1.0 Introduction
1.1 The National Pension Commission (the Commission) expresses its profound appreciation to the House Committee on Pensions for the opportunity to make a presentation at this Public Hearing on the “Need to Invest Pension Funds to meet Nigeria’s Infrastructural Challenges”. Indeed, the House Committee on Pensions has been a critical stakeholder in the evolution and implementation of the Contributory Pension Scheme (CPS) in Nigeria. The Commission, therefore, acknowledges the tremendous support it enjoys from the House Committee and the National Assembly in general, in the consolidation of the pension reforms in Nigeria.
1.2 The discourse on the desirability or otherwise of utilization of accumulated pension funds and assets for infrastructural development has recently assumed prominence and arose public interest in Nigeria. This is certainly not unconnected with the impressive performance of the pension industry in the accumulation of substantial pool of long term assets that can be utilized to bridge the infrastructure deficit inhibiting national socio-economic development. This public hearing on the subject is, therefore, timely and fully supported by the Commission.
1.3 Accordingly, this memorandumseeks to briefly discuss the modest achievements of the pension reforms and highlightthe statutory and regulatory frameworks of investment of pension fund assets under the Pension Reform Act 2014. The memorandum also presents the position of the Commission on the clamour for investment ofpension funds to meet Nigeria’s infrastructural challenges.
2.0 Highlights of the Nigerian Pension Reform
2.1 Honourable Chairman and members of the esteemed House Committee on Pensions would recall that the reform of the Nigerian pension system was necessitated by many problems confronting both the public and private sector pension schemes. The public sector operated largely the Defined Benefits Scheme, which depended on budgetary provisions from various tiers of governments for funding. The scheme became unsustainable due to lack of adequate and timely budgetary provisions as well as huge liability occasioned by increases in salaries and pensions. There were also demographic shifts due to rising life expectancies, which was a phenomenon that affected the period over which pension was paid. Furthermore, pension administration prior to the reform was largely weak, inefficient, less transparent and cumbersome. The private sector schemes had been characterized by very low compliance ratio due to lack of effective regulation and supervision of their schemes. In addition, most of these schemes were akin to Provident Fund Schemes, which did not provide for periodic benefits. Indeed, many private sector employees were not covered by any form of pension scheme.
2.2 Consequently, in 2004 the Federal Government enacted the Pension Reform Act (later repealed and re-enacted in 2014), which established the CPS in Nigeria. The key objective of the pension reform was to introduce a pension system that is sustainable and has the capacity to achieve the ultimate goal of providing a stable, predictable and adequate source of retirement income for each worker in Nigeria. The reform also seeks to establish a uniform set of rules and regulations for the administration and payment of retirement benefits in both the public and private sectors; stem the growth of outstanding pension liabilities; reduce fiscal cost of pension to Government; stimulate domestic savings; and generate pool of long-term funds for financing developmental projects and stimulate private investments.
2.3 The reform has, within the over eleven years of its implementation,significantly achieved these objectives. The CPShas gained public confidence and acceptability as a result of which 6.92 million employees from both the Public and Private Sectors had opened Retirement Savings Accounts (RSAs) as at 31 January 2016.The value of pension fund assets had also grown from N265 billion in 2006, which was the year of actual commencement of investment activities, to overN5.30 trillion as at 31 December, 2015.
2.4 Another important aspect of the pension reform was the establishment of the National Pension Commission as the apex regulator and supervisor of all pension matters in Nigeria. Its mandate includes the supervision and regulation of both the CPS and the Defined Benefits (DB) Scheme as well as the administrative structures established pursuant to the provisions of the Pension Reform Act 2014 (PRA 2014). Accordingly, the Commission had, over the years, established both the institutional and legal frameworks necessary for the successful implementation of the provisions of the PRA 2014.Basically, the Commission stands as a watchdog, with the overriding objective of protecting the pension assets and ensuring that all pension matters are administered in a standardized and transparent manner.
