Research shows PFA’s have posted negative returns in 5 years

Nigerian Pension funds are said to have returned a negative -3.12% since 2007 according to a research report hosted on the well respected www.iiste.org website. The research which was conducted by analyst Oladayo Oduwole also suggest reasons for the poor performance of pension funds. See table below;

Table 1

Rates of return on RSA active funds run by some Licensed PFA’s in Nigeria

RSA –Nominal returns

2006

2007

2008

2009

2010

2011

2012

2013

2014

Aiico

18.39%

3.35%

11.71%

10.48%

2.98%

11.45%

9.46%

8.88%

ARM

25.70%

1.13%

8.57%

10.51%

1.87%

15.51%

17.17%

6.69%

FUG

N/A

4.84%

18.50%

7.66%

11.35%

14.25%

6.47%

IEI

N/A

-1.42%

9.29%

8.38%

3.76%

8.13%

12.73%

5.95%

Legacy

19.29%

-0.38%

15.59%

9.87%

6.21%

11.50%

11.04%

7.89%

Penman

N/A

15.90%

8.17%

7.71%

Pal

N/A

-0.26%

9.88%

12.48%

1.78%

13.34%

13.63%

7.17%

IBTC

N/A

12.93%

4.24%

15.26%

15.37%

6.12%

Trust Fund

24.85%

8.31%

8.57%

6.88%

2.36%

9.30%

16.74%

4.54%

Sigma

N/A

-6.36%

13.62%

12.41%

1.58%

12.88%

13.11%

-0.94%

Sum

79.60%

22.06%

0.62%

10.26%

11.38%

3.60%

12.46%

13.17%

6.05%

Áverage

9.95%

Standard deviation

6.20%

Sharpe ratio

-0.81

Table 2

Rates of return on RSA funds net of Inflation

RSA –Real returns

2006

2007

2008

2009

2010

2011

2012

2013

2014

Aiico

13.00%

-8.23%

-0.65%

-3.24%

-7.93%

-0.79%

0.94%

0.88%

ARM

20.31%

-10.45%

-3.79%

-3.21%

-9.04%

3.27%

8.65%

-1.31%

FUG

N/A

-7.52%

4.78%

-3.25%

-0.89%

5.73%

-1.53%

IEI

N/A

-13.00%

-3.07%

-5.34%

-7.15%

-4.11%

4.21%

-2.05%

Legacy

13.90%

-11.96%

3.23%

-3.85%

-4.70%

-0.74%

2.52%

-0.11%

Penman

N/A

3.66%

-0.35%

-0.29%

Pal

N/A

-11.84%

-2.48%

-1.24%

-9.13%

1.10%

5.11%

-0.83%

IBTC

N/A

-0.79%

-6.67%

3.02%

6.85%

-1.88%

Trust Fund

19.46%

-3.27%

-3.79%

-6.84%

-8.55%

-2.94%

8.22%

-3.46%

Sigma

N/A

-17.94%

1.26%

-1.31%

-9.33%

0.64%

4.59%

-8.94%

Average

-3.12%

16.67%

-10.96%

-2.10%

-2.34%

-7.31%

0.22%

4.65%

-1.95%

The research, rather than use the gross annual returns typically published by pension funds factored in inflation rate to arrive at what the real returns should be. As you may well know, inflation is real and is the greatest enemy of long term investing. Therefore, for fund managers to be said to be performing, Gross returns must be higher than inflation rate as the barest minimum.

For example, contributors to Sigma Pensions have basically seen inflation reduce their real returns to -8.94% in 2014. Two of the country’s biggest pension fund, Stanbic IBTC and ARM also reported negative returns in 2014. Whilst 2013 may have been the best year for the funds, they have both returned on average 0.53% and -1.64% respectively since 2011.

This research if accurate should give huge concerns to pension contributors who every month mandatory contribute 15% of to retirement savings accounts of their employees. If the funds continue to deliver returns that turn negative after inflation is factored, then contributors are bound to lose significant value on their money when they hit retirement age.

The writer concludes the report by stressing that

In summary RSA Nav’s over the last 8 years in nominal terms have grown, however in real terms they have declined due to inflation and low rates of return. RSA’s returns variability seem to be different from what the underlying portfolio constituents would dictate, therefore making it difficult to proffer different portfolio weights that might improve performance. The simple statistical test confirms that the variability is statistically significant. 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 yard stick should be positive inflation adjusted returns.

You can get the research Can Nigeria’s RSA’s beat inflation?