Tuesday, January 19

CBN Ban On OMO Threatens N9.4 Trillion Pension Investment Returns

The exercise of the discretionary power of the Central Bank of Nigeria (CBN) to regulate the economy may soon have a negative impact on the country’s N9.4 trillion pension funds.

The CBN had, in a circular signed by its Director, Financial Markets Department, Angela Sere-Ejembi, directed banks to exclude individuals and local corporates from investing in Open Market Operations (OMO) auctions with effect from October 23, this year.

The development is expected to drive foreign inflows by restricting individuals and local corporates, leaving only the banks and foreign investors to participate at the auction.

Before now, pension fund operators had always invested 70 per cent of the total pension fund in treasury bills, an investment window that has now been shut by the CBN.

The operators are in a dilemma as to where to invest that could be considered as safe as investing in Federal Government securities.

Pension Fund Operators Association of Nigeria (PenOp) President, Mrs. Aderonke Adedeji, who spoke at the PenOp’s yearly media seminar in Lagos over the weekend, stated that the return on investments (RoI) would be affected even as investment risks become very obvious.

PenOp is the umbrella body for Pension Fund Administrators (PFAs).

She also expressed concern that it has become a challenge for the operators to continue to find investment channel.

She said before now, CBN had expanded its operation on the OMO issuance by allowing local corporates to participate in the market.

She said the PFAs found investment in treasury bills safe with fair yields and had invested heavily in the market.

Adedeji added: “Within the period that CBN had allowed us participate in the market, investment in treasury bills moved from about $2trillion to $17trillion, with local corporates accounting for between $5trillion and $7trillion while foreign investment accounted for $5trillion to $6 trillion.

“Overall issuance of OMO far outstrips what the Debt Management Office (DMO) issues in local treasury bills and we are heavily invested in the market. But with the new directive, it means that we are not able to participate in the market going forward and this has a number of limitations for PFAs.

“The first is when those monies mature over the next 12 months, where do we go to. The development will expose us to major investment risks as those treasury bills mature. We know that rates have come down significantly as a result of the new restriction which is what the CBN wants to achieve so that hopefully borrowing rates will drop as well and banks will then be forced to lend to local corporates and use that to stimulate the economy. But on the other hand, it puts us in a difficult position where we ultimately will learn how to in the absence of other windows, invest this money. Perhaps give the banks the money as deposit for them. It’s a difficult time that we as PFAs are in and we need to find other avenues to invest the money.

“Ultimately, it means sometime soon, we will see return figures for the PFAs on Retirement Savings Account holders (pension contributors) reflect this fact. The return will go down. It also means that investment risks become very obvious as we begin to feel the impact. We are hopeful that as CBN reduces the issuance of OMO bills than perhaps to DMOs then it will give us the opportunity to participate within the space again.”

She further stated that it had remained a challenge for them to continue to find investment channel.

“We have a situation where our economy is growing but in terms of investment instrument, the market is still not as deep as what we will like to see. So, our funds are growing but there isn’t enough diversification in terms of what we can do with the resources.

“It is something that we need to keep going to the drawing board. If we had a situation where the economy is growing a lot faster, I think we will see a lot more instrument and investment innovation,” she added.

But the pension regulatory body, the National Pension Commission (PenCom), thinks differently.

For PenCom, the development puts to test the professional investement capacity of the PFAs.

PenCom Head, Corporate Communication, Peter Aghahowa said the Commission believes the PFAs are professionals in terms of investment.

“So, if one outlet closes, there are other outlets in line with the pension investment guideline. This is where professionalism comes to play. Yes, one area that has high yields by the regulation of CBN has been affected.

“But from our point of view, we don’t think it is much of a problem. It only calls to test now, the professionalism investment department of the PFAs. We believe that there is capacity to ensure that we get fair returns from the investments. The whole idea for CBN is about liquidity management,” he added.

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