CPS could help you pay for primary mortgage

In advanced economies where pension has been adjudged successful, money generated from pension is always a good source of long-term funding for primary mortgage acquisitions. In such jurisdictions, there is usually little or no housing challenge because pension funds have been used to bridge the housing deficit, making life more decent and comfortable for citizens.

With Nigeria’s Contributory Pension Scheme (CPS) increasing almost 30 percent annually and pension assets currently standing at N4.2trn ($27.2bn), with 6m contributors as at March 2014 and a projection of over $100bn in two decades, there is a major discussion along utilising the pension funds for primary mortgage in the near future.

So, congratulations if you are a contributor in the scheme, either as Federal Government employee, private sector employee or employee in states that have adopted the Contributory Pension Scheme.

But if your state is yet to adopt the scheme, sorry, because you may not have the opportunity to be part of the ‘pension-mortgage plan’ when it becomes realistic. Very soon states that have complied will be allowed to raise bonds for housing development and workers in such states would be the beneficiaries.

With the ongoing discussion on utilising the pension funds for primary mortgage, contributors in the scheme would be allowed to pay for mortgage with part of the balance in their Retirement Savings Account (RSA) managed by the Pension Fund Administrators (PFAs).

Mortgage is of different classes and this also is a function of what you can afford. So, the balance in your RSA would determine whether you are qualified for mortgage in Lekki, Ikoyi, Victoria Island, or in Mushin, Iyana-Ipaja or Okokomaiko areas.

What this means is that a contributor with N60m in his RSA would afford a better quality mortgage than the person with N30m; so also with persons having N10m and N4m. While the person with higher amount would also have more choices to make as to where and what quality of mortgage to take, the person with smaller amount would have less choices.

This again brings to relevance the need for the employee contributor to consider making Additional Voluntary Contribution (AVC). This will give him the opportunity to increase his pension package over time and enhance his chances for choice mortgage when the programme commences soon.

Apart from what the employer has provided, there is an opportunity for people to enhance their pension savings through this platform so that by the time they are due for retirement, there would be substantial amount of money to make the person retire comfortably.

It also has implication in the interim if, for example, it becomes possible to buy mortgage with pension savings, because the larger the amount you have in your RSA balance, the larger the amount you can use as a proportion of it for collateral.

And part of that additional amount could come from voluntary contribution, so it becomes an incentive to save more because you know that when you get to a certain threshold, it affords you the opportunity to qualify for a particular mortgage; and if you don’t, you may not qualify.

So, far and above what your employer is putting down for you, you could decide to make additional contributions. It has far-reaching implications, not just at the point of retirement but also in the interim.

Section 9 (5) of the Pension Reform Act 2004 provides that any employee to which this Act applies may, in addition to the total contributions being made by him and his employer, make voluntary contributions to his Retirement Savings Account.

In this case, the employee wanting to make additional voluntary contribution would liaise with his employer to remit a certain additional amount of money alongside the statutory pension contribution to his chosen PFA. The money is invested by the PFA and returns generated are credited into the contributors’ RSA.

Mortgage experts say pension monies are mostly long-term funds and are the most qualified to support the mortgage industry in attaining its Millennium Development Goals. But these funds, understandably, are mostly locked up in government treasury bills and bonds.

These (pension) funds have to be unlocked and made available for the real estate sector. This is because, according to the experts, the funds are basically long term and won’t have problem in terms of mismatch in the maturity profile of the loans currently granted by mortgage institutions in the country.

“Mortgage loans are long term, as against the deposits we take that are mostly short-tenured,” the experts say.

“If you do an actuarial valuation of the pension funds managed by the PFAs, the minimum average number of years the money will remain with the PFAs is about 20 years. This is what we call long-term money. This is the kind of money you expect should go into the housing and mortgage sector,” they added.

Today, the pension industry has the largest pool of long-term investible funds in Nigeria. It is the largest investor in the capital market combined industry strength, and in the average contributes between 10 and 20 percent of free floating issued share in the capital market.