‘Why pension fund can’t be used to support stock market’

‘Why pension fund can’t be used to support stock market’ Whilst the dust of the pension recapitalisation is gradually settling down, Chairman Pension Operators Association of Nigeria (PENOP) Dave Uduanu, has said it would be out of place to use pension fund to revive the ailing stock market. He predicts that competition would induce more merger and acquisitions in the industry and also spoke on how contributors can access their benefits among other sundry issues. CHUKS UDO OKONTA met him. How did pension operators felt about the recapitalisation? PenCom has concluded the first phase of the recapitalisation exercise. They have said it would be two phases and the first phase was to state the number of Pension Fund Administrators (PFAs) that have in principle met the new minimum capital requirement and they are 18. What they have also said is that they are going to do verification on the capital contributed by other PFAs. The verification exercise is a throw back of the banking recapitalisation days where, Nigerian Deposit and Insurance Commission (NDIC) used to do verification of capitals to ensure that they were sourced genuinely. It is just to ensure that operators do not contravene the Anti-Money Laundering Act. We do not expect that number to change. So, I would say, today, we have 18 PFAs. And we do not expect that number to reduce because; we believe that a lot of the PFAs are owned by corporate institutions and individuals of high pedigree. The check is not about whether the money came in, but to ensure that there is no issue of money laundering. The Recapitalisation was seamless, there is nothing to worry about, some PFAs were bought over by others, and there were two PFAs that were adjudged not to meet the minimum capital and are not bought over by any body. And after 28 days, if nothing happens, their licences would be revoked. The Law states that every PFAs should be giving 28 days notice of intention to revoke their license. We believe that by the end of August, the approved 18 would become the conclusive list and that would draw the curtain of the consolidation. Going by the number of firms that scaled the recapitalisation hurdles, did the outcome meets operators expectation? We used to have 27 PFAs, now, we are 18. Consolidation happens in phases, while some people were expecting 10 PFAs and others 15 PFAs, people should note that the pension industry is a bit different from banking. I do not think we were expecting any thing significantly lower just like other people. We really need certain number of pension fund administrators to go round the country, doing registration, canvassing for new members, because this is pension not banking. Also, the industry is stratified, and there are 10 top PFAs and others, depending on how one looks at it. I think that consolidation would take its natural course. There would be merger and acquisitions over the next one or two years, but they would not be induced by regulation, but by competition. People would decide then rather than being alone, let me come together with one or two pension fund administrator so that we would be stronger and bigger. Remember also that in the pension industry, ones one crosses a certain number of assets under management, you can invest in other businesses. It all depends on the ambition of the owners of the company. The outcome is not different from what we expected. Have the two companies said not to meet the recapitalisation requirement made any presentation to PENOP? PENOP is an association of willing members of the industry. Whilst everybody is supposed to be a member of PENOP, the association is not the regulator. So, it is not really our business to deal with whether a company recapitalise or not. It is the duty of National Pension Commission (PenCom). We are not at liberty or allowed to start interfacing. What we know is that today we have 18 Pension fund administrators, if PenCom says tomorrow, it is 19 so be it. So, members of the industry are those that have been cleared and have clean licenses from PenCom. How would the over N18 billion industry new capital impact the economy? The industry’s shareholders’ fund is more that N18 billion. N1 billion is the minimum for a PFA, but some PFAs have N2 billion, while others N3 billion. The shareholders’ fund of PFAs is not what determines the impact of the pension in the larger economy. It is the size of the pension fund which is about N2.6 trillion. It is this N2.6 trillion that are invested in the various instruments, whether is the money market, bond, capital market, infrastructure and others that would impact the larger society. Pension fund administrators need capital to run their business. They need capital to rent an office, employ staff and do marketing and branding activities. It is not really the capital of the pension fund administrators that matter; it is the size of the pension assets. As the pension assets grows, the PFAs become stronger. This is because they would have more assets to look after technically. We are going to see better services from PFAs, we would also witness recruitment of quality staff, have good offices, move out side main areas of Lagos, Abuja and Port Harcourt to other area of the country. In Pension Alliance Pensions Limited, for instance, we would be opening offices in other part of the country. Pension fund administrators are been reposition to play a better role in the larger economy. By way of rivalry, the only financial institution that is bigger than the PFAs today are the banks. PFAs are now bigger insurance companies, because they manage bigger assets. So, the size of a company is not depended on its shareholders’ funds, but the assets it manages. The biggest PFAs manage about excess of N500 billion, while the biggest insurance firm may be N50 billion. This shows the role of PFAs in an economy. How would the increase in capital impact pension contributors? It is not the capital that the pensioners are relying on; it is the pension fund or the assets the PFAs are managing. A well capitalised pension fund administrator would be able to give better service to pensioners. If an operator does not have enough capital he would not be able to open offices across the nation. One of the emphases operators are making is to ensure that they place their service close