By Rosemary Onuoha

There are indications that the accumulated pension assets now in excess of N4.6 trillion will continue to be invested on zero risk financial instrument vehicles despite the fact that the National Pension Commission, PenCom, has released draft guidelines on investment of pension fund on infrastructure.

 Pensioners queuing for verification

Investigations by Financial Vanguard revealed that the stringent requirements in the guidelines as well as the country’s limp-wristed legal system are factors that could delay the take-off of investment of pension asset in infrastructure.

Experts who spoke to Financial Vanguard said, “What is likely to happen is that a company could access the fund for a road project or other things.

Eventually, the road will be abandoned and pension operators could find themselves in court trying to recover the money. Unfortunately, court cases can drag on for years in Nigeria, unlike in developed countries where cases are dispensed with in a short spate of time.”

Relaying his fears on why PenCom should not be in a hurry to allow the investment of pension fund in infrastructure, Group Managing Director of Mutual Benefits Assurance Plc, Mr. Akin Ogunbiyi said, “Until the issue of rule of law and arbitration improves in accordance with global standard, PenCom should not be in a hurry to allow investors access the pension fund.”

Director-General, Lagos State Pension Commission (LASPEC), Mr. Rotimi Adekunle Hussain said, “Physical funds can’t be taken from the pension fund and thrown into infrastructure. That is why the guideline stipulates that it is only through infrastructure bonds or infrastructure fund, however, who insures the bonds?

“So, if there is adequate arrangement for insurance element for such investment classes, perhaps, it will take off. But until then, let’s be assured that the funds are safe,” Hussain stated.

PenCom guideline

Recall that PenCom recently released the draft regulation on investment of pension fund assets to guide Pension Fund Administrators (PFAs) and other investors who have been agitating for the use of accumulated pension fund assets to develop infrastructure across the country. PenCom set the minimum value of individual projects that pension fund assets could be invested in at N5 billion.

According to PenCom, as much as 15 per cent of the total value of pension fund assets under management could be invested in infrastructure through infrastructure bonds and another five per cent of the total value of pension fund assets could be invested in infrastructure through infrastructure funds, making 20 per cent of the total value of accumulated pension asset that could be so deployed.

Also, both outlets must meet the conditions for the investment of pension funds in infrastructure before PFAs could channel pension fund assets into such investments. The pension regulator cited section 5.2.3 of the draft “Regulation on Investment of Pension Fund Assets” saying it provided that pension assets could be invested in infrastructure projects through eligible Bonds, Sukuk subject to two major conditions.

“The infrastructure project shall be not less than N5 billion in value and awarded to a concessionaire with good track record through an open and transparent bidding process in accordance with the due process requirements set out in the Infrastructure Concession and Regulatory Commission Act (ICRC Act) and any regulation made pursuant thereto and certified by the Infrastructure Concession and Regulatory Commission (ICRC) and approved by the Federal Executive Council (FEC),” PenCom said.

Other conditions for the investment of pension assets on infrastructure include ; that the projects business plans and financial projections indicate that they are viable as well as economically and financially rewarding for investment by pension funds.

The Bonds or Sukuks issued to finance the infrastructure project shall have robust credit enhancements including guarantees by the Federal Government or eligible bank/development finance institution or MDFOs and a maturity date that precedes the expiration of the concession.

File Photo: Aged Pensioners waiting for their entitlement

It should also have a feasible and enforceable redemption procedure in the event of project suspension, cancellation or, in the case of regulated sectors, when changes in regulatory or policy decisions make the project to differ significantly from its original financial projections.

Where infrastructure projects are financed through infrastructure funds, the value of the infrastructure fund shall not be less than N5 billion and the infrastructure fund must have a well defined and publicised investment objectives and strategy as well as disclosures of pricing of underlying assets, including any other necessary information.

All annual financial statements of the fund shall be audited by reputable firms of chartered accountants and the infrastructure fund shall have satisfactory pre-defined liquidity/exit routes such as IPO, sale to other PE Funds, Trade sale, sale to a strategic investor etc.  The funds shall be managed by experienced fund managers, versed in infrastructure financing and registered with the Securities and Exchange Commission, (SEC) as fund managers.

Some other conditions for the investment of pension assets in infrastructure include that a minimum of 60 per cent of the infrastructure fund shall be invested in projects within Nigeria and where an infrastructure fund does not have development finance institutions or MDFOs as co-investors,

but the fund manager has a minimum investment manager rating of BBB issued by a rating company registered or recognised by SEC and the fund manager shall retain a minimum investment of 3 per cent of the infrastructure fund.

Where the infrastructure fund has development finance institutions or multilateral development finance organisations as co-investors, the fund manager shall retain a minimum of 1 per cent of the infrastructure fund and the fund shall have an advisory board with independent representatives of institutional investors being in majority.

And prior to investment and during the tenor of investment in any infrastructure fund, PFAs are to ensure that the advisory board has responsibility over audit functions regarding the evaluation of projects prior to investment; transactions with parties related to the infrastructure fund manager and strategies concerning divestiture of investments in which the private equity fund has interests.

Experts’ reaction

According to Ogunbiyi, the principal challenge that is bedeviling Nigeria and which could affect investment of pension fund in infrastructure is corruption. Ogunbiyi said, “Because people have seen such huge amount of money in the pension industry which they have never seen before, they are now talking about investment and they forget that Nigeria is a country that has no rule of law. So we have to watch it.”

Ogunbiyi stressed that the Contributory Pension Scheme, CPS, has been able to record massive success in terms of accumulation of funds for the very first time due to the fact that the rule of law governing the CPS has been allowed to function.

He said, “I don’t know how government did it because if government says, ‘There is red light there, don’t cross it,’ the first persons that will cross it will be either members of the National Assembly or the state governors because there is no rule of law and everybody is above the law.

But I give kudos to the federal government on the implementation of the Pension Act and I really wish that whichever way they achieved this, they will again look at various sectors of the Nigerian economy and take the laws seriously the way they have taken the pension Act.   If we have a government that puts the rule of law as number one priority, within six months this country will change for the better.

If a person breaks the law, even if highly placed, and cannot call the commissioner of police to defend him because the commissioner of police knows that he cannot help such person out, I think the person will at least behave himself in a responsible manner.

“There are instances where some state governors have said that they can use part of the pension fund for infrastructure, however, I strongly believe that in a country where there is no rule of law, we really need to be very careful. Until the issue of the rule of law is adequately addressed, PenCom should never be in a hurry to allow investment of the pension fund into infrastructure,” Ogunbiyi stressed.

For Hussain, it is ideal that the pension industry left the fund strictly in the hands of pension fund administrators and custodians because they are the professionals.   He said that pension funds have been so seriously ring-fenced that in ten years of practice there has never been a single case of fraud being reported.

Hussain said, “But it could get to a worrisome level where you keep accumulating funds and you leave that kind of fund in low yield investment for years in a developing economy. PenCom have laid down the investment guidelines, however, if you study the investment guidelines closely, they are stringent because the conditions are so strict.

“It is important to note that safety of the pension fund takes very high premium over and above returns. Nobody says you shouldn’t make returns but not at the risk of losing money. So the industry is not going to throw money after risky investments,” Hussain stated.