Serious policy environment needed to attract pension funds to infrastructure
Infrastructure Finance is a critical topic in Nigeria and indeed other African countries. In this interview with INNOCENT UNAH and BALA AUGIE, EGUAREKHIDE LONGE, Managing Director, AIICO Pension Managers Limited speaks on infrastructure development, corporate governance in Nigeria, current innovations in the pension landscape, and a host of other critical issues.
In your recent interview with CNBC Africa, you stated that pension funds should be used in a regenerative way, can you expatiate on that?
The long and short of it is that if you use pension funds to construct a road that does not finish or you construct a road that does not bring back returns, the pensioners money is gone. I know there are all sorts of experts moving around saying how this money, 5.9 trillion naira . . . I appreciate their idea that it should be used to block the infrastructure gap. But that’s not what pension funds are meant for. All of the pension money is invested and it’s invested in income-generating assets, so regenerative is simply income-generating.
An expert mentioned that the pension fund managers should actually be involved from initiation of the project so that they will build in risks mitigating factors. What is your take on this?
Where in the world does that happen . . . it doesn’t make sense, and it’s not my job.
Not to manage per say; it’s a PPP
Its project management, project management is a specialized skill. . . First and foremost, the entity or the environment that wants to embrace this direction has got to have clear thinking strategy.
I’d like to know if the government has that kind of strategy. We want to be able to do agriculture but one of the biggest problems of agriculture is evacuation from the farm gate, so how do we do that? We need to have roads linking railways, railways linking markets, and markets properly structured so that when it comes to the market the farmer is guaranteed off-take and he goes straight back into his production process and somebody else takes the distribution risks, that’s strategy; that’s thinking; that’s planning. That’s how Dubai happened, that’s how United Arab Emirate happened, that’s how Singapore happened, and that’s how any place that has moved people away from poverty happened. We can’t make it the pension funds managers’ fault that it’s not happening.
The environment to which you now commit a serious contract like pension to has to be serious.
Right now the pension fund seems to be giving below inflation-adjusted returns suggesting probably the investment managers are not innovative enough.
Which sector in this country is giving above inflation adjusted returns?
Are we saying it’s a systemic thing, can’t anything be done?
We are living in an unusual situation and I think that it’s a transitory situation that we find ourselves in. So, I think that as an investment manager who isn’t affected by knee-jerk reactions, what you do is that you study it and look at your performance over time – like say a 3-year period and then look at what has happen over 3 year.
This is an unusual situation; Oil price crashed, there is scarcity of foreign exchange, imported inflation, petrol price inflation, so these are serious pressures – pension money has to be invested in a structured way, we can set up the plan today and see how we harvest it over a period of time; I think that work is being done.
Although our obligations are not in hard currency but we need to be able to retain value because a lot of the goods and services that the people who contribute to us buy have imported inflation elements and that inflation affect them. So, we begin to go in that direction and allow investing in Eurobond. Because the procedure of getting the foreign exchange to buy Eurobond is a bit stringent, we need to have presidential approval to able to access forex, and even that is going out of the way now because of scarcity.
So, we are looking to invest and I am sure you will see a few PFAs buying dollar denominated instruments to give their portfolio a hedge and we think that infrastructure is a very good asset to buy .
One of the key areas we are focusing on is housing and we have spoken with relevant agencies and they have said yes that’s one of the key point of focus of this government.
Do you think the present land tenure system is impeding that effort in any way?
I am not so sure that the land tenure system is impeding it completely; I think that it is a question of not having evolved the ecosystem to make it happen.
That can be done but the critical point is that: is the state government willing, does the state government understand?
Pension funds are underinvested in equities. We are aware that Nigerian pension funds are underweight equities and invest more in bonds and fixed income securities. Why?
First are you invested in equities?
Not yet.
You are not invested in equities for a particular reason. Let’s talk about equities. Several reasons we are not invested in equities. But I will give you two.
The first reason is that disposable income is low. That means that the retail market for equities is non-existent.
Because of that and many other reasons the macroeconomic environment that makes the investment class attractive is not there. So the macroeconomic environment is weak and that is what should be attacked. It’s not so much put more money in equities.
Number two: there are also corporate governance issues. There are serious corporate governance issues in the equities market.
The corporate governance issues: is it for the market or the companies.
The companies, they don’t respect the rule of ethics. They churn out results that you know that they have not performed their fiduciary responsibilities to regenerate the money entrusted to them.
Are there any companies you like?
Okomu Oil and Presco. This environment has been fantastic for them.
What is your percentage allocation to stocks?
I am not sure of the number but I think we are about 4.5 per cent invested in public equities. We have other variable income instruments. There are private equities. I think the total allocation to equities is about 5 per cent.
What is the return on your RSA funds?
I don’t think I want to externalize that information.
We would like to know the level of your present exposure to fixed income.
79 per cent.
