Govt should de-risk infrastructure sector before investing pension funds
Dave Uduanu is the Managing Director, PAL Pensions. In this interview with The Guardian, he urged the Federal Government to de-risk the infrastructure sector before investing pension funds considering the likely impact of failed investments as well as return on investments for pensioners. He also addressed other key issues involving the industry. Excerpts.
There has been so much fuss about the investment of pension funds in infrastructural development. What do you think is the leeway out of the situation?
Pension funds are long-term funds. So ideally in more developed countries, pension funds invest up to 10 per cent and in some instances like in the U.S., in Latin America it is up to five per cent and in Canada, it is up to 20 per cent in infrastructure. One would expect that in Nigeria, that should be the case. However, in Nigeria, infrastructure as an asset class is very new, as it is not well developed. The bulk of infrastructure has been built by the government and is done through appropriations from the budget. So our initial stance is that pension fund ideally should invest in infrastructure. However we are quick to caution that such an investment should be secured; it should be well structured and investment should be through an instrument or through intermediaries who are experts in infrastructure investing.
There has been a bit of news in the papers about how the Federal Government plans to use the pension funds for infrastructure and we say that on the face of it, that is not possible to use pension funds directly. You cannot directly appropriate pension funds to invest in infrastructure because the funds are unitised and they belong to individuals. And one thing I need to quickly point out is unlike in Canada, Australia or in the US; the pension funds are contributions from individuals. In those other countries,the pension funds are promises by the employers; they are defined benefit schemes. And the bulk of the employer being government is at liberty to decide on how these funds can be used but that is not the case in Nigeria where the pension funds are contributed by individuals, they are held in accounts and the individuals know their account balances and therefore, it would be difficult to appropriate. That would be like a confiscation of pension asset, which would send a wrong signal.
So my stand is that yes, pension fund should seek to invest in infrastructure in a safe and secure way. So what we are doing is liaising with the Ministry of power, housing and works, which is almost like the infrastructure ministry headed by Babatunde Raji Fashola, to come up with safe and secure way to invest in infrastructure.
When do you think these appropriate rules and laws would be put in place?
The first thing we agreed was to set up a committee, which has been done. So we are going to have a meeting in the middle of April and that working committee team is made up of representatives from PENCOM, from the industry, from the pension operators and from the ministry. And that working team is to come up with a work plan on how these things should happen.
So I believe that once that meeting is held we should be able to give more clarification around the timeline.
You know infrastructural development takes time. When talking about investments in roads, airports, power plants, water schemes, railways, these things do take time. So what we also agreed is that they would come up with a shortlist of the type of investment infrastructure that can be completed within the next three and a half to four years which is the tenure of this regime and see how we can work with government to issue out instrument so that pension funds can invest through does instrument.
How far have PenCom, fund managers and custodians gone with plans to invest in state government bonds?
We are being selective as far as state government bonds are concerned. If you take Lagos state and some of the oil-producing states, you would find that a great proportion of these state governments rely on federal allocation to finance the budget. So with the drop in oil prices, there is a bit more risk in investing in state bonds because the monies that they get from the federal government has reduced by as much as 50 per cent and a lot of them have very low IGR’s. I don’t expect to see a lot of investments in state bonds. However, about 7 per cent of the funds are already invested in the state bonds. So there is a selective appraisal of state bonds and each Pension Fund Administrator (PFA) makes their own decision based on its judgement on the credit rating of the state and the ability to repay these bonds. So we don’t expect to see a lot of state bonds.
What is your assessment of the performance of pension funds in 2015 and what has been your company’s experience?
2015 was a difficult year for the pension industry. Simply because of two things; the elections and the year oil prices dropped. And because of that, the stock market didn’t do well at all and also bond yields started to come down because the Central bank then decided to reduce rates. So you find that bond yields dropped from as high as 15 per cent to as low as 10 per cent last year. Stock market was negative so pension funds didn’t do well. The returns were at about between 7 and 8 per cent on the average. But that is an exceptionally bad year because over the last 5 years or since inception, the average return on pension fund is about 11.9 per cent, which up until now has been above inflation. As you know, the mandate of pension funds is to generate positive returns above inflation. But as inflation is beginning to inch up, the challenge now is that the bonds are still low, the stock market is still depressed and there are very few alternative assets to invest these pension funds. That is why we are actively seeking out for opportunities in private equity, infrastructure and housing so that we can continue to invest these funds profitably for the end users.
What is the impact of current inflation trend on pension fund and its investments?
One of the biggest enemies of investments is high inflation whether it is pension fund investments, individuals or corporate investments. So as inflation begins to inch up, we need to find instruments that would give us returns that are above inflation and at the moment it only government bonds that can give you that sort of returns.
Another thing is what to expect in a well-managed economy as inflation inches up, Central bank begins to raise interest rates to manage inflation and money supply. And I think the last MPC decision by the central bank was in the right direction because they raised rates from 11 to 12 per cent and in response to that, the bond yield has gone up from 10.5 to as high as 12.5 per cent. And inflation is just below 12 per cent.
So government bond yields are still giving a return above inflation but we cannot say that much for money market instruments with banks which are below inflation and also, for the stock market which is also still in negative territory simple because of the currency policies which has seen exit of a lot of the foreign portfolio managers and therefore, their withdrawal is depressing the stock market prices.
So we are facing a significant challenge this year with inflation and one hope that inflation would be brought under control through the activities of the Central bank so that we can still see single digit inflation.
In your opinion, the CBN is going in the right direction?
They are going in the right direction as far as the monetary policy is concerned and we expect to see more rates hikes over the next MPC cycle. Our view in Pensions Alliance is that rates should go up to about 14 per cent. However with 14 per cent, it means that growth in the real sector would be affected but we believe that monetary financial stability is more paramount at this point than growth and if inflation begins to go up, a lot of investors would delay making investment decisions and then FDI’s would stay away from the country. We think that the CBN should raise rates by an additional 200 basis point to further moderate and reduce inflation.
Pal pension is one of the prominent players in the market, what position can you assign yourself in the market and what are your plans to increase your market share?
We are about number six in the market, which is a decent position but not where we want to be. At PAL pension, our strategic plan is be one of the top 5 PFA’s in the industry. So we are very close but not there and whilst one can begin to say we want to be the biggest, we are realistic because we also know that other pension players are not sitting down and folding their arms. So we want to one of the top 5 but more importantly, is to reach asset under management (AUM) of N500 billion over the next 2 or 3 years. How do we intend to do that? There are two ways, one is either through organic or by acquisition.
In the organic area, we have just launched an aggressive market strategy where we want to position the brand as the number one brand within the youth market segment. Today we have moved from being a distant number in the social media space to being the top 2 or 3 brands as far as social media is concerned and this is directly measured by the number of hits and likes that we have on social media platforms like Facebook, Instagram etc. we have also launched our YouTube channel and we have a crop of very young and creative workforce that are focused on this segment of the market.
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