3.0 Legal Framework for the Regulation of Investment of Pension Fund Assets
3.1 The legal framework for the investment of pension fund assets is provided for under Sections 85-91 of the PRA 2014. Section 85(1) of the Act provides that all funds accumulated under the CPS shall be invested by the Pension Fund Administrator (PFA) with the objectives of safety and maintenance of fair returns on the amount invested. Sections 23(b) and 85(2) of PRA 2014 went further to state that pension funds and assets shall only be invested in accordance with regulations and guidelines issued from time to time by the Commission.Section 115(1) of the PRA 2014 further empowers the Commission to make regulations, rules or guidelines as it deems necessary or expedient for giving full effect to the provisions of the Act.
3.2 In more specific terms, however, Section 86 of the PRA 2014 provides that subject to the guidelines issued by the Commission, pension fund and assets shall be invested in any of the following:
a) Bonds, Bills and other securities issued or guaranteed by the Federal Government and the Central Bank of Nigeria (CBN);
b) Bonds, Bills and other securities issued by the States and Local Governments;
c) Bonds, Debentures, redeemable preference shares and other debts instruments issued by corporate entities and listed on a Stock Exchange registered under the Investment and Securities Act;
d) Ordinary shares of public limited companies listed on a Securities Exchange registered under the Investment and Securities Act;
e) Banks deposits and bank securities;
f) Investment Certificates of closed-end investment fund or hybrid investment funds listed on a securities exchange registered under the ISA with good track records of earning;
g) Units sold by open-end investment funds or specialist open-end investment funds registered under the ISA;
h) Real estate development investments; or
i) Specialist investment funds and such other financial instruments as the Commission may, from time to time, approve.
3.3 In the discharge of its aforementioned statutory functions and powers, the Commission issued the first Regulation on Investment of Pension Fund Assets in 2006. Subsequent amendments to the Investment Regulations were undertaken and issued by the Commission in 2008, 2010 and 2012. Another amendment to the Regulations, which was made following the enactment of the PRA 2014, will be issued as soon as it is approved by the Board of the Commission. These amendments were introduced with a view to ensuring a dynamic and effective regulatory and supervisory regime for the investment of pension fund assets, through gradual expansion of the allowable securities from the traditional equities and bonds, to include alternate assets such as Infrastructure Financing (through Bonds and Fundsstructure), Private Equity Funds and Supranational Bonds, amongst other securities.
3.4 The table below shows the current approved assets classes and maximum portfolio limits for pension fund investments in Nigeria:
Asset Class Portfolio Limit (Maximum)
Equities 25%
Open & Closed – End Funds and Unit Trusts (including Real Estate Investment Trusts) 20%
Money Market Instruments 35%
FGN Securities 80%
State Govt. Securities 20%
Corporate Debt Securities, including Corporate Bonds, Infrastructure Bonds, Asset and Mortgage Backed Securities (maximum of 15% is fixed for Infrastructure Bonds) 35%
Supranational Bonds 20%
Infrastructure Fund 5%
Private Equity Fund 5%
4.0 Investment of Pension Fund Assets in Nigeria
4.1 Honourable Chairman and members of the House Committee may wish to recall the point made above that Section 86 of the PRA 2014 and the Regulation on Investment of Pension Fund Assets have stipulated the allowable instruments for investment of pension funds and assets. In addition, the Regulation stipulates that the instruments must be structured and traded on the platform of a Stock Exchange licensed or recognised by the Securities and Exchange Commission and/or Money Market Platform approved by the Central Bank of Nigeria.
4.2 In line with the statutory and regulatory provisions, pension assets have been largely invested by the licensed pension operators in Federal Government Securities, Equities, Money Market Instruments and Corporate Debt Securities. However, as indicated above, new asset classes were introduced into the portfolio by the Commission over the years to stimulate growth in the Nigerian economy.
