Rethinking Pension Fund Reforms in Nigeria (Part I)

Rethinking Pension Fund Reforms in Nigeria (Part I)

Author: Anonymous (Published with permission)

Nigerian pension system is stuck in a short-term, low-risk, low-return cycle; what needs to change.

The Nigerian pension system has made huge strides since the 2004 reform, with over ₦24.6 trillion in assets under management today. However, the question now is less about safety and more about whether these funds are truly delivering the long-term value they should. The industry is still governed by practices that force managers to behave like administrators rather than portfolio managers, with a bias toward short-term stability instead of long-term growth.

Here are some areas we believe deserve urgent attention. We are comforted knowing that the new management at PenCom is pro-change and reform-minded, and some of these shifts would be welcome milestones to celebrate in the future.

Phasing Out Short-Termism

At its core, a pension fund is a long-term vehicle. Contributors invest over decades, and retirement outcomes should be judged in decades as well. Yet in Nigeria, several rules and norms force both contributors and managers to think in months. Daily publication of unit prices creates a monthly or even weekly performance race. Transfer windows and liquidity schemes further heighten short-term concerns.

The effect is predictable: PFAs adopt ultra-conservative portfolios. Managers avoid volatility, preferring government securities and bank placements. Contributors, in turn, judge them on smooth, low-variance returns rather than long-term wealth creation. Today, nearly all PFAs — apart from a handful of closed funds — are underperforming inflation. Contributors are simply getting poorer, and those contributions will do very little good at retirement.

Global best practice looks very different. In countries like Canada, Australia, and the Netherlands, pension funds accept volatility in the short term because they focus on outcomes over 10, 20, or 30 years. They publish returns on a rolling three- or five-year basis and align their risk appetite with their long-dated liabilities. Nigeria could take a cue here: shift away from daily pricing and toward publishing rolling three-year performance quarterly. This would maintain transparency while reframing the conversation toward long-term value.

After all, if contributors are fixated on monthly returns, PFAs will act like Lagos drivers glued to their side mirrors obsessed with the danfo right beside them, instead of focusing on the road stretching ahead.

The Asset Allocation Challenge

Another consequence of this short-termism is that Nigerian pension portfolios are overwhelmingly fixed income. Equity exposure is minimal, and alternative assets like private equity, infrastructure, and real estate are almost absent. Compared with global funds — where equities often make up 40–60% of portfolios and alternatives another 10–20% — Nigerian PFAs are outliers.

Part of this is structural. PFAs are incentivised to avoid volatility, and the accounting framework reinforces this. Bonds classified as “Held-to-Maturity” (HTM) do not show mark-to-market swings, whereas equities do. The result is predictable: PFAs hug bonds and shy away from equities.

One reform could break this cycle. From a set date, say December 31, 2025, regulators could require that all new bond purchases be marked to fair value. Legacy bonds could remain under existing classifications, but everything new would be fair-valued. This would place bonds and equities on the same footing. Once bonds are also subject to market swings, PFAs will be less biased against equities.

Globally, fair value is the standard under IFRS, but we decided to mix and match it with some Nigeria’s GAAP features which has left the system skewed.

By normalising volatility through fair value accounting, PFAs would shift focus away from avoiding paper losses and toward generating real long-term returns. Contributors, too, would learn to evaluate funds based on cash yields and long-run growth rather than month-to-month fluctuations.

In other words, it’s time to stop pretending bonds are the quiet first-born and equities the troublesome last-born. Once both are fair-valued, the household dynamics will look a lot more honest.

Unlocking Value from Market Tools

Nigerian PFAs are also restricted from practices that global peers use to enhance returns and manage portfolios. Securities lending, repos, and other capital market tools are underutilised, leaving money on the table. Allowing PFAs to engage in these activities, with the right safeguards, could create incremental returns without compromising safety.

Another area for change is the treatment of realised losses. Today, if a PFA sells an asset at a loss or terminates a placement early, it often triggers regulatory scrutiny. While well intentioned, this discourages managers from cutting losses or rebalancing portfolios (We do acknowledge that there are some bad actors in the industry) both of which are essential in professional investment management. By removing the stigma around realised losses, PenCom could foster a healthier, more dynamic investment culture. Markets move. Losses happen. Forcing PFAs to avoid taking them is like telling a Super Eagles coach never to substitute a striker having a bad day, just because it might look like a mistake. You may save face for a while, but you are unlikely to win the match.

The Bigger Balance

Reform is about balance. On the one hand, transparency and contributor choice must be preserved. On the other, PFAs need the stability and flexibility to think beyond the next quarter. International experience shows that too much short-term freedom creates instability, while too much rigidity stifles competition and innovation.

Nigeria’s pension system is at an inflection point. With trillions in assets, it could become a powerful engine for long-term capital formation — funding infrastructure, housing, and industry while securing contributors’ futures. To get there, the system must evolve beyond short-term practices, embrace fair value accounting, expand asset allocation, and allow managers to use the full toolkit of modern portfolio management.

A pension fund is not a savings account. It is a multi-decade investment in the future. The reforms ahead should reflect that reality. And if we get it right, maybe our pension funds will stop crawling like danfos stuck in Third Mainland traffic and start cruising like a Chinese express train — steady, long-term, and built for the journey ahead.

Rethinking Pension Fund Reforms in Nigeria (Part II)