Avoid Argentina’s pension management route
Nigeria must avoid the route Argentina trod with its pension assets and the ruinous outcome that the move fetched. In October 2008, the government of President Cristina Fernandez de Kirchner grabbed the country’s private pension assets to meet obligations as the global financial squeeze and slump in commodities prices limited its options. Argentina ran a public and private pension system.
Kirchner’s government nationalised the private pensions to provide it with the cash it needed to meet debt payments and avoid a second default on its loan payments. It was at the height of the global economic crises with countries seeking various ways to manage and fight the credit crunch.
The U.S. Federal Reserve bolstered money-market funds by lending as much as $540 billion to the industry. France proposed injecting $14 billion into six banks on the condition they agreed to increase their lending. The London interbank offered rate declined.
The approach by Argentina was an unusual one in economic management. It represented a novel system of handling pension assets. It amounted to nationalisation.
President Cristina Kirchner justified the move then with the claim that it aimed at protecting investors from losses resulting from the global market turmoil. Financial firms administered funds in the system, which was parallel to a government pension system. The private system had about $30 billion in assets and generated about $5 billion in new contributions annually.
Behind the move was a growing financing need for the country caused by reduced prices of its commodity exports such as soybeans. There was also unchecked government spending. Both factors created a gap of $10 billion to $11 billion in required debt payment between 2008 and 2009. The payments were from debt restructured after a 2001 default and new debt issued locally.
Before then, Argentina’s pension funds contributed to the pool of investible funds in the capital markets. It was the norm in Latin America. The Latin American system created a large pool of domestic savings that funded local capital markets and lent money for projects like toll roads. In Argentina, Mexico and Chile, pension funds are among the most prominent players in local stock markets, helping young companies get access to capital.
The private pensions were an accessible source of funds to the government. Kirchner got two-thirds of the Congress to approve of the move. Years later, the country continues to rue the move. The country was shut out of international capital markets from 2001 up until the 2008 pension grab because it defaulted on its sovereign debt. It got worse afterwards. It took a $57b bailout from the IMF and defaulted on the loan last year.
Nigeria’s mandatory contributory pension scheme has continued to grow because of the conservative approach the National Pension Commission has adopted in its management. A central feature is a restriction on investments to assets of the highest quality. Plans to grow participation in the scheme mainly by private sector firms depend on its credibility.
Government meddling with the pension assets of nearly N9 trillion would impair confidence in the scheme.
Nevertheless, Nigeria needs to grow its pension assets more than ever before. With reduced incomes for most people, the rate of capital formation through savings would drastically reduce. The pension scheme, because of its mandatory nature, drives capital formation.
No one should affect confidence in the Nigerian contributory pension scheme. Indeed not the federal government. As the example of Argentina shows, good intentions do not hack it when it comes to managing funds. Nor does the government’s record of investments in infrastructure assets with various loans raise confidence in the possibility of effective management and return of the pension funds it is now borrowing.