ABSTRACT
Pension Funds Administrators take investment
decisions and apply investment strategies in
order to meet the various needs of retirees. The
process of selecting investment is a complicated one, but funds which are
invested on behalf of potential retirees must follow the line of the best and
appropriate investment strategy to enhance security and ensure positive
performance. Wrong investment decision, poor assessment of pension
liabilities, insufficient funding arrangements, non-preservation of benefits,
inadequate safeguard of the funds to guarantee prompt payment of pension and
other benefits to retirees and serious structural problems were the major
concern of pension management in Nigeria. This study
investigated and evaluated the effect investment strategies on fund performance
of selected Pension Fund Administrators in Lagos State Nigeria.
The study adopted survey research design. The target population of
the research consisted of 469 professional employees from the selected pension
fund administrators (PFA) because they understand the concepts of the different
investment strategies.Yamane’s sampling formula was used to arrive at a sample
size of 335 and simple random sampling technique was adopted. A structured
questionnaire was administered and returned with 100% response rate. The
Cronbach alpha reliability for the major constructs ranged between 0.77 and
0.94. The data gathered was analyzed using simple linear regressions analysis.
The findings revealed that there was a significant relationship
between Investment Strategies and Fund Performance. All the investment
strategies variables significantly affected fund performance. Investment style
had significant effect on fund performance (R=0.291; R2 = 0.084; p=0.000), Asset allocation had
significant effect on fund performance (R=0.810; R2 = 0.656; p=0.000), Risk profile had significant
effect on fund performance (R=0.216; R2 = 0.047; p=0.000, Regulatory influence had
significant effect on fund performance (R=0.169; R2 = 0.029; p=0.002).
The study
concluded that Investment strategies of the pension fund administrators (PFAs)
had significant effects on fund performance and that excellent fund performance
is largely dependent on the investment proficiency of pension fund
administrators (PFAs) as well as the investment strategies adopted. It was
recommended that models need to be constructed and experiences need to be
streamlined to assist in the evaluation of investment decisions deployed on
pension funds.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Over the
past decades, pension fund management and administration has received increased
responsiveness in many countries (OECD, 2015). In recent times, policy makers
in many countries have been attracted to pension as a source of an enabler for
funded retirement savings by the maturing workforce (World Bank, 1994), opting
for numerous forms of pension scheme. Nigeria embraced
the contributory pension scheme subsequent upon the pension reform of 2004. In
the contributory scheme, employers and their
employees contribute a percentage of the employee’s monthly incomes to a
retirement savings accounts from which they would after retirement draw their
pension benefits after retirement. Pension funds are currently amongst the key
institutional investment in the world financial and capital markets (Klumpes
& Mason, 2000).
Pension Fund Administrators (PFAs)
invest monies on behalf of retirees in equities
and other investment securities and assets to ensure increased values. They also save for retirees, preserve assets,
fund a pension plan and meet retiree’s spending requirements (Wallick,
Julieann, Christos & Joanne, 2012). To meet the various needs of retirees
or to ensure the performance of funds that is within existing regulatory
provisions, PFAs adopt investment decisions
and apply investment strategies or process, such as investment style, asset
allocation, risk profiling of funds. A good investment strategy begins with the
right allocation of assets that achieves the objectives of the portfolio. The
allocation must be centered on realistic expectations for risk and returns, and
should use varied investments in order to do away with risks that are avoidable
(Davis, Francis & Glenn, 2007).
Investments involve risk, thus PFAs need
to strike a balance between risk and potential return on investment through
their selected portfolio holdings (Wallick et al., 2012). It is unethical and
improper to carelessly invest pension funds on bad or ill-advised investment,
because these are entitlement of workers at point of exit (retirement time).
Due to the volatility and sensitivity of the pension system especially in a
developing country like Nigeria, successive government have initiated reforms
so that most employees will avoid not having enough money to cater for their
retirement (Awosika, 2009). For these reforms, it became necessary that they
discard old benefit schemes where government makes provision to guaranteeretirement
benefits toward achieving a pay-as-you-go scheme that are either fully funded
or partially funded, where risks are borne by contributors, and not the
government (Amoo, 2008). The previously used scheme lost its acceptability
because of factors such as demographic developments, future liabilities that
are unfunded, multifarious fiscal deficits and lower benefits for pensioners
(Amoo, 2008).
