By Victor Ogiemwonyi
During the past week, the Minister for Finance and the Co- ordinating Minister for the Economy, Mr Wale Edun revealed that the Federal Executive council meeting of that week, has approved a proposal to let Goverment tap into the billions of Naira
Pension savings to develop critical infrastructure, and aid mortgage financing for mass housing development in Nigeria.
The announcement immediately drew a storm of protests, even the labour movement gave a warning, that they will not support any attempt to …” use workers hard earned pensions…” by Government.
One thing was obvious from the protest, many of those who took this stand, did not question what the proposal is really about and how it will affect them.
Many assumed, Government was just going to allocate some of these pension money to these projects, this was a very wrong assumption.
Government can not, and will not be able to do this, no matter how hard they try. The rules guiding the pension industry will not allow them.
The Minister has since come, to clarify his statement, making it clear, the proposed direction, is to work within the rules, to make this varitable source of longterm finance work better for the economy.
Pensions are for longterm investment.
Pension funds make sense when they are invested for longterm with consistent cashflow returns to meet pension obligations as they fall due. Keeping pension funds in savings without growing, will not achieve the goal of making pensions, a sure source of
retirement income for Pensioners.
Many longterm Fund managers, are already complaining, that there are no sufficient longterm investments outlets, for longterm funds in Nigeria today. There is a limit to investment in our stock market, it is too small and relatively risker, even the current recommended allocation for Pension Funds to invest in equities, is frequently not met.
The short term nature of our Pension Fund investing, is already seen in the structure of Pension Funds investment in Nigeria, it is tilted to the shorterm investment end, and majorly in Government securities.
The high interest rate environment in Nigeria, has helped most Pension Funds in Nigeria, earn high returns to be able to meet its obligations and to remain profitable for now. This situation will change as the pensions grow from share weight of enrolling more people and also pressure will come as more people reach pensionable age and the pension obligation payments increase massively.
This is the time to plan for those safe longterm returns, that the Pension Fund industry will need, for absorbing those flood of pension deductions, that is coming and the returns to meet up coming obligations.
Any sudden correction in interest rates, will also mean lower returns for Pension Assets. We should prepare for this reality.
There must be compensating stable, longterm returns, from longterm investments, to replace the high shortterm returns, they get now on shorterm Investments.
The discussions, should focus on how, this proposal to tap into the Pension Fund huge savings, will be done without allowing reckless use by Government.
Creating longterm market Assets, that Pension Funds can invest in, is what i think,
the Minister was talking about.
They are showing the way to … Longterm..
Sometimes, the Government has to show the way. I remember, a few years ago, we were trying to create “ a yield curve” for the market, with help of International Finance Corporation IFC,
the market came together, with Government showing the way, by issuing longterm Bonds. We now have a 30year, 10year and 5year Government Bonds to build the yield curve on.
From what i hear from the Minister, and his specific pointer to Housing and Mortgage Finance, i think, this is the way to go. If the Government was to create Housing Finance institutions like Fani Mae ( Federal National Mortgage Association – FNMA) and Freddie Mac ( Federal Home loan Mortgage Corporation -FMCC) of the United States.
longterm market Assets can be created on the back of these. No one can say, Fani Mae and Freddie Mac are not good models to copy.
Both institutions are Government sponsored Enterprises, created to ensure access to Home mortgage credit. They have the statutory mission to provide, liquidity, stability and affordability to the US housing market. They are also profitable.
We can do the same here, to rapidly close the housing gap in our economy, while unleashing other opportunities in the economy. The Housing market if well played, will move us faster, to the $1trn GDP economy the Tinubu Adminstration has pledged to deliver in this decade.
The resulting investment opportunities will give pension Funds and other longterm Fund managers, investment Assets that will provide in the longterm, stable returns they need to meet their longterm obligations.
Let’s be realistic, Government Budget allocations, can never be sufficient to provide for the huge deficits in our infrastructure requirements.
We must create opportunities for the private sector to come in as partners. Imagine the additional benefits of a private Sector lead infrastructure projects development, It is most likely to be done, more efficiently, because they will have their money in the projects and will ensure, proper contractors get the jobs, cost of project is not bloated, delays to delivery, is minimised.
The Government best options for attracting Infrastructure develpment financing, will be to use Government Guaratees to back, Foreign Investors doing commercial infrastructure projects.
Where they will build, Operate for an agreed period, to recover project cost plus a profit, and sell Asset, back to Government.
The Government can also issue Bonds, backed by Government, for specific Infrastructure projects, that private investors can buy.
If we focus on the way Government directs pensions, to invest in longtem Infrastructure projects, but do not directly borrow from pensions, we will be on our way to properly, using this huge source of longterm finance, to kill two birds, with one stone. We will be providing longterm investment outlets, for Pension Funds and other such longterm Asset managers, while also catalizing the finance needed to build our infrastructure. This way, pension Funds, will be making independent decisions, they will succeed or fail in their credit decisions.
Government has in the past successfully Partnered, with the private sector in Nigeria for development.
The best example for this is , the Nigeria Industrial Development Bank ( NIDB). The NIDB literarily built with private sector core enterprenurs, the early breweries, Bottling Companies and the Textiles industry. The success was very visible in our earlier industrial development drive.
I will suggest that the Government direct ICRC ( the Infrastructure Consessions Regularory Commission) to draw up a program, for indentified priority projects in the country, like the Calabar – Lagos Railway, with detailed, plans and invite consessioners. Some of these projects can attract financing on its own, if the Government’s role is to provide Guaratees only.
Those who say, it is too risky to allow Pensions Funds invest, in Government securities, don’t realize that over 70% of Pension fund earnings now , come from Government Securities. Besides, Government is the bench mark, for risk rating in any country. So, the risk perceived is much lower than we think.
Victor Ogiemwonyi is a retired Investment Banker, and writes from Ikoyi, Lagos.