Pension assets and infrastructure financing in Nigeria

Pension assets and infrastructure financing in Nigeria

Unemployment has been an issue successive governments have not been able to address over the years. On the average, the National Youth Service Corps turns out millions of graduates from orientation camps across the 33 states of the federation (excluding the troubled North East states). Majority of these graduates are on the streets across the country looking for jobs to sustain a living and most of which may not find one.

The reason for this may not be farfetched, it can be attributed to the nation’s grossly underdevelopedinfrastructure. Infrastructural development is a vehicle for economic growth globally. Infrastructure like electricity, housing, transportation, pipelines, good road networks, communication networks are thesubstratum for economic building which isusually  the largest employer of  labour in a country such as ours. It attracts local and foreign entrepreneurs. Infrastructural development canalsosolve the protracted issue of insecurityin the country.

Over the decades, successive governments at various levels have not invested the required resources in infrastructure, in some instancesapproximately 75% of the country’s resources are dedicated to recurrent expenditure.

Currently, only about 18% of the nation’s 197,000 kilometres of federal roads network which takes persons and goods across the country is paved. The situation is worse for state and local government roads. The problem of the roads is worsened by poor maintenance.

The public power generation and supply is still very poor. The country currently generates only about 4000 MW of power which is less than 50% of demand. About 80% of firms in the country still depend on diesel powered electricity generation sets to power 61% of their power needs, even after the privatization exercise of the last administration.

The increasing high cost of power generation forced on organizations by the inadequate public power supply has resulted in high cost of production which has made Nigerian goodsvery uncompetitive in the market.Businesses and organizations that could not cope have closed shop while many have relocated to neighbouring countries with stable power supply.

The National Pension Commission as an economic agent looked into our infrastructural problems and came up with a(Draft) guideline on Investments of Pension Assets and the guideline on the withdrawals from Retirement Savings Account (RSA) towards Equity Contribution for Residential Mortgage which would gradually reduce the infrastructure (housing) deficit  in Nigeria.

National Pension Commission issued the draft investment guideline stipulating that Pension Fund Administrators should manage Pension Assets in line with the multi fund structure as stated in the draftguidelineissued in February 2015, the Investment guidelines in section 1.4 states inter alia:

“The PFAs shall maintain a Multi-fund Structure as provided in this Regulation, to govern the investment of pension fund assets of RSA Funds” and inclusive are other amendments to the subsisting guideline.

Amongst other changes introduced in the new guideline include as stated below:

•By virtue of Section 10 (2) of the Pension Reform Act 2014, all interests, dividends, profits, investment and other incomes accruable to pension fund and assets shall not be taxable.

•The exclusion of Investment of Pension Assets with a Discount Houses or similar institutions.

•The investment of Pension Assets in Non-interest (Shariah) Compliant instrument – SukukBond.

•Pension fund investments may be made in a newly established quoted company that evolved as a result of merger, acquisition or any other combination arrangement of existing corporate entities, subject to the condition that, at least, one of the erstwhile companies had satisfied the minimum quality requirements for investment in ordinary shares.

5.In section 5.2.3 iii (f), in relation to infrastructure financing and investing, the regulation stated that a minimum of 60% of the Infrastructure Fund shall be invested in projectswithin Nigeriabefore a PFA can be allowed to invest pension assets into it.

•The introduction of the Multi Fund Structure of managing Pension Assets in the four different portfolios including the RSA Retiree fund. With these amendments, it implies that we shall have up to four Retirement Savings Accounts (portfolios) as against the existing two portfolios with different investments limits. This is to match the real long term financing with long term funds.

Fund Types & Limits

The Multi-fund Structure shall comprise Fund I, Fund II, Fund III and Fund IV (Retiree Fund). Funds I, II, III and IV shall however differ among themselves according to their overall exposure to variable income instruments.

The exposure to variable income instruments is defined as the sum of a PFA’s investments in Ordinary Shares and participation units of Open Close-ended and Hybrid Funds; Real Estate Investment Trust; Infrastructure Funds; and Private Equity Funds comprising its current holdings and any future financial commitments to the acquisition of participation units in these Funds.

There shall be a transition period of 3 months, effective from the commencement dateof the Multi-Fund Structure for all PFAs to restructure their respective portfolios. The maximum and minimum exposures to variable income instruments by the Fund Types are as follows:

PFAs are also expected to invest in such a way that the actual exposure to variable income instruments in Fund I is higher than the exposure in Fund II. Likewise, the exposure in Fund II shall be higher than the exposure in Fund III. Fund I and Fund II shall have a minimum of 5% of pension fund assets under management invested in Infrastructure, through infrastructure bond or infrastructure fund.

Default Mechanism

According to the commission, effective from the date of implementation of the Multi-fund Structure, the PFAs shall allocate contributors to various Fund Types according to the following criteria:

•Active Contributors who are 49 years and below as at their last birthdays shall be assigned to Fund II.

•Active Contributors who are 50 years and above as at their last birthdays shall be assigned to Fund III.

•Fund IV shall strictly be for RSA retirees only.

Subsequent to the implementation of the Multi-fund Structure, contributors are allowed to choose the Type of Fund in which they desire to be. However, the following rules shall apply:

•An RSA Retiree or Active Contributor who is 50 years and above shall not be allowed to choose Fund I.

•An Active Contributor in Fund III who wishes to be assigned to Fund II shall make a formal request to the PFA.

•A Contributor in Fund II who wishes to be assigned to  Fund I shall make a formal request to the PFA.

Transfers between Fund Types within a PFA

An RSA holder may, subject to a formal application made to the PFA, switch from one Fund Type to another Fund Type within a given PFA, once in 3 years without paying any fees.

Any additional requests for switches among Funds within a PFA by the RSA holder shall attract a fee, of an amount not less than a minimum value, to be determined by the Commission from time to time.

With the introduction of this new (draft) guideline on Investment of Pension Assets and other developmental guidelines from the commission which would be in operation very soon; and with over N5 trillion in Pension Assets, with the appropriate Government support and the collaboration of the organized private sector, we strongly believed that this could be a lasting gradual solution to the huge infrastructural deficit in the country. Data sourced from Federal Ministry of Budget, National Planning and National Pension Commission.

Article contributed by Investment One Pension Managers Ltd

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