In line with global trends, Nigeria’s financial markets have been rocked by the Covid-19 pandemic as the All Share Index shows a decline, with a return of -8.9 percent as at May 20, 2020.
In the bond market, there has been a similar sell-off with the S&P Nigeria Government Bond Index losing 3 percent in May. Naturally, this builds a cloud of worry in the minds of Retirement Savings Account (RSA) holders regarding the safety of their pensions.
We would like to tell you not to worry, your investments are in safe hands.
To allay this fear, it is good to draw inference from past events. We have been here before, and we have learnt a few lessons from past events.
The major recent economic shocks Nigeria faced were, the contagion effect of the 2008-9 global financial crisis and the 2014-15 oil price collapse. In 2008, crude oil prices fell by 51 percent and domestic portfolios including pension funds experienced dismal growth, with pension funds returning 0.3 percent.
Fast forward to 2014-15 where crude oil prices declined by 42 percent during the two years pushing Nigeria into a recession, pension fund returns held up much better, by returning 7.4 percent even in the face of a 30 percent drop in stock prices.
The retiree component of the RSA, which was introduced in 2009, fared better as it delivered double digit returns of 12.1 percent on average during the two years.
Figure 1: Annual Oil prices changes and Aggregate Pension Fund Returns
So what changed between the two episodes? It is worthy to note that, the proportion of the pension funds exposed to volatile assets were much higher in 2008-9 compared to 2014-15.
Following the 2009 financial crisis, pension funds reduced their exposure to the Nigerian Stock market as the share of equities in pension assets declined from 20 percent to 15 percent ahead of the 2014-15 crisis. This helped to reduce the impact of the equity market decline on pension fund returns.
Currently, the aggregate exposure of pension funds to equities is only 5 percent. Overall, pension funds have less holdings of volatile instruments heading to this crisis than previously.
This suggests that pension fund returns should be less volatile and hold up much better in 2020 than in prior episodes.
Figure 2: Pension Fund Equity Holdings.
How are we assured that our assets are safe? Having analyzed the changes in recent previous episodes, we must be quick to say that we are not yet out of the woods, as the economic effect of the Covid-19 shock is still evolving and many countries, including Nigeria, are still experiencing an increase in the rate of infection.
The duration of the measures put in place to curtail the rise in infection, such as economic lockdowns and social distancing rules is uncertain as countries who have eased their lockdown are experiencing a second wave of infection. Under this atmosphere, economic outlook remains uncertain.
Furthermore, interest rates are much lower now than in previous crisis. This low interest rate environment suggests that there is high level of liquidity in the financial system. The combination of high level of uncertainty and low interest rates in the system certainly makes this a very tricky period.
Not to worry, this is when you need the expertise of highly experienced investment managers to navigate this quagmire and deliver competitive returns on your portfolio.
Figure 3: Trends in Pension Assets
Plans are worthless but planning is everything – Dwight Eisenhower
With the continued dislocation to businesses and livelihood caused by the Covid 19 outbreak, there would be a fundamental change in how human beings interact and conduct business.
Understanding these changes and making the required adjustments to align with their long-term implications also presents opportunities if we do not panic.
There is the temptation to focus on short-term survivalist instincts, which is not the best reaction. The resilience of mankind has proven to be our greatest asset: with time a cure will be found, a vaccine will be developed and the current gloom surrounding the Covid-19 pandemic will gradually give way to optimism.
At Sigma Pensions, we have you covered as we understand the terrain and will continue to look after your assets with a razor sharp focus, investing your pensions in the best instruments, so that after the crisis your investments are still in good shape.