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Mind the gap.


Africa is experiencing a sustained period of strong economic growth, which has led to an emerging middle class with more disposable income, who can afford to save for retirement rather than rely on extended family support in later years. But Chinelo Anohu-Amazu (below), Director General of Nigeria's National Pension Commission (PenCom) argues that more needs to be done.

The Nigerian National Pension Commission (PenCom), and other African pension regulators and administrators are working to ensure we devise a more sustainable consumer savings vehicles and create more opportunities for our workers and pensioners to hold stable investments that pay appropriate dividends.

Pension funds in Africa are growing organically. In Nigeria, pension funds have averaged a 25% growth rate over the past eight years and we expect to, at a minimum, maintain that rate based on the most conservative outlook. Nigeria has a 170 million population, yet only 6.3 million Nigerians are currently contributing into pension funds. This indicates there is great potential for growth.

As financial literacy and awareness continues to improve, more workers are saving--and starting earlier--to safeguard their futures in retirement. The average monthly inflow of pension contributions is approximately N45bn ($275m). Pension fund assets often grow symbiotically with the respective size of the country's economy--which has certainly been the case in Nigeria.


Following Nigeria's rebasing of its GDP figures, which sees it lead the way as Africa's largest economy, our pension industry (as at the half year ended June 2014) has N4.43 trillion ($26bn) under management. Economies like our own, as well as other established pension markets such as South Africa, Egypt, Kenya and others, have sizeable assets under management. How those assets are subsequently used to foster national development has become increasingly topical.

Africa, including Nigeria, has huge infrastructural deficits that far exceed government I revenues and local private capital. Africa needs approximately $95bn a year to close an infrastructure gap in electricity, roads, railways and ports. Current investment levels are estimated at $45bn--leaving a large shortfall. Finding additional sources of finance, such as pension funds, to fund that "infrastructure gap" is therefore not only logical, but in many ways, imperative.

Pension funds--being long-term stable funds--are most suitable for infrastructure and housing investment, as the cash flows match the long duration of pension liabilities and also provide protection to contributors against the effects of inflation on the funds.

There is a good long-term asset-liability match with Nigerian pension funds due to the relatively young age distribution of pension contributors, which fits with infrastructure projects that are long-term in nature. To attract pension funds, the investment or co-investment structure must be safe to mitigate the risk exposure of the pension plan members and also provide comfort to the fund managers as well as other capital issuers.

Nigerian pension funds will increasingly partner with the private sector to invest in infrastructure development following a new pension reform bill that was signed into law in July.

Our earlier investment regulations (which provided detailed governing rules for pension fund investment within the broad legal framework outlined in the Pension Reform Act 2004) had allowed up to 35% investment in corporate bonds inclusive of a 15% limit for infrastructure bonds. However, owing to a dearth of these instruments in the market, pension funds had not been able to make significant investments.

Much effort has been expended by the industry to encourage investment in infrastructure. Nigeria's 2014 Pension Reform Act makes provisions that will enable the creation of additional permissible investment instruments to accommodate initiatives for national development, such as investment in the "real sector", including infrastructure and real estate development.

This Act makes provisions to ensure it is both viable and attractive for foreign capital to co-invest alongside our pension funds to bridge the infrastructure and real estate deficits.

As the pension regulator in Nigeria, our role is to create the regulatory framework and an enabling environment with favourable policies to incentivise foreign capital inflow (i.e. investors) into these focus-areas.

To fuel pension fund investment in infrastructure and real estate across the continent there is a need for governments and international development finance institutions to provide credit enhancements on the projects and financial securities that would be issued to fund these projects, especially at the early stages.

Equally, there is a need for all relevant stakeholders to collaborate to ensure the judicious and safe investment of pension funds for the overall benefit of African countries and their citizens.

National governments must think of infrastructure, not in its broadest sense but the specifics of what is required, understanding the ways in which different infrastructure sectors--such as transportation, energy, and water --are governed, financed, and sustainably delivered.

