Market Intelligence

Pension Assets: Opportunity to bridge Nigeria’s infrastructure gap and earn decent yield


October 10, 2016 | 12:30 am
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The Federal Government (FG) may have stimulated the process of accessing the pension assets for funding infrastructure development in Nigeria.

According to the 2017 budget proposal, the FG proposes to set up a $25 billion Infrastructure Development Fund.

It will be recalled that the dearth of instruments in which pension assets could be invested is one of the reasons cited by industry operators for the lack of impactful deployment of the assets towards infrastructure development.

The Contributory Pensions Scheme (the Scheme),introduced by the Obasanjo Administration in 2004, was a quintessence of innovative thinking as it came at a time when many federal and state government ministries, departments and agencies were burdened with huge pension liabilities.

Today, the size of pension assets in Nigeria stands at slightly under N6 trillion (c.US$20.69 billion). Consequently, economy watchers and analysts have advocated the use of part of the assets to bridge the infrastructural gap in Nigeria, which is currently estimated at c.US$2.9 trillion.

For instance, Sammy Chidoka, a Director at Planet Capital Limited, a Nigerian Investment Banking outfit argues, “I totally support the investment of pension assets in infrastructural development. There are precedents across the world. In Canada, the pension assets are invested in infrastructure, so I don’t see why that can’t happen in Nigeria”

In support of Chidoka’s argument, researches confirm that on average, about 5 percent of pension assets in Canada are invested in infrastructure-related instruments, while about 10 percent and 3 percent of the assets go to infrastructural development in Australia and the United States of America, respectively.

Comparatively speaking however, Nigerian Pension Fund Administrators (PFAs) allocate a meagre 0.03 percent of the fund assets to infrastructure-related instruments.

Going by the investment guideline issued in line with the provisions of the Act, PFAs may invest up to 80 percent of Assets in bonds, bills and other securities issued or guaranteed by the Federal Government and the Central Bank of Nigeria, and up to 5 percent in infrastructure bonds.

This implies that the Federal Government could attract up to N300 billion (circa. US$1billion) of pension assets towards developing infrastructure, of which the exact amount to be invested will be determined by the respective PFAs based on their estimation of liquidity needs.

The pertinent question then is, “how can pension assets drive infrastructural development without compromising their role of providing for the retired worker?”To the above question, three answers readily come to the fore.

First, the government could create a special purpose entity (SPE) to which it will transfer and ring-fence proceeds from income-generating assets. The SPE will then raise funds from the pension assets through the issuance of an infrastructure bond (or similar instruments), backed by the proceeds from the income-generating asset.

This way, there will be the comfort that the principal and interest repayment for the infrastructure bond will be guaranteed.

Second, the Federal Government can directly issue an infrastructure bond that will meet the twin objectives of capital preservation of, and modest returns on, the pension assets.

Repayment for the bonds issued in this instance could be guaranteed by the Federal Government, while the Central Bank of Nigeria (CBN) could provide additional comfort to investors by providing additional guarantee.

Finally, stakeholders should embrace the call for pension assets to be assessed to bridge the infrastructure gap in the country as there are practical ways to hedge against the perceived risk.

This will be done effectively if appropriate structures are set up through the collaboration of all stakeholders. In the opinion of Chidoka, the Federal Government, pension industry practitioners, the Securities and Exchange Commission (SEC) and capital market operators need to collaborate to ensure the successful utilisation of the Assets.





October 10, 2016 | 12:30 am
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