Investing pension funds

This is the fifth time the regulator is updating its investment regulations since the Contributory Pension Scheme (CPS) came into effect about 11 years ago. The first review took place in 2007, while subsequent reviews took place in 2008, 2010 and 2012. The idea is to strengthen the guidelines and enhance their effectiveness.The new guidelines, […]

This is the fifth time the regulator is updating its investment regulations since the Contributory Pension Scheme (CPS) came into effect about 11 years ago. The first review took place in 2007, while subsequent reviews took place in 2008, 2010 and 2012. The idea is to strengthen the guidelines and enhance their effectiveness.
The new guidelines, which spell out the portfolios in which pension fund assets can be invested, are expected to unlock the huge investment opportunities available to Pension Fund Administrators (PFAs) and stimulate the nation’s economic development. This is because pension funds, in most economies, serve as the single largest source of investible funds. Under the current rules, PFAs cannot invest directly in commercial papers without deposit money bank guarantees; but the draft guidelines allow them to invest directly.  
This should potentially boost the money market because, as it stands now, about 60 percent of pension funds, that is around N4.6 trillion from 6.5 million contributors, is invested in the more secure federal government bonds and other core assets, even though there are other investment opportunities with higher returns.
The amount available to the PFAs is expected to rise sharply with the inclusion of state and local government employees and the informal sector in the scheme under the Pension Reform Act, which became law last year.
Though this should significantly boost monthly contribution, based on Nigeria’s pension history, there is the likelihood of irregular or delayed remittances, limiting overall impact.
The new guidelines also allow the PFAs to invest in bonds and debt instruments of states that have fully implemented the CPS. This would not only increase pension coverage but also put pressure on states that are yet to adopt the scheme to do so.
Pension funds are long-term savings that should not be allowed to lie idle, but should be judiciously invested to safeguard the contributors’ money, attract returns and promote economic expansion.
With more investment windows opened to them, the PFAs may be tempted to make some wrong investment choices, which may cause serious long-term problems for the scheme and the contributors. This is why it is imperative to urge investment officials to tread with caution when they get the go ahead. It will be a terrible blow to the nation if the pension industry plunges into the kind of crisis that engulfed the banking sector a few years back, because this can trigger a nationwide socio-economic chaos. The Commission’s involvement of major pension industry stakeholders in the review process is a positive step; but this should be taken further by addressing some of the concerns that have been raised before the final guidelines are released to avoid confusion in their implementation.
It also important to add that the Pension Reform Act as some gray areas as some stakeholders have pointed out.
For instance, as Malam Misbahu noted last month, the guidelines provide that an employee who is a first time home buyer can use part of his Retirement Savings Account (RSA) for equity contribution in mortgage loan without giving any guidelines on how that can be done. Though the framework on the self-employed and informal sector operators’ participation is out, there is need to develop one to tackle the problem of identity. These issues need to be looked into if not now in order to strengthen the nation’s pension law.