Pension experts set records straight on investment of pension funds

Experts in the nation’s pension industry who responded to argument in some quarters whether it is right or wrong for the governors of the 36 states of the federation to borrow from the accumulated pension funds under management by various pension administrators, have spoken on the matter in order to set the records straight. EDET UDOH reports.

Recall it was widely reported that the governors had last week resolved to borrow about N17 trillion from two sources intended for infrastructural developments. They would borrow N2 trillion at nine per cent interest from the growing funds under the Contributory Pension Scheme, as well as accessing N15 trillion for national infrastructure funding through InfraCredit at a lower interest rate of five percent.

The Nigerian Governors’ Forum (NGF) Chairman and Ekiti state Governor, Kayode Fayemi, had while featuring on the Channel Television programme “ Politics on Sunday” recently said there was nothing wrong in the borrowing plan.

Fayemi said: “There is nothing wrong and we are not going to be apologetic that we want to borrow to fund infrastructure. We are not borrowing for consumption and the various projects that are going to be allowed to access these funds are going to be determined by the committee that we set up at the National Economic Council NEC.”

While insisting the governors could access the funds, the governors said there was an urgent need for the country to increase infrastructural developments, by sourcing alternative means beyond the budget.

The governor  who said Nigeria was not as rich as it used to be, said: “In the 2021 budget appropriation act, the ministry that has the highest allocation is the Ministry of Works and Housing with about over N400 billion, which is equivalent to less than $1 billion today.

This elicited reactions from stakeholders including the National Union of Pensioners (NUP), the umbrella body of pensioners, and the Socio-Economic Rights and Accountability Project (SERAP) which kicked against the move.

SERAP In clear terms asked President, Muhammadu Buhari to use his “good office and leadership position to urgently instruct the Director-General and Board of the National Pension Commission (NPC) to use their statutory powers to stop the 36 state governors from borrowing and/or withdrawing N17 trillion from the pension funds purportedly for infrastructural development.”

But experts in the pension industry said there is no word like “borrow” in pension lexicon but “invest” stressing that the principal word for pension fund is “investment” not “borrow”. They also warned against interchanging these two words as they are not interchangeable words in the pension industry.

In order to set the record straight as well as educate the public on the workings of pension funds, the Chief Executive Officer (CEO), Pension Fund Operators Association of Nigeria (PenOp) Oguche Agudah, said there have been a number of reports about the government/governors borrowing trillions of Naira from pension funds to finance infrastructure flying around, and that the association felt the need to clarify a number of points.

He noted that the headline of the reports were sensational and do not capture the full thrust of the issues and that what is being referred to is a proposed infrastructure fund to be professionally managed by the Nigeria Sovereign Investment Authority (NSIA), noting that there have been various discussions spanning months regarding how best to structure the funds to invest in infrastructure development and also attract local and international investors.

He posited that there will be a legal and commercial framework in place for this proposed infrastructure fund! adding that to the best of the association’s knowledge, this is still in the proposal stage, when the fund gets finalized, pension funds can decide if they will invest in the fund, what level of investment they decide or if the fund suits their appetite.

“There are 22 (Twenty Two) pension fund Administrators (PFAs) and Six (6) Closed pension fund Administrators (CPFA). Each of these 28 entities have their individual boards, investment strategies, investment appetites, investment committees. It is not possible to compel all 28 of them to invest by fiat in something that does not suit their individual strategies or risk profile.

“In addition, whatever, investment they make has to follow the laid down PenCom guidelines on investment of pension funds,” he said.

Agudah maintained that the PFAs and CPFAs have a fiduciary responsibility to manage the funds they hold in trust for their contributors so that when they retire, they will have decent funds to fall back on. They have carried this function out successfully for the past 16 years.

“Having said that, the Industry, has also been engaging with various parties on how best to individually and collectively fund infrastructure in a sustainable and responsible manner with a commercial return for the benefit of all stakeholders.

