By allocating its $33.4 billion in pension assets to infrastructural funding, Nigeria may be able to close its $100 billion annual infrastructure gap.
According to a recent report by Coronation Asset Management, Nigeria may use its risk-managed long-term pension funds to enable sustainable growth by mobilizing domestic pensions, which currently represent about 19% of its Gross Domestic Product (GDP), rather than external debt for national development.
Pension fund administrators still only make a small percentage of allocations to infrastructure funds, despite recent guidelines which now permit a wider range of investments.
Recent infrastructure allocations to assets under management range from 1.5% to 2.1%, even when paired with private equity and real estate investments. The administrators of pension funds in Australia, Canada, Japan, the Netherlands, Switzerland, the United Kingdom and the United States, on the other hand, devote far more than 26% of the fund to real estate, private equity, and infrastructure.
The report found that Nigerian pension fund administrators have shied away from alternatives in general and infrastructure in particular due to a confluence of unclear regulations, a lack of familiarity with alternative assets, and the perceived risk-free returns provided by fixed income investments.
It explained that Nigerian pension fund administrators have shied away from alternatives in general and infrastructure in particular due to a confluence of poorly understood regulations, a lack of knowledge of alternative assets, and the perceived risk-free returns provided by fixed income investments.
According to the report, the predominance of fixed income investments in Nigeria’s pension funds delivers mixed effects. While Nigeria’s top-five pension fund administrators delivered positive inflation-adjusted returns (averaging between 1.6% and 3%) in 2019 and 2020, real returns in 2018 were minus 7.2%.
Last year, average returns across the top five pension fund administrators were 9.9 percent lower than inflation, highlighting the fact that average returns across the top five pension fund administrators have been mainly negative when adjusted for inflation over the last four years.
“it is surprising that more pension fund administrators have not taken the opportunity to increase their allocation to the power, transportation, communication, real estate and clean water investment opportunities that abound. These domestic opportunities provide a hedge against a volatile global macro-environment by offering the potential to deliver consistent, long-term positive domestic returns,” the report said.
With the prevailing Multi-Fund structure, PFAs are allowed to classify risk profiles by age and distribute investments among four degrees of risk and return tolerance. For instance, Fund One is an optional fund; contributors must choose to participate in the fund in writing. Depending on the asset mix, this fund has a 20 percent alternative investment cap.
Additionally, Fund Two (with a cap of 10%), on the other hand, serves younger pension contributors under the age of 49 who have a greater appetite for risk. As a result, one would anticipate higher levels of investment in higher income-generating alternatives within this group and in keeping with what is observed generally.
Instead, they can direct more of their pension fund assets towards possibly higher-earning domestic infrastructure initiatives going by what the Guideline on multi-fund structure allows to invest differently for different age and risk profile groups.
According to the report, this would give Nigerians under the age of 49 the chance to earn more money while they are still youthful and less risk-averse. Additionally, it gives a great chance for Nigeria to aggressively use its substantial stock of pension fund assets to deal with the infrastructure backlog in the nation.