Senators and Pensions: What Could Possibly Go Wrong?

The alarm bells are ringing. All the papers carried reports this morning about the Senate’s debating of a bill to amend the current Pensions Act. The new bill itself is entitled ‘Bill for an act to Repeal the Pensions Reform Act of 2004 and Enact the Pensions Reform Act 2013’.

There are plenty of changes in the new law including;

• Companies with 3 employees or more will now be liable to make contributions for their employees
• Increasing the rate of contribution by employees from 7.5% of salary to 8% while employers contribute 12% from 7.5% currently
• Prohibiting the Chairman and Members of the Pensions Board from owning stakes in Pension Fund Administrators or Custodians
• Exempting the Armed Forces, Intelligence and Secret Service from the Pension Act
• Stiffer penalties for pension thieves

It is unclear what the motivation for some of these changes is. I am told for instance that the argument for exempting the Armed Forces is so as to not bring them the ‘control of bloody civilians’ or something to that effect. But let’s accept that after a decade, the old law was due for an update.

The real danger is that my worst fears about our Pensions structure are now coming to pass. I wrote about our pensions system recently ;

The other example is our Pension Fund system. Nigeria adopted the Chilean model in 2006 and since then total pension fund assets have grown from $1.8bn to $19bn as at November 2012. We now have 5.3 million Nigerians aggregating around $100m in capital per month into pension funds. And given our population size, there’s potentially plenty more to come.

The fear was always that with the way the pension assets were growing, our leaders were bound to start eyeing the money with the belief that they were the best qualified to spend it.

And this happened in the Senate yesterday. Listen to them

David Mark;

Secondly, I think that applying it (pension funds) for infrastructure is very important. At the moment because it is not properly managed we can’t do it. Otherwise this huge amount of money just sitting down there does not make sense for anybody even for laymen like me who are not economists. We think that this money could be usefully invested or channelled to a better use so that the nation can benefit. We cry of lack of infrastructure all the time while there are so much funds sitting down there idle for people to embezzle

Babafemi Ojudu;

Senator Babafemi Ojudu, lamented that a whopping N2.9 trillion pension fund was idling away in the custody of pension fund managers

Victor Ndoma-Egba

As at September 2012, the estimated accumulated pension fund stood at about N2.94 trillion. One can only imagine the impact of such fund in the economy if channeled properly

This is scary stuff and makes me think we are entering the making of a real life horror movie. To our Senators, the money is just sitting down there being stolen by those in charge of it. Senator Mark also went on to say;

I think the problem we’ve had is that we have all sorts of rookies. People who have no idea about managing funds, not to talk of very huge pension fund, go to manage our pension fund. And I think it’s a very specialised area where you cannot just wake up tomorrow morning and be appointed to manage the pension fund. You will mismanage it. That’s what I suspect has happened

Sigh. Senator Mark, you need to replace whatever it is you are using to make your suspicions. No sir, you cannot just wake up and be appointed to manage a pension fund. All you need to do is read the guidelines for setting up a PFA. Obtaining the form alone costs N500, 000. After that, you then need a non-refundable licence fee of N5m which guarantees nothing. The guidelines also state that to be appointed the Managing Director of a PFA; you need a minimum of 15 years post qualification experience of which at least 12 years must have been in the financial services sector. The requirements are quite onerous and detailed.

Senator Mark, another thing dey there? Why are you trying to give a dog a bad name so you can hang it? If these requirements are being circumvented, then that is a larger problem with Nigeria. Where is the evidence that this is the case? There are currently 20 PFAs in Nigeria and the list can be found here on the Pencom website. Randomly clicking through to Pensions Alliance Limited (#16 on the list), you can see that Emenike D Uduanu is the Managing Director and the website says he qualified as a chartered accountant in 1994 and it’s clear he meets the criteria to be MD of a PFA judging by his history. I won’t bother going through the rest but if there’s such an MD who doesn’t fit the criteria, then Senator Mark should be able to point out the ‘rookie’ assuming he can spot a rookie fund manager if he sees one.

