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In line with global trends, Nigeria’s financial markets have been rocked by the Covid-19 outbreak as the All Share Index plunged 20.7 percent in Q1 2020 with deep declines across all sectors. In the bond market, there was a similar sell-off with the S&P Nigeria Government Bond Index losing 3 percent in March. Though domestic markets have pared back some of these losses, most commentary on outlook has sought to draw parallels between the current financial market woes and prior episodes of market collapse. Naturally, this builds a cloud of worry in the minds of Retirement Savings Account (RSA) holders regarding the health of their pensions. Are our pension assets safe? Will we see a repeat of the 2014-16 stock market collapse or is this a repeat of the 2008 crash?

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In answering this, it is good to draw inference from past events. The last major economic shocks Nigeria faced were the 2008-9 global financial crisis and the 2014-15 oil price collapse. In 2008, crude oil prices fell 51 percent and domestic investors including pension funds experienced a loss in portfolio value with pension funds returning 0.3 percent. Fast forward to 2014-15 era where despite significant oil price declines which pushed Nigeria into a recession, pension fund returns held up much better in the face of an over 30 percent drop in stock prices over the period. Figure 1: Annual Oil prices changes and Aggregate Pension Fund Returns

Pencom, Bloomberg, Sigma Pensions Research *H1 2019

So what changed between the two episodes?

Firstly, following the 2009 financial crisis, pension funds moderated their involvement in the Nigerian stock market as equity share of pension assets declined from a 20 percent in 2008 to 14 percent ahead of the (2014-16) crisis. This helped reduce the impact of the equity market decline on pension returns. What this suggests is that pension returns should be less volatile in 2020 as an equity share of total assets stood at 5 percent at the end of 2019. In addition, following a rise in bond yields over the 2014-16 period, pension funds rotated into fixed income instruments which helped support investment returns. Overall, pension funds have fewer holdings of volatile instruments heading to this crisis than previously. Figure 2: Pension Fund Equity Holdings.

Could this year be different?

Two things make this year different from prior episodes: first, the Covid-19 shock is still evolving and many countries, including Nigeria, are yet to flatten the Covid-19 curve which means the duration of measures such as lockdowns and social distancing is uncertain. Under this atmosphere, the economic outlook is even more highly uncertain and looking at financial market history could be a poor indicator of the future. Secondly, unlike in 2014-15, interest rates are much lower with Treasury bill yields between 1-3 percent and bond yields between 6-12 percent (vs 13-15 percent between 2014-15) reflective of significant Naira liquidity held by domestic non-bank institutional investors following the CBN’s decision banning participation in its high-yielding sterilization securities (OMO securities).

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This excess liquidity could drive significant dislocation in asset prices across both stock and bond markets which could support bullish trends as we have seen recently. For example, Nigeria’s bond and equity markets have rallied strongly since the March sell offs 2020 with key indices up over 20 percent, partly spurred by local investors deploying liquidity into these markets. These two points suggest that 2020 could be the most uncertain year in investing history. However, recent policy actions which seek to plug the financing gap facing Nigeria such as the recent USD3.4billion loan from the IMF, as well as plans to tap domestic debt markets, could help ameliorate concerns over outlook. Figure 3: Trends in Pension Assets

Plans are worthless but planning is everything – Dwight Eisenhower With over 22 million cases and over 777,000 deaths as at 19 August, the Covid-19 outbreak presents an extraordinary disruption of unimaginable magnitude to households, businesses and economies. In Nigeria, where there are 49,895 reported cases and 981 deaths (as at the time of writing), the pandemic will drive 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 presents a superior outcome to an undue focus on panic associated with the outbreak. At this time, there is the temptation to focus on short-term survivalist instincts. However, the resilience of mankind has proven to be our greatest asset: with time a cure will be found, a vaccine will be developed and current gloom about Covid-19 as with doomsday economic forecasts will gradually give way to optimism. Retirement planning essentially is planning for life after retirement. If you fail to plan with this perspective, you are planning to fail. Sigma Pensions is one of the top Pension Fund Administrators in Nigeria with Asset Under Management (AUM) of c.N480 billion for more than 780,000 registered contributors. The company has also paid out over N28billion as benefits to its retirees. Our sole objective is to provide and deliver excellent pension fund administration and management services to employees within the private and public sector, according to the Pension Reform Act (PRA 2014). We also encourage individuals to make additional voluntary contributions (AVC) to augment the statutory contributions. At Sigma Pensions, we are solely focused on putting the needs of our customers first. We reiterate our commitment to never stop working tirelessly to create a better future for you. Featured Image Source: Sigma Pensions