Pension funds are a fast-growing and useful asset pool
for funding infrastructure projects in Nigeria. The National Pension Commission
(PENCOM) recently announced that the asset pool made up of contributor’s funds,
and managed by Pension Fund Administrators (PFAs), is currently at N5.3
trillion (, February 22, 2016). 

Nigeria’s infrastructure deficit has been restated by
many writers, policymakers, development enthusiasts and the government. It has
been suggested that the Federal Government of Nigeria (FGN) may use the Pension
Funds to fund this deficit. But the question is, how much of the N5.3
trillion may actually be invested in Nigeria’s infrastructure? This article
seeks to analyse the Draft PENCOM Regulation on Investment of Pension Fund
Assets, 2015 (Regulation) (The latest published Regulation is the 2012 version,
but the 2015 Draft version has been circulated and is expected to be passed
once the PENCOM Board has been reconstituted. It is hoped that this regulation
would be approved by the PENCOM Board in due course) with the aim of arriving
at estimates of how much is realistically available for investment in
infrastructure projects from the N5.3 trillion asset pool.

Investment of Pension Funds in Infrastructure – PFA
Investment Thresholds and Limits 

PENCOM issued the Regulation that established
Investment Thresholds and Limits for Pension Fund Administrators (PFAs). The
Regulation introduced a multi-tiered fund structure in order to match long-term
investments (such as investments in infrastructure) mainly to PFAs which house
long-term funds. Contributions by younger people who are not likely to cash out
their pensions in the near future constitute the pool of long-term funds. On
this basis, the structure distinguishes between Fund types based on the ages of
contributors and levels of permitted risk exposure as follows:

Fund 1 – This is for
contributors who choose more aggressive investments (possibly higher risk and
higher rewards). (The Regulation permits contributors to opt for Fund 1,
provided that RSA retirees or contributors aged 50 and above will not be allowed
to choose Fund 1).
Fund 2 – This fund
category is for contributors aged 49 and below.
Fund 3 – The fund type for
contributors aged 50 and above.
Fund 4 – This is for RSA

In line with the principle
of long-term investments matching long-term funds, the multi-tiered structure
proposed by the Regulation has carefully matched majority of the possible
funding for infrastructure with Funds 1 and 2. 

A cursory analysis of the
implications of the multi-tiered fund structure shows the following:

a)      PFAs
are obligated to invest a minimum of 5% of Fund 1 and Fund 2 portfolios, respectively
in infrastructure.

b)     The
Regulation distinguishes between investment in Bonds and investment in

c)      Fund
1 is allowed to invest a maximum of 15% in corporate bonds and a maximum of 60%
in FGN and CBN securities including infrastructure bonds. As regards investment
in infrastructure funds, Fund 1 may invest a maximum of 10% in such funds.

d)     Fund
2 is allowed a maximum 20% in corporate bonds and 70% on FGN and Central Bank
of Nigeria (CBN) securities, including infrastructure bonds. Fund 2 has a
maximum investment of 5% in infrastructure funds. 

e)      Fund
3 and Fund 4 (unlike Fund 1 and Fund 2) do not have a minimum threshold for
investment in infrastructure. This means that Funds 3 and 4 have no obligation
to invest in infrastructure. Fund 3 and Fund 4 may, however, invest in
infrastructure by way of corporate bonds and FGN/CBN securities targeted at
infrastructure. The maximum limits for Fund 3 are 20% in corporate bonds and
80% in FGN & CBN securities; whilst the maximum limits for Fund 4 are 10%
in corporate bonds and 80% in FGN & CBN securities.

f)       The
allowable investment in bonds shows a pattern that seeks to allocate a greater
permissible spend in Bonds which are secured (by FGN and CBN), as opposed to corporate
bonds and Infrastructure Funds.

Infrastructure Wallet
Given the analysis above,
we now come to the core of this article: what is the amount of money (wallet)
that Nigerian PFAs have available for investing in Nigeria’s infrastructure?
There is no simple answer to this question. In the paragraphs below, we will
examine three basic scenarios and arrive at some “back-of-the-envelope
numbers”. These scenarios are based on the following basic assumptions:
a)      Total
funds in PFA portfolios amount to N5.3 trillion;

b)     Fund
1 is currently nil, as contributors have not opted for that option yet;

c)      Fund
2 currently accounts for 77% of the total funds in portfolios = N4.081
trillion; (
Number of
contributors per Fund, obtained from Pension Industry Membership by Demography
as at 31 December 2015)

d)     Fund
3 currently accounts for 17% of the total funds in portfolios = N901
billion; and

e)      Fund
4 currently accounts for 6% of the total funds in portfolios = N318

SCENARIO 1 – Minimum
The assumption here is
that PFAs get to invest the minimum of 5% from Fund 1 and Fund 2. If PFAs
simply follow this minimum injunction, the wallet available to PFAs for
infrastructure finance based on the Regulation would be 5% of N4.081
trillion available in Fund 2, which is approximately N204.5 billion.

SCENARIO 2: Maximum Investment in Bonds
The assumption here is
that PFAs get to invest the maximum allowable investment in
infrastructure bonds based on the maximum thresholds discussed above. This would
involve PFAs channeling the maximum of their investment limits on corporate,
& CBN bonds and
all such investments as are geared towards infrastructure. This would give PFAs
an infrastructure wallet of N4.9 trillion for infrastructure investments. This
scenario is, however, highly unlikely, as most of the investments under this
category go to fund FGN recurrent expenditure.

SCENARIO 3: Maximum
Investment in Infrastructure Funds
As in Scenario 2 above, the
assumption here is that PFAs get to invest the maximum allowable investment but
in this case, the investment vehicle would be infrastructure funds. 
This would give PFA’s an infrastructure wallet of N204.5
billion for infrastructure investments based on 5% of N 4.081
trillion in Fund 2.

Based on the above analysis, it is clear from the
Regulation that the bulk of pension funds available for infrastructure may be
obtained via FGN and CBN securities and bonds. Therefore, government should
first and foremost focus on FGN secured infrastructure bonds and not on
infrastructure funds. To maximize this benefit, government may need to
recalibrate its utilization of funds accessed via this window – by reducing
utilization for recurrent expenditure and increasing utilization for
infrastructure investment. PFAs simply require a guaranteed return and are not
concerned with how FGN utilises the money.

Secondly, a structure for FGN guaranteed corporate
bonds (floated by project SPVs or FGN entities like the Federal Airports
Authority) on specific infrastructure projects may be explored. This manner of
project enhancement would go a long way to unlock pension funds for
infrastructure projects and reduce the project risk profile.

Thirdly, pricing of the bonds and the repayment can be
addressed in a cohesive manner if PENCOM, by regulation, discounts the return
on investment to the PFAs for instruments targeted at infrastructure. This may
be viewed as a Corporate Social Responsibility gesture.

Fourthly, as soon as the regulations are passed, FGN
and PENCOM should enforce the minimum investment of 5% to incentivize PFAs to
start investing in infrastructure albeit in bite sizes. PFA’s must learn the
ropes with investing in infrastructure projects.
Finally, it would go a long way if FGN proposes a
legislation that creates an infrastructure sinking fund (a given percentage of
future budgetary allocations) to support some of the bonds and project
enhancements. This will definitely improve the risk rating of each project
backed by FGN, and give the investors greater comfort.
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