An expert has advised the National Pension Commission (PenCom) and operators to invest at least 65 per cent of the country’s N24.5 trillion pension fund assets in private equity for better returns.
He said this is capable of increasing the fund’s rate of return from its average level of 13.73 per cent at the moment to 53.35 per cent.
The expert, Dr. Shamsuddeen Attahiru Nassarawa, gave the advice during the Technical Workshop and Capacity Building on Alternative Asset Investments for Pension Fund Administrators in Nigeria organised by PenCom.
In his presentation, Nassarawa said there was the need to analyse the fund’s growth, evaluate its returns: examine the nominal performance over time, assess risk-adjusted returns: gauge how well pension funds have compensated for risk, address the inflation challenge and demonstrate diversification benefits.
He stated the role of alternative assets, specifically private equity, in enhancing portfolio returns and managing risk through mean-variance optimisation.
He urged the regulator and operators to consider private equity as against the traditional assets like sovereign bonds, money market, and public equities
He stated that pension fund investors are often risk averse and are usually assumed to have a benchmark value of risk aversion coefficient of 5.
He said: “Nigerian pension funds could optimise their returns by investing at least 64.74 per cent of their assets in private equity. This would increase the fund’s rate of return from its average level of 13.73 per cent to 53.35 per cent.
From a modest N815.18 billion in 2007, the Net Asset Value (NAV) of pension funds has surged to an impressive N22,512.35 billion by December 2024. This growth signifies a deepening of the domestic financial market and represents a powerful pool of long-term capital available for national development.
“From 2015 to 2022, the pension industry’s asset holdings were more than half of the stock market capitalisation. There have been years of strong double-digit returns, like 19.37 per cent in 2007, 16.91 per cent in 2020, and 16.74 per cent in 2024.
However, there have also been periods of lower returns, such as 3.74 per cent in 2011 and 6.13 per cent in 2014. The risk-free rate, our benchmark for ‘safe’ returns, has also fluctuated, reflecting changes in monetary policy and economic conditions.
“From 2007 to 2024, the average yearly risk-free rate was 11.22 per cent while the average yearly pension fund’s return was per cent. The standard deviation of excess return, of 7.36 per cent, indicates the degree of fluctuation in the pension fund’s out/underperformance relative to the risk-free rate.’’
He added that the low sharpe ratio signals that the investment strategies, heavily skewed towards traditional assets, are not optimally compensating for the risk borne.
He said Nigeria has experienced high inflation rates over the past two years. Key drivers are currency depreciation, higher energy prices, rising food prices, and increased import costs.
“For many years, the ‘Pension Fund’s Real Return’ has been negative. For example, in 2024, despite a nominal return of 16.74 per cent, an average inflation of 34.80 per cent resulted in a real loss of -18.06 per cent. Inflation will erode the real value of pension fund assets if the portfolio return is lower than the inflation rate”.
On the need for alternative assets, he said there is concentration in sovereign bonds, money market, and public equities limits diversification and inflation hedging.
Alternative assets, particularly private equity, often exhibit lower correlation with traditional markets and can offer inflation beating returns.
Nassarawa said to properly assess the attractiveness of private equity, the industry must look at its risk-adjusted returns alongside that of existing pension funds.
“There is a vast difference in annualised: 13.73 per cent for pension funds versus a remarkable 74.92 per cent for private equity in naira terms. This highlights the potential for significant return enhancement. The private equity fund has delivered immensely superior returns per unit of risk taken compared to the existing pension fund portfolio.
“Pension fund investors are quite often risk averse and are usually assumed to have a benchmark value of risk aversion coefficient of 5. Pension funds could optimise their returns by investing at least 64.74 per cent of their assets in private equity. This would increase the fund’s rate of return from its average level of 13.73 per cent to 53.35 per cent.”
He submitted that the industry has grown significantly, accumulating substantial assets under management, demonstrating its increasing importance to the national economy.
Speaking on the challenge of real returns, he said despite nominal growth, pension funds have struggled to maintain purchasing power, with negative annualised real returns over the last 18 years, primarily due to persistent high inflation and concentration in traditional assets.
On alternative investments as a solution, he said private equity funds, even based on a single representative fund’s performance, demonstrate the potential for significantly higher nominal and risk-adjusted returns, offering a powerful hedge against currency depreciation due to their dollar-denominated nature.
He pointed out that variance optimisation shows that even a small, regulatory permissible five per cent allocation to private equity can substantially improve the portfolio’s risk-adjusted returns, enhancing beneficiaries’ long-term wealth without dramatically increasing portfolio volatility.