The Pension
Reforms Act (PRA, 2004) was created with contributions from all
stakeholders. This act is completely
premised on individual accounts which are held and managed privately by Pension
Fund Administrators (PFAs). PFAs are financial institutions established with
the aim of accruing funds in order to meet projected pension obligations of
workers; they are saddled with the duty of devoting pension contributions to
ensure that profits are made (National Pension Commission, 2008). Thus, the
bleak future of the retirees from public and private service made it paramount
for policy formulators in the country to set up pension funds, which is
contributory in nature, with part obligation on the employee and part on the
employers. The Pension Fund Administrators were licensed to properly manage
potential retiree’s funds.
The new pension scheme appears to be on
firmer grounds than the previous ones, however for the funds to perform
excellently, it still largely depends on the investment proficiency of pension
fund administrators (PFAs) and investment strategies adopted by the PFAs.
Despite the establishment of PFAs the process of selecting investment is still
complicated. On the average, investment selection have to go through asset
allocation (a method of determining how to allot an investor’s wealth among
different countries and asset classes for investment purposes) to Strategic
asset allocation (which involves outlining and fixing portfolio asset
allocations from the inception, based on historical performance data) and
investment style (Chen,
Gary & Kaplan, 2002; Reilly & Brown, 2012). If this process are not understood and properly followed it
will result in poor fund performance.
Anthony and Mustafa (2010) assert that
investment decision is not just a mathematical selection of expected returns on
various risk profile, but a whole range of factors - such as political,
economic, social factors. Despite the need to risk profile a fund, it does not
guarantee capital security or a level of performance. Risk profiling entails identifying the level of risk with
respect to investment for a client, bearing in mind, required risk, the
client’s ability and strength to accommodate risk, and the toleration level for
risk (Resnik, 2016). These concerns, along with numerous dynamics have enormous
consequences on investment choices for Pension Fund administrators. PFAs’ are
entities that have the final say, in terms of decision making. The duty of
pension administrators entails allocation of assets, industry by industry, on a
yearly basis to ensure that they get maximum returns on investment benchmarks
pre-assessed on a particular fund. Allocation of assets and investment style
verdicts that are reached by handlers of these funds for a long-term basis,
stand as the bedrock of what makes up the advantages to plan members, and also
help give form to the economy of a nation substantially (Tsado & Guru,
2011).
Fund managers can be inactive, that is,
just buying and holding funds or passively indexing just to reduce transaction
cost. On the other hand, fund managers can employ an active investing strategy,
a situation where they invest in a fund that is momentum trading or “actively
managed” (an attempt to outperform benchmark indexes) instead of duplicating
market’s returns, as seen with index-tracking or passive investment funds
(Blankfein & Cohn, 2010). Studies have also shown that on the average,
active funds cannot beat the market, thus corroborating the findings of critics
(Malkiel, 2003). Some authors like Morey (2005), Morey & Gottesman (2006),
Huebscher (2009), and Philips; Kinniry Jr.; Walker; Schlanger; Hirt (2015),
found dissimilar outcomes on fund rating. Higher-rated funds were found to outpace
lower-rated funds.
Furthermore,
according to Reilly and Brown (2012) the highest compounded returns from the
broad asset class, such as bonds,
Treasury bonds, corporate bonds, and high-yield bonds, in the long run, will
most likely accrue to those investors with larger exposures to risky assets.
The various moves made by PFAs, to make investment in a certain asset class or
otherwise hinge on different reasons and their significance (Tsado & Guru,
2011). Also, there is a division of thought and experience in the world of
investing, and there are studies suggesting that both sides are right. However,
there is also a division among practitioners as to which strategy is the best.
There exists no backdoor or guarantees to being successful when it comes to
investing, however, sustaining a realistic and methodical attitude to the art
of investment may in some cases enhance the possibilities of investment
accomplishments as time progresses (Reilly & Brown, 2012).
For accurate management of pension by
Pension fund administrators (PFA), it is imperative that funds which are
invested on behalf of the client (potential retirees), must toe the line of the
best and appropriate investment strategy to enhance fund security and
performance. The Investment strategy adopted by the PFA goes a long way in
determining how successful they perform, otherwise retirees both from the
public and private sector may face a miserable future (Ayegba, James &
Odoh, 2013). This study intends to explore and investigate deeply, the impact,
importance and extents that investment strategies go to in order to engender
fund performance.
