Alternative Investments

Pension funds should steer next level growth and development in Nigeria (2)

While it is acknowledged that such distribution will provide the needed funds for infrastructural projects by the government and the funds for corporate growth, they also raise pertinent questions as to the sustainability and impact of such investments on the economic growth and the quality of life of Nigerians.

It can be argued that the investment apparatus set up by the regulator, National Pension Commission, constrains the Pension Fund Administrators to invest the pension funds in the real economy to boost immediate economic growth and development. PENCOM has a strict percentage of funds under management to be invested in various sectors, markets or financial instruments. The goal in doing this was to guide against unreasonable risk-taking by administrators that will result in the impairment of investors’ funds.

It is thus not surprising that as of June 2021, instruments like real estate properties, private equity funds, and infrastructure funds took up only 1.23%, 0.27% and 0.53% respectively of the total pension assets invested.

This activity in the Nigerian pension industry is at variance with emerging trends in the global pension industry where the shift has now been towards allocation of capital to alternative investments – specifically to commodities, high-yield bonds, hedge funds, real estate, and private equity.

Portfolios of asset-backed securities, e.g. student loans are now tools used by pension funds to increase returns, the same way private equity investments are becoming popular and making a grand incursion into the pension industry.

Nigeria’s level of pension assets to Gross Domestic Product is only a little over 8 per cent while in developed markets, they surpass the 100 per cent mark.  The United Kingdom had a pension to GDP ratio of 118.5 per cent in 2020.

There is thus a need for the Nigerian pension industry to consider non-traditional avenues of investment, in particular, alternatives and infrastructures in line with global trends.

Investments in infrastructure are more targeted at the real sector of the economy with a direct impact on transportation, power, utilities, renewable energy, communication, social welfare and institutions, like schools and hospitals.

This is even necessary given that the Nigerian financial and money market has been hit by record low-interest rates in the past year. TB rates, in particular, have hovered around 2.5 per cent over the past four quarters representing a dip from the over 10% plus rates obtainable in the year 2018.

It is projected that diversification into new investment sources will help to manage risks, negative returns and market fluctuations subsisting in the volatile equity and fixed income markets in Nigeria.

Investments in long term infrastructure funds promise higher returns than a shorter investment in equity or fixed income buoyed by the fact that pension funds have a constant level of inflow.

The investments made by the PFAs should be subject to the prevailing exchange and inflation rate in the country. It will defeat the purpose if people save to cater for their livelihood during old age, yet these funds that have been saved are not sufficient to cater for retirement.

Investments in alternatives like infrastructure will help manage the high inflation levels currently in operation in the Nigerian economy. These investments are less sensitive to the risk of inflation and do not fluctuate unnecessarily, deepening investment to create impact.

PFAs can invest directly in projects and so help with effective tracking of the capital that is dedicated by institutional investors. Investment in crowdfunding activities is at its highest levels. Pension funds can take advantage of such opportunities to make long-lasting technology-driven financial and social services in the economy with a high rate assured.

Investing directly in infrastructure that gives capital to the real sectors and industries in the Nigerian economy will also increase production of local exportable goods and raw materials, increase foreign exchange earnings and in turn stem the tide of the depreciation of the naira.

With this, there will be a focus on an increase in per capita income and not a nominal economic growth that is unevenly distributed and skewed. This is important because the prevailing rate of inflation in Nigeria will mean that contributory pension funds at retirement will be unable to cater for the needs of retirees after years of dedicated input over productive years of work-life into a RSA. In Section 16(1) of the Pension Reform Act, it is stated that an employee is not entitled to make any withdrawal from his retirement savings account before attaining the age of 50 years. It is thus safe to say that if an employee does not lose his job or does not stay unemployed for a minimum of four months in order to access 25 per cent of his contributed pension fund (as stipulated by the Pension Reform Act) it means that access to pension funds are shut out of contributors over their working years till retirement.

This obvious shortchange of beneficiaries can only be prevented and addressed with an increased rate of return or a rebased growth (by GDP inflator) that takes into cognisance the inflation rate – a ‘real economic growth’ in economic parlance.

Inasmuch as the contributions of the Federal Government to the retirement benefit of employees of the public service remain a charge of the consolidated revenue fund of the federation as directed by the Pension Reform Act, there will continually be a strain on the income of the government and so targeted investments are necessary.

In terms of geographical biases, there is a need for PenCom to grant allowance to pension administrators to diversify their holdings from domestic to foreign instruments. While at the risk of capital flights, more benefits accrue from such portfolios given the current currency fluctuations, high inflation and uncertainty in the domestic capital and money markets. Overseas investments have been known to effectively control currency fluctuations. However, care should be taken that these funds are invested in stable markets and that they are made upon strong asset management advisory services.

In all of these, the regulatory body should provide the much-needed allowance, monitoring, supervision and guidance for the diversification of funds while ensuring that pension administrators are guided by strong governance, process and transparency. Goals of equitable distribution of income, good healthcare, education, and climate change, will be effectively advanced with a well-functioning pension system.

Finally, that the contributory scheme is primarily set up for the payment of retirement benefit should not portend that it cannot be expanded to ensure that financial services that are concomitant to its mission are offered especially while trying to deepen the inclusion of the informal sector into the scheme through the adoption of mobile money and the collaboration with telcos and financial players that are closer to the rural population aside other operational strategies like the Micro Pension Plan.

Peter Imouokhome, an economist and development expert, can be reached via [email protected]

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