Liquidity squeeze and the traction of pension

Great economies are usually those that among other things have relatively high Gross Domestic Product (GDP) and solid financial cushion or at least inhere the capacity to conjure one when the need arises. With yawning gaps and deficits, Nigeria cannot be said to be a great economy, the rebasing narrative that makes it the largest economy in Africa notwithstanding. The GDP growth rate has been at the lowest ebb in recent times. It remains a largely import-dependent mono-cultural economy that has scant regard for human capital and creativity and embodies a perverse reward system that in itself stifles productivity.

Nigeria is currently at a critical juncture. It is either the right decisions are taken and the right things done or we take an irretrievable plunge economically. There is no time for rhetoric or political statements. For decades, we have been hearing of the need to diversify the economy. It has almost become a cliché. But the truth of the matter is that economic diversification is not done by fiat and cannot be issued as a decree. There must be a well-laid-out plan to incentivize the development of non-oil sectors. In other words, investment in them must be made attractive and products therefrom internationally competitive.

This brings us to the challenges of infrastructure which is a major impediment to the diversification of the economy. The infrastructural deficiencies of the country are acknowledged and well-documented and the negative impact on productivity glaring. Our mineral resources would not have a competitive price tag if the cost of production remains prohibitive because of lack of basic infrastructure and necessary incentives. The same goes for agriculture which produce rots away owing to inadequate storage facilities. We should see infrastructure beyond buildings, roads, electricity, running water, etc. It should also include the necessary policy framework to drive growth.

Following the drop and/or volatility of oil prices in recent times and the concomitant large-scale funding gap of the 2016 budget, the Federal Government is obviously at its wit’s end in search of alternative sources of funding to bridge the deficit. The global economic meltdown has adversely affected institutional investment in infrastructure as big corporations are hoarding cash and private sector participation in infrastructural development in Nigeria has often been mired in controversy. A state in Nigeria has had to practically construct toll gates and proceeded with the collection of tolls even before the associated road construction properly got underway amid protests by residents in the area and other stakeholders.

As hinted above, great economies include those with huge financial backbone. The Contributory Pension Scheme (CPS) has the potential to provide the necessary financial cushion in our drive to build a solid economy beginning with addressing our infrastructural deficiencies. From a deficit of more than two trillion Naira in the old defined benefit scheme before 2004, the CPS is closing in on six trillion Naira in the amassment of pension funds even when a greater percentage of this is illiquid as pension funds don’t lie idle in bank accounts. This is even with far less than 10% market penetration in the pension industry. In other words, less than 10% of Nigerian workers in the formal and informal sectors of the economy have enrolled in the CPS. This explains the great potential and immense possibilities of the industry. While savoring the excitement generated by the remarkable success of the CPS, it is important to note the marked difference between it and the old defined benefit scheme. This is because the word pension in Nigeria has acquired a pejorative connotation as a result of the runaway corruption that characterized the old scheme and still persists.

The various tiers of government have been eyeing the pension funds as a possible source of funding for infrastructure and other development projects. Interestingly, this includes some states that have yet to comply with the Pension Reform Act 2014, by putting the necessary structures in place and enlisting in the CPS. The Federal Government has yet to wield the big stick to bring every state and every worker into the scheme.

There is no gainsaying the fact that there must be an airtight policy framework for investment to ensure that risks are reduced to the barest minimum. Pension funds are held sacrosanct in view of the fiduciary relationship that exists between the Retirement Savings Account (RSA) holders and the Pension Fund Administrators (PFAs).

It should be reiterated that pension funds are well-positioned to play a critical role in economic development in Nigeria. However, excitement must give way to reason to ensure proper application of the funds. It is gratifying that the investment portfolio in the pension industry has since 2010 been diversified to allow investments in infrastructure funds and bonds as well as other asset classes such as supranational bonds and private equity funds. Before then, The National Pension Commission (PenCom) regulation on the investment of pension assets only allowed investment in ordinary shares, money market, corporate bonds and open -and close-end funds. All these are core asset classes. PenCom has done a marvelous job in regulating the industry so far.

The question now remains how funds in this subsector can be mobilized without the necessary prudential safeguards watered down or even compromised. The Honorable Minister of Power, Works and Housing, Mr. Babatunde Raji Fashola recently at the Nigerian Pension Industry Strategy Implementation Roadmap Retreat organized by PenCom advocated the use of pension funds to address the infrastructural deficiencies of the country. In fact, the minister stated that Nigeria should take the lead in Africa in using people’s funds to drive inclusive growth. Said he: “I see a future for Africa led by Nigeria, using the resources of the people to build a future that include the people. ”

Such optimism has been palpable not only in Nigeria but in other countries in Africa including South Africa, Kenya, Uganda and Tanzania, where pension funds are witnessing tremendous growth. But there are many issues for consideration and structures to be put in place before the desired results can be achieved.

First of all, transparency in the entire processes leading to the choice, funding and execution of projects must not be compromised. Projects must be in sync with a development plan and/or vision with clear deliverables and milestones as well as mechanisms inbuilt or otherwise for monitoring and evaluation.

As I said earlier, PenCom has been outstanding in the regulation of the CPS; ensuring strict compliance with the ground rules of the industry as laid out in the Pension Reform Act 2014. An unswerving oversight mechanism has to be established to ensure all-round compliance not only with the policy framework for investment but also the actual rendition of the project. This is to guarantee the retirement of whichever instrument has been used in the investment. Also, Regulatory approaches must be consistent.

It is important to note that the investment of pension funds in infrastructure development requires some measure of capacity building to achieve the desired results. We have to shore up our expertise across the entire chain. We can achieve this through specialized training and collaborative efforts with countries that are way ahead of us in this regard. For instance, more than USD93 trillion is owned by institutional investors including pension funds in Europe alone. The Organization for Economic Co-operation and Development (OECD) is already sharing their Policy Framework on Investment with 30 countries including seven countries in Sub-Saharan Africa while the Southern African Development Corporation (SADC) is working with OECD towards developing a Regional Investment Policy Framework.

With the necessary measures put in place and the right steps taken the pension funds might well be the solid backbone required to jumpstart our economy beginning from massive infrastructural development.

Paddy Ezeala (Tel: 08023061283) paddyezeala@yahoo.co.uk) – a strategic communication specialist – is Head, Corporate Communication, Premium Pension Limited.