1.2 Statement of the Problem
Sule and Ezugwu (2009) assert that in
the past it has been established that some of the issues believed to be
responsible for the difficulty in accessing retirement benefits are poor
documentation of work history, lack of transparency and accountability by the
operators of the pension funds, and non-compliance by the operators of the pension
funds to the laid down processes in the scheme. At present, the new pension
reform of 2014 confirms that the continuous review of pension’s regulations and
gratuities in the country without a well structured approach for funding the
system has become a key challenge that is creating untold economic hardship for
retirees (Ayegba, James & Odoh, 2013). This implies a researchable gap in
the operation of funds in Nigeria.
One major area of study where theory do
not match with practice or investment fails to deliver consistent fund
performance in literature is the investment strategy of fund administrators.
The close connection between poorly performing fund and different investment
strategies (such as strategic tactical and integrated asset allocation, risk
profile and regulatory influence) employed by practitioners is still an
evolving area of study. Studies have shown that in some situations regulatory
influence positively impact fund performance. In some other cases, regulatory
influence have a deleterious effect on fund performance. For instance, German
Pensions at the mercy of risk-based regulations, commonly have less than the
permitted maximum of 35% in equities (Davis, 2013). But when the limits are
enforced it leads to lower performance. Thus, regulations which aim to protect
fund can also limits investors from achieving higher fund performance.
Stone, Chen, Marsella, Rebekah,
Nicholas, Paul and Michael (2015) posit that active strategies are not
necessary factors that can be used to aim at return maximization; instead, they
centre on risk mitigation, income generation, or social causes, amongst other
factors. In the US, Kremnitzer (2012), discovered that actively managed funds receive an average 3 year
return of 2.87% more than passively managed funds, however, a study by Carhart
(1997) conducted along these lines of thought, deduced that actively managed
investment funds have tended to under-perform their passively managed
counterparts.
With respect to the Nigerian pension and
investment situation where scholarly publications constantly bemoan the plight of pensioners,
especially regarding shoddy and irregular payment of their pension entitlements,
among other problems (Elumilade,
1999; Ogunbameru, 1999; & Idowu, 2006), fund performance has not been
investigated along the line of how investment style and strategy impacts
performance in the country. The varied results suggest that incongruities exist
across the world pension space, as such it is pertinent to factor in the whole
spectrum of investment strategy in other to evaluate the effect on fund
performance since the pension reform of 2004 (Odiah & Okoye, 2012)
Furthermore, close analysis of fund
performance literature both in Nigeria and outside Nigeria revealed that apart
from the scanty studies (especially in Nigeria) on risk profile and regulatory
influence effect on fund performance, there exist a plethora of anomalies on
the effect of investment strategies on
fund performance. Studies did not clearly show the effect of risk profiling and
investment style on the performance of funds. In addition disparate schools of
thoughts, experts and fund managers have not conclusively reported on the best
strategy that brings about superior fund performance. Thus, it is the aim of
this research, apart from contributing to literatures on fund performance also
seeks amongst other things, to determine the relationship between various
investment strategies and fund performance in Nigeria.
1.3 Objective of the Study
The general
objective of this study is to examine the effect of investment strategies and
fund performance of selected pension fund administrators in Lagos State,
Nigeria. The specific objectives are to:
1.
identify
the effect of investment style
on fund performance of PFAs;
2.
determine
the effect asset allocation has on fund
performance of PFAs;
3.
evaluate
the effect risk profile has on fund performance of PFAs; and
4.
assess the
effect of regulatory influence on fund performance of PFAs.
1.4 Research Questions
In order to address the objectives of the study, the following research
questions were designed.
1.
What is the effect of investment style on fund performance of PFAs?
2.
What effect will asset allocation have on fund performance of PFAs?
3.
By what means does the risk profile affects PFAs fund performance?
4.
What effect does regulatory influence have on Fund performance of PFAs?
1.5 Hypotheses
The
objectives of the study and its research interest are under consideration,
therefore, the following null hypotheses were postulated at 5% level of
significance:
Ho1: Investment style has no significant
effect on fund performance of PFAs.
Ho2: Asset allocation has no significant effect on fund performance of PFAs.
