Nigerian pensioners will be lending to the government at an interest rate well below inflation rate if the Federal government does dip its hands into pension funds.
At the end of the National Economic Council (NEC) meeting last week, the council disclosed that the Federal Government had resolved to borrow N2 trillion from the current N10 trillion pension funds to finance the development of infrastructure.
It’s not exactly clear how it will work, seeing that over 70 percent of the N10 trillion of pensioners money under the management of Pension Fund Administrators (PFA) are already in the hands of the government in form of bonds and treasury bills.
“There were meetings held to speak to the PFAs of some private bonds that we will be sold at between 6-9 percent that they would have to buy,” a source familiar with the matter told Business Day.
“The worry with such an action is that pensioners are at risk of giving up their savings to a government that isn’t an efficient spender and prioritizes recurrent expenditure over capital expenditure,” the source said.
“It’s only in a lawless society that such will happen,” the source added.
The government hasn’t exactly earned the reputation of being judicious with public resources and that has drawn the worry of some sources who say the government’s action could inflict some reputational damage in the eyes of investors.
“The Pension Act is one of the pivotal reforms of the Obasanjo era, it’s a shame that this government wants to ruin it this way, given that past schemes run by the government never worked but this one has,” another source who did not want to be named, to speak freely said.
“No one understands how this will work but the implication this has for the economy and investor confidence is damaging,” the source said.
Nasir el-Rufai, the governor of Kaduna state said that the decision to tap into the pension funds was reached by a NEC committee headed by him.
El-Rufai said that the committees’ decision is consistent with the Pension Reform Act 2004, which empowers the government to borrow 20 percent of the fund to address national issues.
Over the years, Nigeria’s widening infrastructure deficit has been a recurring discourse as it is widely believed that the low stock of infrastructure investments is one of the biggest challenges to the ease of doing business.
From poor port infrastructure, dilapidated transport networks, epileptic power supply, huge housing deficit, Nigeria’s infrastructure gap cannot be overemphasized.
“The reason why pension funds don’t play bigger roles in infrastructure development in Nigeria is because the Federal government is not investing borrowed funds, taken from the PFAs, wisely. After all the government holds 70 percent of the Pension funds,” a source familiar with the matter said.
“Saying you want to take private money and do whatever you want just shows how hostile the government is to private capital and that is the last thing it needs at this time,” the source added.
“Nigeria’s Pension Fund industry has been through turbulent times to be where it is today and this could scuttle the progress made,” another source said.
Prior to the enactment of the Pension Reform Act 2004, pension schemes in Nigeria had been bedevilled by many problems.
The Public Service operated an unfunded Defined Benefits Scheme and the payment of retirement benefits were budgeted annually.
The annual budgetary allocation for pension was often one of the most vulnerable items in budget implementation in the light of resource constraints.
In many cases, even where budgetary provisions were made, inadequate and untimely release of funds resulted in delays and accumulation of arrears of payment of pension rights. It was obvious therefore that the Defined Benefits Scheme could not be sustained.
In the private sector on the other hand, many employees were not covered by the pension schemes put in place by their employers and many of these schemes were not funded.
Besides, where the schemes were funded, the management of the pension funds was full of malpractices between the fund managers and the Trustees of the pension funds.
This scenario necessitated a re-think of pension administration in Nigeria by the administration of President Olusegun Obasanjo. Accordingly, the administration initiated a pension reform in order to address and eliminate the problems associated with pension schemes in the country. The outcome of the reform was the enactment into law of the Pension Reform Act 2004, which has today led to an unprecedented rise in Pension Assets to N9.4 trillion from a negative position before the reforms.