4.3 It is important to note that pension assets are being invested by the licensed PFAs/CPFAsas pool of funds under the custody of licensed Pension Fund Custodians (PFCs). The Table below gives abreakdown of portfolio of the pension fund assets as at 31 December, 2015:
Asset Classes
RSA AES CPFA TOTAL
Active Retiree
N Billion N Billion N Billion N Billion N Billion Weight (%)
Domestic Ordinary Shares 347.89 2.52 100.58 66.77 517.76 9.76%
Foreign Ordinary Shares 0.00 0.00 0.00 68.35 68.35 1.29%
Total FGN Securities 2,504.29 304.85 350.95 355.08 3,515.18 66.29%
State Govt. Securities 97.95 20.47 22.78 11.23 152.44 2.87%
Corporate Debt Securities 91.41 24.33 27.67 39.60 183.01 3.45%
Supra-National Bonds 6.80 3.51 0.00 2.51 12.82 0.24%
Local Money Market Securities 363.00 59.27 71.86 66.94 561.07 10.58%
Foreign Money Market Securities 0.00 0.00 0.00 0.13 0.13 0.00%
Open/Close-End Funds 14.31 0.00 2.12 4.29 20.72 0.39%
Real Estate Properties 0.49 0.00 84.67 145.19 230.34 4.34%
Private Equity Funds 4.89 0.00 9.75 9.91 24.55 0.46%
Infrastructure Funds 0.90 0.00 0.00 0.46 1.36 0.03%
Cash & Other Assets 23.15 6.20 2.28 4.42 36.04 0.68%
Other Liabilities 0.00 0.00 (1.09) (19.78) (20.87) (0.39)%
Total Pension Fund Assets 3,455.08 421.15 671.56 755.09 5,302.88 100.00%
4.4 It could be seen from the Table above that Nigeria, like other emerging economies, had invested over 66% of the pension funds in government securities. On the other hand, investment in quotedequities and money market instrumentwere moderate at 11.05% and 10.58% respectively. It is pertinent to note that investments in Foreign Assets (foreign ordinary shares & money market instruments) were in respect of legacy assets of CPFA Schemes that were in existence prior to the pension reform in 2004 and were allowed by the Commission to maintain the investments. Furthermore, the amount of Cash & Other Assets represented matured investments and new contributions received by pension funds awaiting investment in approved asset classes as at 31 December, 2015.
4.5 There was no significant investment in Infrastructure Bonds and Infrastructure Funds despite the expansion of the permissible investment horizon in 2010, to include such asset classes. This was largely due to lack of structured investment instruments for pension funds to participate in the provision of finance for infrastructure development in the country.
4.6 It is therefore imperative to note thatno pension fund asset is un-invested or ‘lying idle’ in any account as is being speculated in some quarters.The Commission, in discharging its supervisory responsibilities, monitors the investment activities of PFAs on a daily basis via a daily regulatory reporting requirement. PFAs are guided by the provisions of the PRA 2014 and the Regulation on Investment of Pension Fund Assets in their investment activities. Thus, the investment activities of the PFAs must be in conformity with the law, regulations as well as global best practices in investment risk management and corporate governance. Accordingly, Section 90(2) of the PRA 2014 requires that every PFA shall conduct extensive research and due diligence prior to investment. The PFA is also obligated to utilize the risk rating reports on investment instruments and securities from any risk rating company registered under the Investments and Securities Act (ISA) 2007in taking all investment decisions. Thus, in order for any investment decision to be lawful, a PFA must ensure that the investment complies with the provisions of the ISA 2007 as well as relevant codes of corporate governance regulating investments in financial services,as may be issued by the Central Bank of Nigeria/Securities and Exchange Commission/Financial Reporting Council(FRC).
5.0 Infrastructure Development and Investment of Pension Fund Assets in Nigeria
5.1 Nigeria’s infrastructure deficit is a matter of general knowledge. Indeed, some estimations recently put Nigeria’s infrastructure investment requirements at aboutN23 trillion, excluding maintenance and operating costs. Meanwhile, the Federal Government budget offers limited funds for infrastructure development due to competing demands. The long-term financing market in Nigeria is also underdeveloped, shallow and offers limited capital for deployment to develop infrastructure.
5.2 Consequently, capital provided by pension funds, which are long-term obligations, are best suited toaddress the need for long-term financing instruments that havematurities commensurate with the long-term nature of infrastructure projects. Indeed, several countries in Europe, North and Latin America as well as Africa have successfully utilized part of the accumulated pension funds by investing in new infrastructure projects or renewing dilapidated ones. It is therefore understandable that given the infrastructure deficit in Nigeria, pension funds need to be mobilized for investment in such projects.