Ho3: Risk profile has no significant effect on
fund performance of PFAs
Ho4: Regulatory influence has no significant
effect on fund performance of PFAs
1.6 Scope of the Study
This study focused
on selected Pension Fund Administrators (PFAs) and the strategic investment
that is employed in guaranteeing fund performance of the pension funds. With
respect to coverage, this study only focused on the following three selected
PFAs: ARM Pensions, Leadway Pensure, and PAL Pensions. The study was further
limited itself to assessing professionals in the field under observation, among
other employees, because of their wealth of knowledge in fund administration.
With respect to geographical location, Lagos State of Nigeria has been chosen
as the area of study, because most of the PFAs have their head offices situated
in Lagos the commercial hub of the nation. The sample size was determined using
the formula recommended by Yamane (1967). Primary data were used.
1.7 Significance of the Study
It is the
hope of the researcher that at the end of the study, the result derived would
uncover the benefits and shortcomings of investment strategies employed by
PFAs, in order to secure a brighter future for Nigerian workers after their
active service years. Furthermore, the management of the concerned PFAs would
find this research work very relevant in articulating investment strategies.
They would also be enlightened on how to properly invest the pension funds of
employees of various public and private institutions so that they can obtain a
better return on contributed funds. It shall also provide the management of
these PFAs with a framework for investing pension funds. The existing active
customers and retirees would find the work invaluable as they stand to benefit
from the improved service delivery and returns that would be derived from
improved fund performance and hence reap higher pensions payment. The
stakeholders in pension administration would find in this research work, an
important source of knowledge that is capable of assisting them in making
qualitative investment decisions. Specifically, the government would benefit as
future liabilities which used to be unfunded reduces, derived from the
advantages of deploying better investment strategies by pension administrators.
This research project would serve as a significant repository of knowledge for
students. It would further help their appreciation of the topic and provide a
bedrock for more studies on the topic and most importantly, it is envisaged
that it should be useful to public policy analyst, particularly policy makers,
scholars and the society at large.
1.8 Operationalization
of Variables
The dependent variable in this study is fund performance indicated by
Unit Price. The independent variable is investment Strategies; and the proxies
for investment strategies are Investment Style, Asset allocation, Risk profile,
and Regulatory influence.
Y = f (X)
Y = Dependent Variable
X = Independent Variable
Where:
Y = Fund Performance
X = Investment Strategies
X = (x1, x2,
x3, x4)
Where:
x1=
{Investment Styles (INS)}
x2 {Asset
Allocation (ASA)}
x3 = Risk
Profile (RIP)
x4 =
Regulatory Influence (REI)
Functional Relationship
Y = f
(x1) ………………………………………………………………Equation 1
Y = f
(x2)………………………………………….................................Equation 2
Y = f (x3)……………………………………………………………
…Equation 3
Y = f (x4)………………………………………….................................Equation 4
1.9 Operational Definition of Terms
Investment: The action
or process of investing money for profit.
Pensioner: A person
who collects a pension, most commonly because of retirement from the workplace
Pension: a programme
established purposefully for workers, it entails the monthly remittance of
money into a dedicated account throughout the period a worker is in active
service, and payments are made from this account after the retirement of the
worker, in order to sustain him or her.
Asset Allocation: asset
location is measured by strategic asset allocation,tactical asset allocation
and integrated asset allocation
Fund: A sum of money or other incomes set aside for a defined investment
purpose
Fund Performance: refers
to the returns from an invested pension fund quantified by the unit price.
Risk Profile: Risk
Profiling functions as an indicator with respect to what investors might
anticipate in terms of fund’s volatility
Investment
style: refers to diverse style
characteristics of equities, bonds or financial derivatives within a given investment philosophy. It can be active or
passive. It is the determined beliefs of the investor.
Investment manager:
refers to a person or organization that makes portfolio investments on behalf
of clients in accordance with predetermined investment objectives.
PFA: Acronym for
Pension Fund Administrator. A PFA is a company that has been given licensed by
the federal government to manage pension funds and pay pensioners their
benefits in line with the Pension Reform Act
PENCOM: refers to
the National Pension Commission which is the regulatory body that ensures
effective administration, supervision and regulation of the Pension Schemes in
Nigeria.
Regulatory Influence:
these are restrictions and controls specified by the Pension commission that
must not be violated.
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