“The industry has recorded some success on some infrastructure funding across the country directly and through funds, investing in power plants, student accommodation, roads, telecommunication infrastructure, among others,” he submitted.

The PenOp CEO posited that the industry is talking to a number of partners and looking to partner more in infrastructure funding in ways that are beneficial to all stakeholders, which is delivering a commercial and sustainable return for contributors, helping to grow the economy, create jobs that will fuel more contributors for the industry and by its investment activities improve the governance of projects and companies involved in this space.

An expert who asked that his name should net be mentioned, said the governors last week reportedly proposed to borrow around N17 trillion from the pension funds, adding that this again was an indication that most of those in authority are not conversant with the workings of the Pension Industry specifically the Contributory Pension scheme (CPS).

“It would interest you to know that the total value of the pension funds under management as at September 2020 stood at N11.57 trillion. Besides pension funds are not borrowed but rather invested in line with the investment regulations issued by the National Pension Commission,” he said.

He submitted that the investment regulations allow pension funds to be invested in asset classes such as Bonds, Sukuk, Treasury Bills, Global Depository Notes and other securities issued by the Federal Government of Nigeria, provided that the securities are guaranteed by the Federal Government of Nigeria.

The investable assets, according to him, also include Bonds and Sukuk issued by eligible State and Local Governments provided that such securities are fully guaranteed by Irrevocable Standing Payment Orders (ISPOs) and subject to the fulfilment of the conditions set out in the Commission’s Circular on “Minimum Requirements for the inclusion of State Bonds as Investible Instruments in the Pension Industry’’.

According to him, the Commission had deemed it necessary to prescribe that pension funds may be invested only in the Bonds floated by states that have fully complied with the CPS. This however, he said does not guarantee pension funds investing in the state bonds, as Fund Administrators are required to conduct several risk analyses to decide if investing in such bonds meets expected yields and risk appetite. Accordingly, Fund Administrators may wish not to subscribe to a state bond, he submitted.

“From the fore going it is clear that though governors may have the intention to borrow pension funds and SERAP had raised the alarm, the realization of this intention is really not practicable,” he posited.

The expert maintained that it is noteworthy that one of the major achievements of the Pension Reform is the establishment of robust legal and institutional frameworks for the administration of pensions in Nigeria, stressing that in addition to the legal safeguards and institutional checks and balances, the Commission, as the regulator of all pension matters in Nigeria, has entrenched good corporate governance practices, high ethical standards instituted through rigorous supervision and regulation of the industry.

Also speaking on the matter, the Director, Centre for Pension Rights Advocacy, Ivor Takor, said “News has it that the Governors Forum is considering borrowing N17 trillion from pension funds to develop infrastructure. This as expected has generated mixed reactions from the public including Stakeholders such as the the Nigerian Union of Pensioners, that kicked against the move.”

According to him, the misleading issue in the report was the word “borrowing” from pension funds, which he said he had made clear on several occasions and write ups that pension funds is not for borrowing. “Pension funds is for investment. That is what is provided in Section 86 of the Pension Reform Act 2014,” he stated .

Takor maintained that Section 86 of the Pension Reform Act 2020 provides that Subject to guidelines issued by the Commission, pension funds and assets shall be invested in any of the following instruments, adding that the instruments are listed from paragraphs (a) to (i) of the Section. And that Paragraph (i) provides for investment on “specialist investment funds and such other financial instruments as the Commission may, from time to time, approve”. Infrastructure is a financial instrument, which pension fund can be invested in, he added.

“There are guidelines for investment, issued by the National Pension Commission (PenCom). The spirit behind Investment of pension funds are two, security of the investment and adequate return on investment. I know as a member of the pioneering Board of PenCom, that PenCom will never compromise on this. Theneeds to be made that if the Governors Forum can come up with instrument(s) on infrastructural development that meets the guidelines of PenCom on investment of pension fund, there is no reason why pension funds can not be invested in such instrument(s),” he posited.