5.3 One of the major thrusts of the PRA 2014 is the provision of greater opportunity for investment of pension funds in infrastructure and housing development. Accordingly, the Commission has been making efforts to stimulate growth in the economy by introducing new assets classes into the portfolio of the pension funds within the limits allowed by the PRA 2014. The pension industry has long recognised that pension fund investments in infrastructure and real estate development provide veritable avenues for portfolio diversification as well as properly match pension assets with their future liabilities.
5.4 However, research has shown that the methods employed by pension funds toinvest in infrastructure varies according to the level of maturity of such schemes and local financial markets. For instance, matured pension systems, such as Australia, US and Europe, invest through direct investment and ownership in the infrastructure company that is developing the project or by way of Co-investment with other institutional investors and project development firms. On the other hand, less matured pension systems, like Latin American/African countries who operate Defined Contribution (DC)systems, prefer indirect investments through Project Finance and Public Private Partnership (PPP) by way of Infrastructure Bond and Infrastructure/Private Equity Funds.
5.5 In Nigeria, the Investment Regulations allows for investment in infrastructure throughInfrastructure Bonds and Infrastructure Funds. However, despite the availability of aboutN1.16 trillion for infrastructure financing, only N1.36 billion has been taken as at 31 December 2015, leaving aboutN1.159trillion untapped. This is largely due to non-availability of investment instruments that qualify for pension investment as stipulated in the Investment Regulations issued by the Commission.The Table below shows the maximum allowable investment of pension fund assets in infrastructure and housing as well as the untapped potentials:
Asset Class
Portfolio Limit (%)
Total Amount Available Utilization Untapped Potential
(N Billion) (N Billion) (N Billion)
Infrastructure Bonds 15% 795.41 152.79 642.62
Infrastructure Fund 5% 265.14 0.98 264.16
Corporate Debt Securities (Including Mortgage Backed Securities) 35% 1,855.97 171.13 1,684.84
Open/Closed End Funds (Real Estate Investment Trusts – REITs) 20% 1,060.55 22.82 1,037.73
Private Equity Funds 5% 265.14 15.40 249.74
Total 4,242.21 363.12 3,879.09
5.6 Honourable Chairman and members of the House Committee on Pension, it will be instructive to give a brief insight into the requirements of the Investment Regulation for eligibility of investment of pension fund into Infrastructure Bonds and Funds.
a) Registration of Infrastructure Fund / Private Equity Fund with SEC.
b) It must be managed by experienced Fund Managers registered with SEC.
c) Key Principals of the Fund shall have minimum of 10years’ experience.
d) ‘Skin-in-the-Game’ for Fund Manager: 1%-3% of Fund Value. This means the Fund Manager must personally invest at least 1% of the Fund value.
e) Well defined and communicated investment risk strategies as well as life cycle and exit clause.
f) Minimum of 75% of the Fund must be invested within Nigeria.
5.7 Furthermore, some of the major considerations to engender pension funds’ confidence in investment in infrastructure may be summarised as follows:
i. Full repayment Guarantee by FGN, especially in the early stages of projects’ financing;
ii. Strong ‘political will’ and consistency in formulation of policies;
iii. Open and transparent transaction procedures and processes; and
iv. Instituting policies to attract global infrastructure advisors and managers, in order to build capacity and facilitate knowledge/skills transfer to Nigerians.
