With all the talk about pension funds and the federal government’s alleged attempt to borrow an extra N2 trillion at artificially low rates from it, I thought to share some facts about our current pension funds and the pension system.
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First fact. Pensions are savings. In the past, with the public run pension system, it was kind of difficult to imagine pension funds as savings. The company, or the government, just internalised everything. With the system we run now though, it is very clear. Pensions are people’s savings. Every naira paid into a pension fund can be linked directly to an individual who is saving for his or her eventual retirement. Pension funds and savings accounts are not that different. Except that one is given to a fund manager to manage on your behalf and you cannot really withdraw from it until you retire.
Second fact. You might have heard that pension funds have nearly N10 trillion but that does not mean they have N10 trillion in cash sitting down somewhere. In reality, it means they have N10 trillion in assets. The fund managers have invested your money in bonds and stocks and other funds and so on. So, it’s not like the pension funds have N2 trillion cash lying around that they can just loan out. If the pension funds wanted to raise the money, they would have to sell assets. They would have to sell N2 trillion worth of bonds and stocks and liquidate other investments. Which means someone would need to buy N2 trillion worth of assets from the pension funds. Who is that someone?
Third fact. More than 70 percent of all those pension funds have already been loaned to the government. As at 30 November 2019, 70.88 percent of pension assets were invested in federal government securities. To put it simply, of that near N10 trillion pension fund assets, over N7 trillion has been loaned to government. Not loaned as in “just give me the money”, but loaned as in the federal government sold bonds and treasury bills which the pension funds willingly bought. These are not wild statistics in case you are wondering. These are official statistics from PENCOM, the official government regulator of pension funds.
Fourth fact. The pension funds can invest in infrastructure. Nothing in the laws says they cannot invest. But the investment must make sense and must be approved by PENCOM as making sense. What kinds of infrastructure investments make sense according to the pension fund administrators and PENCOM? Infrastructure that has a proper legal framework and a legal and transparent revenue stream, typically in the form of a fund. In short, infrastructure in which money from that such can pay back the funds directly. As at November pension funds have invested over N40 billion in infrastructure funds. So obviously if the projects are there and structured right the pension fund administrators will invest without being forced to.
The final fact. The pension fund is valued at only roughly N10 trillion in total but according to the government’s own estimates, we need about N10.8 trillion worth of investments every year for 30 years to close our infrastructure gap. Which means that the N2 trillion in question will not really change anything even if spent efficiently. But collecting that N2 trillion from pension funds via fiat may ruin the pension system indefinitely. So, there is a small benefit from the potential raid but a big risk of disaster that confidence in the pension system will be destroyed.
So, there you have it. Five facts with which you can make up your mind on the seriousness of the government’s proposal to “borrow” 20 percent of pension assets. We need to learn that on this infrastructure problem we will need to do the hard work. These kinds of shortcuts typically only lead to bigger problems down the line. If we do the hard work of making our infrastructure projects investible then we won’t need to force anyone to invest. The world has trillions of dollars just looking for where to invest. It seems for now that we are not serious.
Dr. Obikili is chief economist at BusinessDay
