National Pension Fund, (PENCOM)’s proposed investment of part of the N1.9 trillion so far collected has been put on hold as a result of the absence of an inflation index bond, an instrument designed to cut out the inflation risk of an investment.
PENCOM had, late last year, requested for the pegging of the yields of bonds above 7 years to the inflation rate, ostensibly to make up for lower interest rates on savings, when it first mooted the idea of the inflation index bond.
But the Debt Management Office (DMO) said the instruments will not be issued until the next 15 months when the Agency must have consolidated the rapid transformation that took place in the market in the past 3 years.
An index bond is the one which cash flow is inflation-adjusted, by being linked to the purchasing power of the nation’s currency.
In the United States, for instance, there is the Treasury Inflation Protection Securities (TIPS) designed to cancel the capital eroding effects of inflation. Their interest rate remains fixed but the principal is adjusted to match changes in a price index such as consumer price index (CPI).
“This can only be possible after we have fine-tuned and consolidated the rapid transformation that took place in the bond market in the last 3 years. Over the next 12 to 15 months, we will focus on strengthening institutions, regulation and processes; new introductions and sophistications will follow later.” says Abraham Nwankwo, the director general of DMO.
Analysts hold a consensus view on the beauty of the inflation protection security for PENCOM investments which has existed elsewhere in the world, including emerging economies, but are equally concerned that the continued absence of investment channels for the N1.8 trn pooled into the pension fund is defeating the whole essence of the fund.