I am particularly disappointed in Senator Ojudu for joining in the ignorant chorus in the Senate by saying the pension funds were ‘idling away’ in the custody of PFAs. This is unpardonable ignorance unbecoming of a Senator who was once a journalist.

No, the funds are not idling away anywhere. You can take issues with how and where they have been invested, but you are not allowed to make things up. I have done a quick chart based on figures taken from the PENCOM website;

Source: PENCOM (Q2 2012)

What is most annoying about the above chart is that you can clearly see the government is the biggest beneficiary of the funds at the moment – almost 60% of the pension funds are lent to the government by way of bonds. There is no mystery about this – Nigeria is full of dangerous investments and the safest person you can lend money to at the moment is the federal government because, worst case scenario, they will simply print more money to repay you. Given that it is people’s future livelihoods at stake here, it does make some sense to keep the investments as safe as possible at least for now [You can also see the total matches the N2.9trn Sen. Ojudu is talking about]

The Senators are complaining about the money sitting ‘idle’, yet it is not impossible, given the profligate way the government borrows and spends, that some of their fat allowances have been paid from these funds. If there is any money sitting ‘idle’ it is the N40bn in cash, representing less than 2% of the total assets.

The rest of the investments are straightforward things designed to ensure the pension funds are as diversified as possible.

Given the way that Nigerians start acting funny when it comes to money, the original pension act was designed to make it rather difficult to access by investment managers such as Private Equity and Venture Capital funds. Again this made sense, there are huge sums of money at stake and we don’t want a situation where one guy and his friends set up a PE firm and are able to access pension funds the next day. You only need to speak to a PE Manager in Nigeria to hear how onerous it can be to get PFAs to invest in your fund.

Finally, having determined that the pension funds are just idling away, the Senators then proceeded to suggest where they should be invested. Infrastructure of course! Who can quarrel with infrastructure spending in Nigeria today given our huge challenges? Of course it’s a no brainer…or is it?

From the numbers above, you might be tempted to ask – given that the government is the biggest recipient of the pension funds, what exactly is stopping it from using the money it raises to fund infrastructure development? I happen to work with a fund manager with a huge amount of pension funds under management. I wish it was as easy as putting money towards infrastructure. For a lot of funds, the objective is simply not to lose any money at all so small returns will be absolutely fine. But with infrastructure spending, you really can lose a lot of money which is why the government will need to backstop the investments anyway. What if you build a bridge with pension funds and plan to make the money back by tolling it and then no one passes the bridge? When the retirees come to collect their money, you are not exactly going to cut a piece of the bridge and give it to them are you?

Hearing legislators trying to direct where investments should go sends a shiver down my spine. This is the first time Nigeria has attempted to have a serious and independent pension fund system in place. The reason the Senators can even complain about funds ‘idling away’ is because there is evidence that we have pension funds somewhere. In the past it was never this way; no one could tell you where people’s pensions were. As an example, my mum used to be an Air Force. I recall that during one ‘harmonisation’ exercise that was carried out under President Obasanjo, retired military officers got a significant pension increase (admittedly what they were being paid previously was no more than loose change). What was even more interesting about the change was that her new monthly pension payment was around 5 times what she was paid as her salary before she retired. Much of this has to do with inflation of course but the real issue is that Obasanjo could pretty much declare a huge increase in pension payments to a favoured constituency because these things were done by fiat and were not linked to any contributions or invested funds.

This is one of the few things working pretty well in Nigeria at the moment and even if progress sometimes seems slow, we are, fingers crossed, very much on the right path. But given that this is Nigeria, the chances of snatching defeat from the jaws of victory are very very high and this is what the Senators are planning to do.

Distinguished Senators, find something else to occupy your time and leave this one alone. You are not fund managers or investment advisors and no one is asking you to be. Just leave this and move on to something else.

Abi another thing dey there?

FF