He noted that pension funds are not in PenCom’s account, nor the account of any Pension Fund Administrator (PFA) or even in the Central Bank of Nigeria that any Governor can just go there and borrow.

The funds, he maintained, are in individual Retirement Savings Accounts of contributors, stressing that the principal word for pension fund is “investment” not “borrow”. “We should stop interchanging these two words as they are not interchangeable words in the pension industry. Borrow is not even a lexicon in pension language,” he advised.

Takor maintained that he is strongly of the view that pension funds have a strong social connection apart from its economic connection, stressing that pension is an old age social security and that the Contributory Pension Scheme (CPS) that accumulated the pension fund that is being talked about is a product of Pension Reform in the country, with the Pension Reform Act 2014 being the law.

“There are several State Governments that have not keyed into the Contributory Pension Scheme. Some that have keyed into it are in default of their own laws. These State governments should stay away from anything that has to do with investment of pension funds. Let me say with all sense of responsibility that trade unions, the Nigeria Labour Congress and the Trade Union Congress will not allow any state governments that has not fully keyed into the CPS to eye the fund for any of its investments. They should put their mouths were their hands are. They have no business with pension funds,” he said.

According to PenCom, the pension fund assets stood at N11.57 trillion as at September 30, 2020, adding that a breakdown of the pension industry portfolio indicated that the pension funds were mainly invested in Federal Government Securities, with an allocation of about 65 per cent of the total pension assets (FGN Bonds: 57 per cent, Treasury Bills: seven per cent, Sukuk Bonds: one per cent while Agency Bonds and Green Bonds: less than one per cent).

PenCom maintained that the value of investments in domestic quoted ordinary shares was N585.77 billion (five per cent of Total Assets under Management) as at 30 September 2020, indicating an increase of N61.00 billion (11.62 per cent) compared to the value of N524.77 billion as at 30 June, 2020.

The increase in the value of investments in domestic quoted equities, it said was primarily due to the appreciation of some stocks during the reporting period, as the Nigerian Stock Exchange All Share Index (NSE-ASI) rose by 9.61 per cent from 24,479.22 basis points (bps) as at 30 June, 2020 to 26,831.76 bps as at 30 September, 2020 and the market capitalization was also up by 9.79 per cent, from N12.77 trillion as at 30 June 2020, to N14.01 trillion as at 30 September 2020.

The the pension sector regulator said the value of investments in FGN Bonds increased by N329.88 billion (5.23 per cent), FGN Sukuk by N9.16 billion (9.31 per cent), while investments in Treasury Bills decreased by N239.85 billion (23.51 per cent), Agency Bonds by N0.45 billion (4.07 per cent) and Green Bonds by N1.55 (10.62 per cent) billion and that the reduction in the value of the Treasury Bills was due to maturities and reallocation to other asset classes, mainly FGN Bonds and Money Market Securities.

PenCom posited that N5.85.77 billion was invested in domestic ordinary shares, which as 5.06 per cent, while N76.46 billion was invested in foreign ordinary shares 0.66 per cent.

State government securities gulped N150.33 billion (1.30 per cent); Corporate Debt securities, N670.45 billion (5.80 per cent); Supra- national bonds, N1.34 billion, (0.01 per cent); Local money market securities, N2.01 trillion (17.37 per cent); Foreign money market securities, N17.64 billion, (0.15 per cent) and mutual funds, N35.12 billion, (0.30 per cent).

Open/close -end funds, N22.92 billion, (0.20 per cent); REITS, N12.20 billion, (0.11 per cent); Real estate properties, N217.58 billion, (1.88 per cent); Private equity fund, N34.46 billion, (0.30 per cent); infrastructure fund, N54.57 billion, (0.47 per cent) and Cash & other assets N162.21 billion, (1.40 per cent).