Funmilayo Odude, Partner, Commercial and Energy Law Practice (CANDELP)

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How to bridge Nigeria’s infrastructure deficit through pension funds 10 Jun 2024

The Federal Government (FG) caused unease last month when it announced plans to “unlock” local funds, including pension funds, to finance infrastructure projects. The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, in a parley with the press after the meeting of the Federal Executive Council that held on 14 May 2024, stated that the FG was eyeing pension funds, life insurance funds, and investment funds generally to fund infrastructure projects in the country. He described an opportunity whereby the N20 trillion pension fund assets in Nigeria can be channeled into vital sectors such as housing and provision of long-term mortgages. This financing, he said, could bridge Nigeria’s housing deficit by providing mortgages at low interest rates and with long-term maturities.

The public outcry that greeted this proposal mostly stemmed from a misconception that the FG had direct access to the funds and could appropriate it at will, like it would with tax revenues generated by it. It was also not disconnected from the high level of distrust Nigerians have for the government.

Pension funds are not public funds and do not form part of government revenue. The pension industry is highly regulated and governed by legislation – the Pension Reform Act (PRA) 2014 and regulations made by the National Pension Commission (PenCom). The Act creates the Contributory Pension Scheme (CPS) where employers and employees, both in the public and private sectors, contribute a minimum total of 18% of the employee’s monthly remuneration into his or her Retirement Savings Account (RSA). The CPS is fully funded, the funds and assets are held in third-party custody, and privately managed, based on individual accounts. It is regulated by PenCom who issues licenses to and regulates the activities of the funds’ administrators, known as Pension Fund Administrators (PFAs), and the custodians, called Pension Fund Custodians (PFCs). PenCom also formulates, directs, and oversees the overall policy guidelines on pension matters in the country.

Investment of pension assets must be in accordance with the extant law and regulations issued by PenCom. Unlike regular investments, where obtaining the highest return on investment is the primary objective, the objectives of pension investment are more aligned towards security of funds and achieving an ultimate trade-off of risk and return through strategic asset allocation. Section 85(1) of the PRA 2014 provides that all contributions shall be invested by the PFAs with the “objectives of safety and maintenance of fair returns on amount invested.” In the risk management for pension assets, therefore, quantitative limits of individual class or mixed class assets and preservation of capital while obtaining a good income are preferred and viewed in line with the principle of the prudent man.

The available investment windows under the law and PenCom’s Regulation on Investment of Pension Fund Assets include government securities, corporate bonds and debt, money market instruments, ordinary shares, and open- and close-end funds.

Section 86 of the PRA provides the modes of investments of pension funds, subject to guidelines issued by PenCom. It lists bonds, bills and other securities issued or guaranteed by the FG and Central Bank of Nigeria; bonds, bills and other securities issued by the states and local governments; bonds, debentures, redeemable preference shares and other debt instruments issued by corporate entities and listed on a stock exchange registered under the Investments and Securities Act (ISA); ordinary shares of public limited companies listed on a securities exchange registered under the ISA; bank deposits and bank securities; and investment certificates of closed-end investment fund or hybrid investment funds listed on a securities exchange registered under the ISA with good track records of earning. Others are units sold by open-end investment funds or specialist open-end investment funds registered under the ISA; real estate development investments; or specialist investment funds and such other financial instruments as PenCom may, from time to time, approve.

These classes of investment may be local, i.e., within the country or international, i.e., outside Nigeria, subject to the portfolio limits for investment of pension fund or assets outside Nigeria as may be issued by the President upon recommendation by PenCom.

Based on these stipulations, Mr. Edun was not proposing any contravention of the law when he described pension funds as a source of investment in the housing sector. Real estate development is a permissible mode of investment of pension funds under the Act. He probably should have pointed out that the selection of this asset class – or any other asset class under the Act – is vested in the PFAs.

Moreover, under the Amended Investment Regulation issued by PenCom in 2019, pension fund assets of RSA Funds under management with PFAs shall not directly invest in real estate. Such investments shall only be through instruments such as mortgage-backed securities (MBS), real estate investment trusts (REITs) registered by the Securities and Exchange Commission (SEC) and similar non-interest compliant instruments. However, Closed Pension Funds Administrators (CPFAs) and approved existing schemes that operate Defined Benefit Schemes are allowed to directly invest in real estate, subject to guidelines issued by PenCom.

The regulations further provide for the requirements to be satisfied for an investment in MBS, including meeting rating requirement (minimum credit rating of ‘A’ issued by, at least, two rating agencies, one of which must be a rating agency incorporated in Nigeria and registered with SEC), the face value of the issue, the market value of the mortgages securitising the issued MBS, and that they must be trade-able on a securities exchange registered by SEC.

In the 2021 Annual Report issued by PenCom, the latest annual report published on its website as of the date of writing this article, it was reported that as of 31 December 2021, the net asset value of the pension assets under management in Nigeria stood at N13.42 trillion. 68.46% of the RSA Active Portfolio is invested in Federal Government of Nigeria (FGN) Securities, including bonds, treasury bills, agency bonds, sukuk, and green bonds; 14.64% in money market instruments; 8.14% in equities; 6.03% in corporate debt securities; 1.37% in state government securities; 0.66% in infrastructure funds; 0.27% in private equity funds; and 0.14% in mutual funds/REITs.

The Nigerian pension fund assets have generated a large pool of long-term investible funds with an estimated annual growth rate of 30%. The government, including the regulator of the industry, PenCom, has no power to compel PFAs and other operators to invest in any asset class. The investments, though subject to compliance with the extant regulations, are purely business decisions. It then behooves on any potential investee, in this case the government, to create attractive investment portfolios to achieve its goal of bridging the infrastructure deficit in Nigeria, including housing.

Historically, the Nigerian government has relied more on debt than investment to bridge the huge infrastructure deficit in the country. Public-private partnerships have played very limited role in addressing the deficit. With a growing debt burden, it has become necessary to diversify the sources of financing for public infrastructure in the country.

Whereas the infrastructure deficit presents opportunities for investors, either through direct investment or portfolio investments in government and agency bonds that fund infrastructure projects, the country has not attracted enough investment to keep pace with its needs.

Infrastructure investments, which usually require large amounts and long tenors, typically put such investments beyond risk appetite of commercial banks. Institutional investors, including PFAs, are more able to make such investments. But there are limits to the risks these institutional investors are willing to take, especially PFAs who usually have low- to moderate-risk appetites. Unfortunately, Nigeria’s history with infrastructure projects have not been stellar. Factors such as rule of law, political environment, currency depreciation, poor project management, and sudden changes in government policies can and still affect the viability of infrastructure projects in the country today.

Harnessing pension funds to address Nigeria’s infrastructure deficit undoubtedly presents a promising prospect for sustainable development in the country. But to turn the prospect to reality, the government must play a vital role in ensuring the attractiveness and viability of infrastructure projects by offering projects with low-risk profiles, stable returns, and clear regulatory frameworks.

It is the government’s responsibility to instill confidence in PFAs to invest in infrastructure. In light of this, the government should create and maintain an enabling environment that safeguards investment of pension funds in infrastructure.

The mandate of the PFAs remains to prudently manage the pension funds to secure the financial well-being of retirees. They have the responsibility of implementing robust risk-management strategies and conducting thorough due diligence before investing. This is critical to the long-term security and sustainability of the pension funds. Mr. Edun is surely well aware of this.

Funmilayo Odude is Partner at Commercial and Energy Law Practice (CANDELP).