By Babajide Komolafe
The Pension Commission, PENCOM is reconsidering bank guaranty for pension assets in light of the new banking model.
Director-General, PENCOM, Mr. M.K Ahmad gave this hint in Lagos last week at the 2nd Conference of Directors of Licensed Pension Operators.
He said the Commission is considering whether to allow banks to continue to provide guarantee for pension assets or make the holding company provide the guarantee.
Under the Contributory Pension Scheme which came into effect in 2004, Pension Assets are guaranteed by the parent bank of the Pension Custodian, which is the company that has custody of pension funds contributed by employers and employees through the Pension Fund Administrators.
At the moment, there are five pension fund custodians namely: Diamond Bank Custodian owned by Diamond Bank, First Pension Custodian, owned by First Bank, Oceanic Bank Custodian owned by Oceanic Bank, UBA Pensions Custodian owned by UBA and Zenith Pensions Custodian owned by Zenith Bank.
But the new banking model which became effective November 15th, and replaced the old universal banking model, disallowed banks from owning any non-bank subsidiaries. However, the Pension Custodians are subsidiaries of banks, the implication is that the banks have to divest from them completely, hence weakening the guarantee arrangement for pension funds.
In the case of universal banks that chose the Holding Company model, the Pension Custodian will then become a subsidiary of the Bank’s Holding Company.
Thus, the choice before PENCOM is either to transfer the guarantee responsibility to the Holding Company or still maintain the existing guarantee by the banks despite the fact that they are no longer the parent of the Pension Custodian.
“We are studying the legal implications of both scenarios,’’ Ahmad told Vanguard
Meanwhile, the PENCOM D-G has called on pension operators to adopt long-term approach in their investment strategies. He said that a recent assessment of the pension industry by a foreign consultant indicated prevalence of short-term investments in the industry. He attributed this to “lack of proper understanding of the long-term nature of the pension business” by the board members of pension fund companies.
Bismarck Rewane, Chief Executive, Financial Derivatives Company, however, identified regulation as one of the causes of the prevalence of short-term investment of pension funds.
In a paper titled Investment Horizon in Nigeria: Prospects And Challenges For Pension Funds, he noted that the Pension Act limits pension funds investments to equities, government bonds and bank deposits and this has resulted to clustering of pension funds in a handful of securities.
He said in addition to this is the scarcity of investment outlets in Nigeria, adding that this is compounded by the bureaucratic bottlenecks before an operator could invest pension funds abroad. “Presidential approval is required for a Pension Fund Administrator to invest abroad”, he noted
Rewane identified infrastructure and foreign assets as long-term investment opportunities for pension funds, saying, “Pension funds will provide a major source of capital due to the long-term nature.”
Total pension assets as at September 30th 2010 amounted to N1.836 trillion and were invested as follows: Equities (17.26%), Government Securities (34.33%), Money Market (24.78%), Corporate Bond (03.67%), Real Estate (06.78%) Others (13.48%).