to the retirees. This is because we know that when people retire in Lagos, they often do not stay in Lagos. The fact is that with stronger capital base PFAs would be able to provide service very close to the retirees and that gives them assurance that their pension assets is available and they can access it any time they need it. Would there be indirect investment of pension fund in infrastructure in the future? There is a clamour for pension funds to be invested in very sector of the economy. The stockbrokers want the pension fund to pomp –up the equity market, the housing sector wants pension funds to be used to finance housing, the ministry of power want pension to be used for power. There are all sorts of demands. We had a session two weeks ago with the capital market community and the Finance Minister was there. The issue was why can’t we use the pension fund to support the equity market? Our responds was that pension fund is not national savings. It belongs to individuals who need it when they cannot afford loss the money – when they are 60 years and above. The first job of very PFA is the security of the pension funds. Their number one objective is to ensure that when a contributor retirees, there is money to finance the pension. However, as financial players, we know that we cannot take this money and keep them in a bank because we are afraid of losing the money. So, PenCom, therefore, came up with guidelines on how the fund should be invested. The first guideline that was issued was very conservative. It was only money market and bonds with some equities. The guideline has been reversed three times and we are going to the fourth revision. The last revision includes all sorts of instruments. There was inclusion of infrastructure, private equity, mortgage backed securities, real estate investment trust. However, there are strict guidelines as to how these things should be applied. The challenge we have, is that in Nigeria people do not care to read those guidelines before they make pronouncements. People says we want pension fund to be used for housing, the law has said we can invest in mortgage backed securities and real estate investment trust. However, there are clear guidelines that must be met before we can do that, so that the pension assets are protected. Yes we expect pension fund to be used in financing some of the deficit we see in infrastructure, but has to be used in a manner that the pension funds are secured. Specifically, on infrastructure, what we asked for is that, for us to finance infrastructure, it must be public private partnership projects and those project must have a guarantee of the Federal Government. What are the requirements for infrastructure financing? There are pre – conditions that must be met, before pension funds can be used for infrastructure. If those conditions are not in place the fund cannot be used for infrastructure. Why it is required that the projects must be guaranteed by the federal government is because we know that one government can give someone a concession and another government would come and revoke it. We want an irrevocable guarantee from the federal government, that these projects cannot be change. Also, we want a principal guarantee – that is ensuring that the money going into the infrastructure projects guaranteed by the federal government. Therefore, the only two ways pension funds can go into infrastructure is either through a bond – a dedicated infrastructure bond that is tied to a specific project. Take for an example, Lagos/ Ibadan Expressway is a project that is adjudged to be viable because of the traffic on it. If the Federal Governments says it want to do the road and would give it to a project manager who is reputable, who would employ a contractor, and the government said it want to issue infrastructure bond of N100 billion to finance the project, and we know that when the project is finished there would be toll which would enable them collect the money, of course, pension funds can be deplored to such a project. Like what they do in Chile, they use pension fund to finance the national housing deficit, but it was through mortgage bonds that were issued and guarantee by the Federal Government of Chile. Those bonds meant that pension funds put money in a pool and people borrow this money to build house, and contributors to the scheme, had the guarantee that the money would not be lost. Can’t pension fund be invested in the power sector? When officers of government said pension funds should be used to finance power, a lot of contributors said their money should be refunded, if their money is to be used to finance National Electric Authority (NEPA) for in Nigeria, Power means NEPA. People are not really interested in investing pension funds in power sector due to problems associated with Power Holding Company of Nigeria (PHCN). Nevertheless, there can be a tripartite meeting between Government, PenCom and PENOP and we would work out a survey for some of these projects on case-by case bases with government guarantee. Obviously, if we set out five or 10 per cent of pension funds and invested them appropriately, we would have good projects financed with pension funds. What we do not want is when people called for investment of pension fund in projects not guaranteed. There is no place in the world where pension fund has been used to stabilise the stock market, it is not done. You cannot use pension fund to pomp-up the stock market, because we know what happened in the stock market. When the scheme started, we were allowed to invest up to 25 per cent in the stock market. Some of our member indeed invested, but when the market started having problems, they retrieved. What is the percentage of pension fund in stock market? Now the investment of pension fund in the stock market is about 11 per cent. Some people want pension fund to have up to 30 per cent in stock market, it is not going to happen. This is because no body can decree how pension money should be used unless PeNcOM, for it does not belong to us. It belongs to every body. There is moral hazard in using pension fund to support the stock market. What that simply means is that whether is the stock brokers or the investors in the market, they would take reckless risks knowing that if any thing goes wrong, they would fall back on the pension fund. If there is any