Nigeria recently underwent the successful privatisation of the power sector, which creates both a need, and a significant opportunity, for investors to co-invest with pension funds to help develop the infrastructure required for growth.

Governments need to outline their priorities given their peculiar economies, competitive advantages, and infrastructure needs.

The potential returns and reduced risk of investing in infrastructure --with the promise of high yields and strong economic growth in Nigeria--makes it increasingly attractive for fund managers and private investors. Nigerian pension funds' estimated rate of return of 14.5% in 2013 was 6% above the average inflation rate of 8.5%. Also, the rate of return in 2012 was 14%, 2% above the average inflation rate of 12%.

With concerted efforts being put in place to maintain stable macroeconomic conditions, it is expected that the returns on investment by the pension funds will continue to exceed the inflation rate, to the benefit of the contributors and investors.

Pension fund assets can be invested in infrastructure projects through eligible bonds or debt securities. Only infrastructure projects with a minimum value of N5bn ($3im) will be considered eligible for an investment from a Nigerian pension fund.

In order to qualify, infrastructure projects must be evaluated to ensure they have robust credit enhancements, such as guarantees by the Federal Government, an eligible bank, development finance institution or multilateral development finance organisation (MDFO).

The role of MDFOs, as co-investment partners in an infrastructure fund, is such that an infrastructure fund with an MDFO investment requires the fund manager to retain a minimum of 1% investment stake while a fund without an MDFO investment requires a minimum of 3% stake to be held by the fund manager.

Nigeria, and indeed Africa, can look towards Australian and Canadian pension funds--which have the highest asset allocation to infrastructure around the world--as benchmarks for the use of pension fund assets to aid national development. Factors such as infrastructure policies, the pension system, investment strategies, asset allocation and governance of pension funds must all be considered when analysing what African policymakers could adapt from Australia and Canada.

Pension funds in these countries allocate more of their asset base (approximately 5% in total) to infrastructure than those in other OECD economies--although Canadian pension funds have undertaken most infrastructure investment abroad.

Investors would certainly appreciate the increased government efforts in both Australia and Canada to provide sound infrastructure policy and regulatory certainty. Co-ordination between the various levels of government is critical, particularly so in federal states. This is an important point which many larger African counties, such as Nigeria, must be mindful of so it is an area in which we are making great efforts to improve.

Pension funds typically have a preference for brownfield assets, seeking stable, often inflation-linked income streams, at moderate risk. However, given the significantly higher returns that can be generated from greenfield investments, some investors are keen on these types of assets.

In this regard, the Asset Recycling Fund Bill in Australia, which established a new fund as a vehicle for providing financial assistance and incentives to states and territories to invest in infrastructure, could come into consideration in other countries. Thereby, the public sector sells existing infrastructure assets to the private sector, with the funds used to develop infrastructure.

In a Defined Contribution pension system, investment in illiquid asset classes, such as unlisted infrastructure, can be difficult, especially when individuals have the option to switch funds easily, as in Australia. This creates issues with the interim valuation of illiquid assets and potential liquidity bottlenecks. The drive towards low-cost, default Defined Contribution funds can also be a detriment to investing in more complex asset classes such as infrastructure.

Infrastructure and real estate development, apart from improving the living standards of the people, are platforms for job creation, entrepreneurship and also have significant multiplier effects on the economy. Sustain able investments for pension funds, and increasing investment asset classes and opportunities --specifically infrastructure and real estate--have become a core agenda for PenCom.


Focusing on our infrastructure challenges will certainly help in creating the economic preconditions needed for longer-term growth while fostering poverty alleviation. Infrastructure development remains a key driver and a critical enabler of sustainable growth in Africa and the current favourable economic landscape on the continent provides a unique opportunity for the public and private sectors to collectively address the infrastructure gaps.
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Title Annotation:OPINION: Nigeria
Publication:New African
Article Type:Column
Geographic Code:6NIGR
Date:Oct 1, 2014
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