Pensioners Lose Over 3% Retirement Savings to Inflation | Independent Newspapers Limited
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Pensioners Lose Over 3% Retirement Savings to Inflation

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Posted: Mar 23, 2016 at 12:29 am   /   by   /   comments (0)

Nigerian pensioners may have lost about 3%, year-on-year, of their retirement savings to inflation since the inception of the contributory pension system in 2007, according to stakeholders.

This is in contrast with UK pension funds returns, which, in the last 50 years, have consistently outperformed increases in UK retail prices and wages.

The stakeholders and pensioners alike say that though pension assets have grown nominally, in real terms they have declined when inflation is factored in.

Inflation hit 11.4 percent in February, a three-and-a-half year high and well above the central bank’s target band of 6 to 9 percent.

“When inflation is taken into account, pension fund assets have been declining in value by 3% year-on-year since 2006. Inflation in this case is the annual consumer price index published by the Nigerian National Bureau of Statistics,” says Oladayo Oduwole, an alumnus of the Center for Computational Finance and Economic Agents, United Kingdom and the Imperial College London, in a working paper on Nigerian pension fund administrators.

He indicated that on average, PFAs returned about 9.95 percent between years 2006 and 2014, with 2007 showing the highest rate of return (22.06 percent) and 2008 showing the worst rate of return (0.62 percent) with inflation standing at an average of 10.3 percent for the review period.

“These results seem good for a fund and could be heralded as a success when compared to the 8% delivered by the Nigerian all share index within the intervening time.

Oduwole’s study, which covered publicly available data on the net asset values per share (NAV) of 10 out of the 21 public PFAs between December 2006 and December 2014, revealed that the impact of inflation on Retirement Savings Account (RSA) returns has not been fully considered.

He noted that the priority of pension fund administrators should be to keep returns well ahead of inflation at most times, stating that when inflation is taken into account, the average real rate of return is -3.12% between 2006 and 2014.

But Bismarck Rewane, CEO of Financial Derivatives, however, sees inflation as impacting on all Nigerians, noting that the returns on the over N4.6 trillion pension assets must have outperformed inflation.

“Inflation affects everybody and not only pensioners. I think returns from the investment in pension funds will outperform inflation”.

On the other hand, Ayo Teriba of Economic Associates, said the whole issue of inflation in Nigeria has been exaggerated, that inflation right from the time of Soludo as governor of the Central Bank of Nigeria (CBN) has been reined in with rates hovering below 10 percent. He said that the issue should be on how to invest the almost idle funds in the sector.

“The regulatory induced investment rule may however hinder the profitable investment of the funds,” he said, adding that he wondered where inflation is coming from where most state civil servants are owed salaries.

Based on Oduwole’s result, he concludes that considering the underlying interest being served, the pension industry is not adequately delivering the right level of returns to Nigerian workers and their savings are being depleted by inflation.

“Year-on-year, each naira saved by workers is worthless than it was the previous year. The industry, therefore, needs to change to deal with ‘inflation eating into workers’ pensions,” he added.

Oduwole claimed that RSA net asset values over the last eight years in nominal terms have grown, while in real terms they have declined due to inflation and low rates of return.

For him the pension fund industry, therefore, needs to review its recording of NAV performance and adjust its portfolio weights and constituents to deliver above inflation returns to RSA unit holders. The new yardstick should be positive inflation adjusted returns.

The CPS has accumulated a large pool of investible fund of over N4.6 trillion pension assets as at June 2014 and more than 6.2 million contributors have been registered into the scheme since inception.