (NTBs), Agency Bonds (NMRC), Sukuk Bonds and Green Bonds.

Data released by the National Pension Commission (PenCom) revealed that PFAs exposure in FGN Bonds opened January 2024 at N12.14 trillion, a growth of N257.14 billion to close April 2024 at N12.4 trillion.

THISDAY investigations revealed that PFAs exposure in FGN Bonds contributed 62.65 per cent of the estimated N19.79 trillion pension funds industry portfolio as of April 2024.

The Central Bank of Nigeria (CBN) has consistently hiked interest rate amid rising inflation rate and drive to raise funds to bridge budget deficit.

The likes of Nigerian Treasury Bills in 2024 has witnessed significant patronage by investors with yield over 20 per cent on one-year auction.

Amid high demand for government securities, PFAs and investors’ subscription to NTBs increased to N23.75 trillion in the first four months of 2024, 292 per cent Year-on-Year (YoY) growth from N6.06 trillion in the first four months of 2023.

The 2024 Budget of ‘Renewed Hope’ as proposed by President Bola Tinubu outlines a total expenditure of N27.5 trillion, with a projected revenue of N18.32 trillion and a deficit of N9.18 trillion.

Local and foreign investors seem to respond positively to the double-digit interest rates on NTBs, as seen in the robust subscription rates, suggesting confidence in the CBN’s ability to manage the country’s monetary challenges amid scarcity of foreign exchange and double-dight inflation rate.

The stop rates on NTB have surged significantly from 2.44% on a 91-day tenor bill, 4.22% on a 182-day tenor bill, and 8.3995 on a 364-day tenor bill from the first auction in January 2024 to 16.24%, 17%, and 20.70% respectively from the last auction in April 2024.

The heightened interest in the NTBs signifies a keen PFAs and investors’ appetite for higher interest rates, providing a solid anchor for the fiscal stability of Nigeria.

Notably, the stop rate for the 364-day bill hit a high of 20.70% on the same date, reflecting tightening monetary conditions.

Specifically, NTBs in first four months of 2024 has attracted a huge subscription of approximately N22.6 trillion, with the CBN capitalising on this demand to offer and total sales of a whopping N142.16 billion N6.18 trillion, respectively.

The CBN, under Yemi Cardoso, has increased the monetary policy rate (MPR) from 18.75per cent to 26.25per cent.

The rush for FGN securities has impacted on PFAs exposure in stock market in the period under review, dropping to N1.82 trillion as of Apriil 2024 from N1.93 trillion January 2024.

The N1.82 trillion PFAs exposure in the stock market as of April 2024 is much higher than the N1.01 trillion exposure reported by PenCom April 2023.

Capital market analysts believe PFAs are benefiting from the undervalued stocks amid weakening Naira and renewed investors’ confidence in the stock market.

They expressed that the PFAs and domestic investors reacted sharply to naira depreciation in the foreign exchange market, double-digit inflation rate, coupled with the CBN’s hike in MPR currently at 26.25 per cent.

They expressed further that the pension industry has been recording significant growth in recent years, following several regulatory reforms by PenCom, which has seen the number of PFAs in the industry reduce as a result of some mergers and acquisitions.

The pension Industry operates under stringent regulations due to the nature of handling public funds, primarily the contributions of workers meant for their retirement. The PenCom enforces guidelines and limits to ensure the safety and security of contributors’ funds as restrictions are placed on PFAs regarding the allocation of contributors’ funds into volatile assets.

This cautious approach is in line with the need to protect contributors’ savings and ensure that they have a secure and reliable source of income during their retirement years.

To achieve this, the PFAs adopt a mix of fixed and variable assets in their investment portfolios.

This diversified approach takes into consideration the risk tolerance of contributors and the different fund categories within the pension system.

Responding to PFAs exposure in the stock market, the CEO, Wyoming Capital and Partners, Mr. Tajudeen Olayinka explained that PFAs and investors reacted to low prices of some fundamental stocks on the exchange.

According to him, “Prices had become too low to resist, and this happened because of prolonged repricing of securities across markets and instruments, pushing down stock prices below the levels they should ordinarily be.

“It also demonstrates improved earning capacities of some listed companies, as they continue to adjust to variability of costs and cost pressures in the short run, in order to stay afloat.

“Another factor is the usual positioning and repositioning for year-end rally by investors, as some companies begin to show strong earnings’ prospects ahead of full year results.”

On his part, Chief Research Officer, InvestData Consulting Limited, Mr. Omordion Ambrose told THISDAY that low pricing of some fundamental stocks and portfolio rebalancing contributed to PFAs renewed interest in stocks.

He said, “The PFAs do not take trade in the stocks with a speculative report as they trade long-term. Attractive revaluation led to PFAs renewed exposure in the stock market.”

Also speaking, the Vice President, Highcap Securities, Mr. David Adonri acknowledged the PFAs’ role in lifting the stock market, stressing that some PFAs opted to invest in the stock market.

He noted that, “As long as the Nigerian economy continues its current trajectory of stability and growth, the pension industry’s assets in the stock market are likely to remain robust. However, it’s essential to remain vigilant and take a cautious approach. Financial markets can be inherently volatile, and it’s crucial for PFAs to maintain a balanced and diversified. The surge in PFAs assets in the Nigerian stock market, in tandem with the broader growth of the pension industry, suggests a positive outlook for both pension fund managers and the Nigerian stock market.”