The National Pension Commission (PenCom) and the Pension Fund Administrators (PFAs) in the country have disagreed over the restriction placed on investments in Open Market Operation (OMO) auctions.
The directive according to the PFAs would negatively affect yields accruing to the country’s N9.6 trillion pension assets. Pension fund assets have yielded over N1.7 trillion in investment returns since the inception of the Contributory Pension Scheme (CPS) in 2004, of which FGN bonds and Treasury Bills have contributed a large chunk of this profit.
In recent times, the PFAs have seen OMO auctions as investment haven and have participated actively in the market since it gives the highest return on investment (RoI), hence, pension fund operators decided to invest over N1 trillion of pension assets in the market.
Recently, the financial regulator restricted OMO auctions to only deposit money banks and foreign investors. OMO Bills is a monetary policy instrument which financial regulator uses to manage liquidity within the system.
Historically, it has been between banks and apex bank, but in recent times, the apex bank has extended it to local corporate firms, of which PFAs and local corporates have invested about N6 trillion in that market.
However, few days ago, the apex bank completely prohibited individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions.
This action, LEADERSHIP learnt, affected PFAs the most of all the corporate players in the open market operations, with investment returns on pension fund Assets expected to dwindle in the next couple of months as pension operators look elsewhere for investment outlets.
The decision has also crashed yields on the bills, hence, making the reducing yields from OMO instruments. Although, the pension operators are losing nothing on their previous investments, investigation shows that PFAs are facing the challenge of where to channel the invested funds when the bills matured in the next six to 12 months.
Moreover, the fact that PFAs can no longer make fresh investment in a market that has given the highest Returns on Investment (RoI) to the pension industry in the last few years, is a signal of a fall in investment profits.
Already, insider source in the pension industry disclosed to LEADERSHIP, that there is an ongoing discussion between the National Pension Commission (PenCom), pension fund managers, the apex bank and banks to see how pension funds can still be invested in OMO bills.
Speaking at the 2019 Annual Media Seminar organised by the Pension Fund Operators Association of Nigeria (PenOp) in Lagos at the weekend, the managing director/CEO, ARM Pension Managers, Mr. Wale Odutola, said PFAs invested heavily in OMO because the local issuance of treasury bills by the Debt Management Organisation (DMO) is slow, especially, in the last two years, attributing the slow pace to issuance of OMO bills.
Odutola, who is also the head, Branding and Communications, PenOp, said: “The fact is that, we are heavily invested in that market and the fact that we will not be able to invest in that market going forward, has implications for the PFAs and the pension industry.
“The first is, when these monies matured over the next 12 months or so, where do we put the money? So, it exposed us (PFAs) to major reinvestment risk as those treasury bills mature. Rates have come down significantly as a result of this sanction.”
Speaking further, he stressed that this development puts pension operators in a difficult position where they need to, as a matter of urgency, find other avenues to invest these monies.
According to him, “In the near future, you will see returns figure from the PFAs reflect this reality of the fact that we are having lower yield. It also means that reinvestment risk becomes obvious as we begin to feel the impact of that policy. We are hopeful that as the apex bank reduces its issuance of OMO Bills, DMO will now raise its own issuance, which gives us an opportunity to participate within that space.”
Similarly, the managing director/CEO, Leadway Pensure Limited, Mrs. Ronke Adedeji, said, the painful aspect of this sanction is that PFAs have enjoyed access to this market more in recent times and because the yields are higher than the normal auction, the operators invested more in that market.
Adedeji, who is also the President, PenOp, said: “There are times we will go couple of months and there will be no OMO transaction. It’s just that we have enjoyed access to this market more in recent times and because the yields are higher than the normal auction, that is why we are reacting. But the reality is that, it is an instrument used to manage interest rates and the cost of borrowing.
“So, they are doing what they are supposed to do but it is just that, unfortunately, we are enjoying something before and we are not enjoying it now and naturally, we want to be part of it.
The rates in the OMO market are very attractive and now, we don’t have it anymore.”
On his part, the head, Corporate Communications, PenCom, Mr. Peter Aghahowa, believes the development should not raise much eyebrow because pension operators are professionals in investments, urging them to utilise other investment outlets as provided for in the investment guidelines of the pension industry.
According to him, “Pension fund managers are professional in these areas. So, if one outlet closes, there are other several outlets in line with the Investment guidelines. This is where professionalism comes to play. Though, one area that has very good yield closed, from the regulatory end, we don’t see it as much problem.”
However, some financial market analysts have expressed concern about the fate of non-bank financial institutions, such as PFAs that hold significant amount of treasury bills and OMO instrument in their portfolio and are by law requested to invest in such instruments.
More so, a recent report by Stanbic IBTC Stockbrokers Limited, showed that PFAs’ investments in FGN securities was up by a whopping 22 per cent to N6.819 trillion in August 2019, from N5.589 trillion in March 2018.