body that can finance the stock market, is the government. If the government want to bail-out the stock market, it can. When the banking crisis happened, it was the government that bailed out the banks. It is important to make this clear that pension fund cannot be used to bail out the stock market. The stock market would achieve a natural recovery as the economy continues to grow. There is a bit dishonest argument about the stock market recovery. The stock market losses are larger in the financial sector – the banks and insurance companies, because of loss of confidence that happen in the sectors. Companies like Nestle were not that affected by the crisis. In fact, the company has achieved an all time high. Stocks like Nigerian Breweries, Guinness are doing well. Let us separate the problems of the banks and insurance companies from the stock market. If they are isolated, there is no problem in the stock market. The capital market is not just made up of stocks; it also has bonds, which is doing well. We should not use the problem of people who borrow money and could not pay to say that the stock market is in crisis, there is no crisis in the stock market. It is achieving a natural recovery. The discussion should be that pension fund should engage the stock market in an intelligent way. What do pension operators consider before investing in stocks? We invest in the stock market, but in companies that are well managed, with good corporate governance and available good results. Pension funds cannot be forced to invest in companies that are not doing well. On infrastructure, we are engaging PenCom to see how practically it can be invested in. We want to invest in critical sectors that would create jobs. How would contributors benefit from the returns from investment of pension fund? Every profit made from investments belongs to the contributors. The only thing we collect is our management fees. We need to distinguish between the capital and the fund. The fund belongs to the contributors and the company raise capital to grow the funds. And from the fund, we collect our management fees which belong to the shareholders and are used to run the company. The statutory fee is 2.25 per cent. Why do PFAs focus on programme withdrawer more to annuity? Both are retirement exit plans. It is natural to sell what you would benefit from. That is human nature. What happens practically is that when someone retires, he/she is given an option and told the features of annuity and programme withdrawer. A lot of people chose programme withdrawer because the money is with the pension system which is regulated by PenCom and they feel their money is secured. Insurers still have a lot to do in building the confidence of the public. As the confidence improves over time, people would begin to go for annuity. In fact, insurers market more aggressively than the pension operators, but a lot of people still chose service withdrawer. Why is it difficult for contributors to get their contributions when they need them? No body can collect his or her benefit until time of retirement. The scheme is Retirement Saving Account (RSA) not a bank account. What the regulator said is that if an employee losses his or her job – if you are sacked not when you voluntarily resigned, before age 50, six months after the employee losses the job and do not find another job, he or she can apply to collect 25 per cent of the balance on his or her account. But the PFA has to prove that the person was dismissed and that his or her company has remitted all the contributions. Otherwise, the employee has to wait until he or she is 50 years. What are the challenges operators are facing as regards payments of benefits? We have two major challenges. We have people that have died but their next-of-kin have not shown up for their benefits. We want the next-of- kin of those that died to come and claim their benefits. Next-of-kin are normally the spouse, but some people use their children. If a child is below 18 he/she needs a legal guidance to get the benefit. People should also prepare their will, so that when they die the benefits would be disposed according to the will. We also have people that have retired and relocated from where they used to live to places where their PFA cannot reach them. We have the money of these classes of people, either their dead benefits or terminal benefits. We still have those that have not submitted their documents. Their money is ready, we are appealing to them to come to their PFA to complete their documentation and collect their money. In the pension industry, once someone completes the documentation he or she would be paid within one week. Another problem we have is that in Nigeria when a company want to sack somebody he or she is asked to resign. When an employee resigns, he or she cannot get 25 per cent of the contribution. A lot of banks staff that were sacked were asked to resign, now they cannot get 25 per cent of their benefits. It is important to let people know that their employer must sack them for them to get 25 per cent of the benefit. If your employer tells you to resign, tell him to sack you for it is better than forceful resignation. Does PENOP have a measure of checking unethical practices among operators? We are moving towards that. Remember that we are fairly young; we are moving towards what we call Self Regulatory Organisation (SRO). However, it is important to make the point that though we can intervene, we do not have the powers to met-out any sanction. It is only PenCom that can do that. What we do is to use moral suasion to talk to our members. As the industry matures, PENOP would be a bit more involving to ensure that erring members are brought to book. Even if we do not do it directly, we can do it liaising with PenCom. What is the state of the transfer window initiative? We have commenced the initiative that would lead to the opening of the transfer window. Where we are now, is working out collaborative bases to capture the biometric data of every body that have a pension account in Nigeria. If ones biometric data is not captured, because it was done manually, we are going to do electronic capture of the biometric data. I expect that to commence as soon as possible and would be concluded very quickly. Once that biometric enrolment is complete, the transfer window would be opened by PenCom.