Infrastructure development: Is the pension fund really idle?

There has been a lot of pressure from government and politicians that the accumulated pension funds under the contributory pension scheme (CPS) now valued at about N3.7 trillion be channelled to infrastructure development, instead of lying idle where there is paucity of fund for infrastructure.

While this call has continued to generate debate among and support of many stakeholders because of the infrastructural challenge facing the country and the need to close the gap as a necessary catalyst to economic development, managers of pension funds say this money after all is not idle as many have been made to believe.

To them, all of that money is already circulating in the system with government as major beneficiary having borrowed about 60 percent of the fund amounting to N2.22 on bonds, while the rest are distributed in money market, capital market and other asset classes.

Misbahu Yola, chairman, Pension Fund Operators Association of Nigeria (PenOp) said it’s a wrong perception if anybody thinks this money is lying idle somewhere.

“There is no idle money; governments through bonds have borrowed 60 percent of the money, so would you say it is idle?

“We must be very careful on what to do with contributor’s money, because we cannot tell a retiree that his money was used to build this infrastructure but unfortunately it was cancelled by government. This is what we cannot tell somebody who needs his contribution for food, medical attention and payment of his or her bill in retirement,” Yola explained.

According to him, “Pension Fund Administrators can do as much as 80 percent on bonds if need be, so I have not seen any idle money as people are clamouring.

“We have provision for infrastructure bond in our asset classes approved by the National Pension Commission (PenCom), but there is no government guarantee yet, so that is why we have not invested there,” Yola noted.

Dave Uduanu, immediate past chairman, PenOp said operators would continue to engage with the financial community to diversify the asset classes in a way that it creates value for the contributors and the larger economy as a whole.

“The risk with investment of pension funds is that it is borne directly by the contributor because there is no government guarantee.”

“Our first priority is risk management, because we must not invest contributors’ money where it cannot be accounted for or where there would be no returns. As mangers of pensions, risk management is critical and that is why we are being careful,” Uduanu stated.

Until 2004, Nigeria had operated particularly in the public sector, a Defined Benefit (DB) pension scheme, which was largely unfunded and non-contributory. The system was also characterised as a pay-as-you-go (PAYG) scheme since retirees were to be supported not by their previous contributions but by annual budgetary Provisions. Because it was largely unfunded, the DB system led to massive accumulation of pension debt, which was estimated at more than one trillion naira.

But with the coming into force in June 2004 of the Pension Reform Act 2004, a new pension scheme came to replace the previous DB scheme. The new scheme which is known as the Contributory Pension Scheme (CPS) as the name suggests, is contributory in nature, making it mandatory on employers and workers in both the public sector and private sector organisations with 5 or more employees to contribute 7.5 percent each of the emoluments of the employee into a Retirement Savings Account (RSA).

The objectives of the scheme, as stated in section 2 of the Act, are to: Ensure that every person who worked either in the public service of the Federation, Federal Capital Territory or the private sector receives his entitlement as and when due; Assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age; and Establish a uniform set of rules, regulations and standards for administration and payment of retirement benefits for the public service of the Federation, Federal Capital Territory and the private sector.

This system has a number of features making it an increasingly vital component of economic planning, not only in Nigeria but in many other economies of the world where it has been adopted.

Pension funds in Nigeria today are worth N3.7 trillion representing 7 percent of GDP. They are projected to grow at the rate of 30 percent over the next ten years. At that time pension funds will become 20 percent of the GDP. Pension funds will, therefore, become the biggest investor in the economy. It is imperative that all stakeholders should support the new pension scheme to ensure its success and the far-reaching impacts on pensioners and the economy in general.

By: Modestus Anaesoronye