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Business & Finance

Liquidity Squeeze And Traction Of Pension Funds

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Great economies are usually those that, among other things, have relatively high gross domestic product (GDP) and solid financial cushion, or at least inhere the capacity to conjure one when the need arises. With yawning gaps and deficits, Nigeria cannot be said to be a great economy, the rebasing narrative that makes it the largest economy in Africa notwithstanding. The GDP growth rate has been at the lowest ebb in recent times as it remains a largely import-dependent mono-cultural economy that has scant regard for human capital and creativity and embodies a perverse reward system that in itself stifles productivity.

Nigeria is currently at a critical juncture. It is either the right decisions are taken and the right things done or we take an irretrievable plunge economically. There is no time for rhetorics or political statements.  For decades, we have been hearing of the need to diversify the economy and today it has almost become a cliché. But the truth of the matter is that economic diversification is not done by fiat and cannot be issued as a decree. There must be a well-laid-out plan to incentivise the development of non-oil sectors. In other words, investment in them must be made attractive and products therefrom internationally competitive.

This brings us to the challenges of infrastructure which is a major impediment to the diversification of the economy. The infrastructural deficiencies of the country are acknowledged and well-documented and the negative impact on productivity glaring. Our mineral resources would not have a competitive price tag if the cost of production remains prohibitive because of the lack of basic infrastructure and necessary incentives. The same goes for agriculture in which produces rot away owing to inadequate storage facilities. We should see infrastructure beyond buildings, roads, electricity, running water, etc. It should also include the necessary policy framework to drive growth.

Following the drop and/or volatility of oil prices in recent times and the concomitant large-scale funding gap of the 2016 budget, the federal government is obviously at its wits end in search of alternative sources of funding to bridge the deficit. The global economic meltdown has adversely affected institutional investment in infrastructure as big corporations are hoarding cash and private sector participation in infrastructural development in Nigeria has often been mired in controversy.

The potential of the Contributory Pension Scheme (CPS)

As hinted above, great economies include those with huge financial backbone. The CPS has the potential to provide the necessary financial cushion in our drive to build a solid economy beginning with addressing our infrastructural deficiencies. From a deficit of more than N2 trillion in the old defined benefit scheme before 2004, the CPS is closing in on N6 trillion in amassing of pension funds even when a greater percentage of this is illiquid as pension funds don’t lie idle in bank accounts.

This is even with far less than 10 per cent market penetration in the pension industry. In other words, less than 10 per cent of Nigerian workers in the formal and informal sectors of the economy have enrolled in the CPS. This explains the great potential and immense possibilities of the industry.

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How states can access fund

The various tiers of government have been eyeing the pension funds as a possible source of funding for infrastructure and other development projects. Interestingly, this includes some states that are yet to comply with the Pension Reform Act 2014 by putting the necessary structures in place and enlisting in the CPS. The federal government is yet to wield the big stick to bring every state and every worker into the scheme.

There is no gainsaying the fact that there must be an airtight policy framework for investment to ensure that risks are reduced to the barest minimum. Pension funds are held sacrosanct in view of the fiduciary relationship that exists between the Retirement Savings Account holders and the Pension Fund Administrators. It should be reiterated that pension funds are well-positioned to play a critical role in economic development in Nigeria. However, excitement must give way to reason to ensure proper application of the funds. It is gratifying that the investment portfolio in the pension industry has since 2010 been diversified to allow investments in infrastructure funds and bonds as well as other asset classes such as supranational bonds and private equity funds. Before then, the National Pension Commission (PenCom)’s regulation on the investment of pension assets only allowed investment in ordinary shares, money market, corporate bonds and open-and close-end funds. All these are core asset classes. The PenCom has done a marvelous job in regulating the industry so far.

The question now remains how funds in this subsector can be mobilised without the necessary prudential safeguards watered down or even compromised. The minister of power, works and housing, Mr Babatunde Raji Fashola, recently at the Nigerian Pension Industry Strategy Implementation Roadmap Retreat organised by the PenCom, advocated the use of pension funds to address the infrastructural deficiencies of the country.

Safety Of Funds

First of all, transparency in the entire processes leading to the choice, funding and execution of projects must not be compromised. Projects must be in sync with a development plan and/or vision with clear deliverables and milestones as well as mechanisms inbuilt or otherwise for monitoring and evaluation.

PenCom has been outstanding in the regulation of the CPS; ensuring strict compliance with the ground rules of the industry as laid out in the Pension Reform Act 2014. An unswerving oversight mechanism has to be established to ensure all-round compliance not only with the policy framework for investment but also the actual rendition of the project. This is to guarantee the retirement of whichever instrument has been used in the investment. Also, Regulatory approaches must be consistent.

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