Manufacturing companies are exposed to FX risk because they import their raw materials. But the FMDQ has developed the futures market where these manufacturers can hedge their foreign exchange exposure. A few of them we spoke to apparently have poor knowledge of the market and how it works. Do you think the manufacturers should patronize the futures market more in order to also give you greater comport on that?
When you become technical, people lose the essence of what you are trying to do. The essence of what you are trying to do is to provide FX for manufacturers to import raw materials, carry out their production and sell. But the operative focus is that the money is scarce. So regardless of how much motion you are making the question is can you get more money in?
There’s scarcity, and that scarcity can only be surmounted by so many collaborative events and actions that will ease up the situation.
We are in recession. And you don’t get out of recession just by saying you are not in recession. You don’t have foreign exchange, so you set up a system where you can bid for it and you can buy futures and you can estimate. You need and buy at 300 (N/$) today even when it has gone to 460 (N/$) tomorrow. You manage your cost that way.
But you see, the narrative in this country is so childish. People who are serious about changing their circumstances wake up in the morning and talk about the issues and challenges that they face. These are the things we should be talking about. If you have built a value system in the pension industry, what you should be thinking of is growing this value system and making it also the key plank of the economic strategy.
So what do you do? How can you attract pension money?
In the East of Nigeria, you know, all you need to do is to ensure there is movement and market will follow it. But the governors have very high egos and don’t talk to each other. They are busy quarrelling and looking for small money, building boreholes and things that don’t mean anything.
Then you want to go to the north, the north is agriculture how do you structure agriculture in such a way that you can transport those goods efficiently – the railways- how much is it going to cost to build the railways?
But what are we talking about? Look at — you are the ones who write the papers every day and you know what people are talking about. We do not engage in things that are serious enough to take us out of where we are.
We are busy competing for 2019. Yes, corruption is a real factor but for me as a person, EguarekhideLonge, Corruption is about 15 per cent to 20 per cent of our problem is this country. You can’t get higher value environment by chasing thieves. You have to sit down and create.
And that is the hardest part of the work. And if we are not ready for it, it won’t work. It is not going to work by prayer.
Some analysts and industry watchers say that there are young contributors that would prefer their pension contributions to be allocated to riskier but potentially more rewarding assets. But presently, it seems that the industry is just adopting a one-size-fits-all kind of model?
No. That is what it used to be before. There are guidelines that are in draft form that ought to have been implemented at this point, but you know, I think one of the reasons why the guidelines haven’t been finalized is the lack of board for the pensions commission, because the board has to sign-off on those guidelines.
Presently most Nigerians still don’t have retirement plans. What is the plan to bring these people into the pension system?
That is also a problem of the informal sector. It is not only in this country. But I think that the template that we are evolving for the pension industry will probably be the global pace-setter. It probably will be because we have looked at the environment and we have focused on it and we are evolving plans and guidelines to expand coverage to include the informal sector.
There must be flexible ways to allow them withdraw part of their money. This is being finalised.
How can you say AIICO Pensions RSA funds have performed relative to its benchmark?
For this year, we felt the headwinds. So relative to benchmark we did not perform badly. We have matched our benchmark about 90 per cent. But you see you need to assure yourself what defines a benchmark what defines a benchmark depends on what you see in the environment.
So what benchmark does your RSA fund track?
See we don’t have an index. There is no index that we use and so the benchmark is a combination of the benchmarks of the asset classes we invest in. For instance the money market will be NIBOR; the fixed income market will be government treasuries of the various maturities, same thing with the treasury bills market. You put that as a combination.
The pension industry has been fairly active in the Nigerian capital market. But analysts say there is still a lot they can do to further deepen the market.
It is not our responsibility it is not our responsibility to deepen the capital market. It is only our responsibility to access the products that have been presented by the market. It is the responsibility of the people in the capital market.
So it is essential the responsibility of the issuing houses?
Exactly! It is not our responsibility.
So they need to come up with innovative products that will suit your investment needs?
It is not my responsibility to design products and then sell it to myself. It is the responsibility of someone who has the license to do that, right?
From our discussions with some of these bankers, they claim that they get discouraged sometimes because they have created products like the REIT, approached the pension funds, but they wouldn’t buy?
That may be true in some cases, but not true with AIICO Pensions. And if you really look at it, they also did not tell you that the pension community invested in two REITs that did not get out of water. The Union Homes REIT, and even UNIQUE home, the one promoted by UAC. How did those ones work? And then there’s one that came during the election period last year, the HMK REIT. It was difficult for that to sell because there was a lot of uncertainty. So when they put the product in the market they were not able to get up to 50 percent subscription. At that point they said they were going to come back, but they never did.
You see we are ready to invest but you don’t have your product properly put together, but you want pension money to throw it away? We do our research properly. We know we need to create value because when our subscribers retire, they need to have money in their account to take care of them for the rest of their life, so yes we don’t have any liabilities as such that your benefits are based on but we are also driven to create value, so we are looking for value all the time.