6.0 Concluding Remarks
6.1 In the light of the foregoing, therefore, the Commission respectfully requests the esteemed House Committee on Pensions tonotethat:
i. One of the achievements of the 2004 pension reform and the implementation of the Pension Reform Act in the past 11 years, is the accumulation of a pool of long-term pension fund assets, which has grown to over N5.30 trillion as at 31 December, 2015.
ii. Section 86 of the Pension Reform Act 2014 has clearly stipulated the allowable instruments for investment of pension funds and assets. The instruments must be structured and traded on the platform of a Stock Exchange licensed or recognised by the Securities and Exchange Commission; and Money Market Platform approved by the Central Bank of Nigeria; subject to regulations issued by the Commission.
iii. Pursuant to its powers under Sections 23(b); 85(2) and 115(1) of the PRA 2014, the National Pension Commission has issued the Regulation on Investment of Pension Funds Assets, which provides the details of approved Assets Classes and Portfolio Limits for investment of pension funds and assets.
iv. Pension Fund Administrators (PFAs) are statutorily obligated to undertake their activities in accordance with the provisions of the PRA 2014 and Regulations issued by the Commission. Non-compliance with the statutory and regulatory requirements may attract either or both administrative and criminal sanctions.
v. As at today, all pension funds assets are invested in various approved assets classes within the limits allowed by the Investment Regulations. Over 66% of the pension assets are invested in Federal Government securities. On the other hand, investment in equities and money market securities were moderate at 11.05% and 10.58% respectively. No pension assets under the Contributory Pension Scheme is un-invested or’lying idle’ in any bank account in Nigeria.
vi. There is no gain saying or denying the fact that Nigeria’s infrastructure deficit requires urgent attention in order to achieve meaningful national development. The long term nature of pension fund assets properly aligns with the long term profile of infrastructure and real estate/housing projects. Pension fund investments in infrastructure and real estate development also provide veritable avenues for portfolio diversification for pension funds.
vii. Infrastructure financing is an allowable asset class for Nigerian pension funds, as provided for by the PRA 2014 and Investment Regulation issued by the Commission.The minimum requirements/criteria for pension fund investments in Infrastructure, through Infrastructure Bonds and Infrastructure Funds,as stipulated in the Investment Regulation,are very robust and provide adequate safeguard for pension fund assets.
viii. Despite the availability of aboutN1.06 trillion for infrastructure financing, only N1.36 billion has been taken as at 31 December 2015, leaving N1.059trillion untapped. This is largely due to non-availability of investment instruments that qualify for pension fund investment as stipulated in the Investment Regulations.
ix. Pension fund investment in infrastructure projects in Nigeria is a “Win-Win” for all stakeholders, most especially for the contributors. For the pension funds, it will generate consistent streams of income and relatively higher/above-inflation returns. For the contributor, it will provide a platform for employment creation and sustenance as well as improved standard of living for the citizens.
x. In the light of the statutory and regulatory framework for investment of pension fund assets, there is an urgent need to refocus the discussion to a call for development of bankable/eligible infrastructure financing structure in Nigeria that can attract pension fund and other institutional investments. Thus, in order to attract pension funds investment, infrastructure projects in Nigeria must be shown to be commercially viable and self-financing. The bid/concession processes for the projects must also be open and transparent. There must also be a cover against political risk, to be provided by the Federal Government and/or Multilateral Finance Institutions e.g. IFC/World Bank, AfDB, etc.
xi. As a way forward, the Commission recommends the following action steps, whichrelevant Federal Government agencies should immediately embark upon:
a) Determination of key infrastructure segments to focus on – e.g. roads, rails, power and ports. The need to identify potential projects and create PPP vehicles for these projects.
b) Put in place appropriate government guarantees that will improve ratings of infrastructure projects and thereby increase their attractiveness to institutional investors.
c) Provide other Government support, such as long-term policy planning and tax incentives to encourage investors invest in less liquid, long term infrastructure investments.
d) Create a public/private intermediary that provides instruments, such as takeout financing, co-financing in the form of long-term or subordinated debt, and a variety of guarantees.
e) The intermediary would need to have a credible governance and management structure in place that provides oversight as well aschecks and balances to maximally insulate its operations and decision-making from political influence.
f) The intermediary should provide the credit assessment and arranger functions.
g) Improved coordination between key stakeholders such as the Central Bank of Nigeria, the Ministry of Finance, the Infrastructure Concession Regulatory Commission, Securities and Exchange Commission, and various line Ministries, Departments and Agencies to ensure that the right projects are initiated, financed and successfully completed.
NATIONAL PENSION COMMISSION
APRIL, 2016
