Mr. Dave Uduanu
Against the repeated clamour for accumulated pension savings of workers to be channeled into infrastructural development in the country, President of the Association of Pension Fund Operators (PenOp), Mr. Dave Uduanu, spoke with Nnamdi Duru and explained why Pension Fund Administrators (PFAs) would not invest in this critical area unless the Federal Government first guarantees safety of workers’ retirement savings to be invested in such funding. Excerpts:
How did pension operators feel about the recapitalisation exercise?
PenCom has concluded the first phase of the recapitalisation exercise. They have said it would be in 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 was 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 have met the minimum capital and were not bought over by anybody. And after 28 days, if nothing happens, their licences would be revoked.
The Law states that every PFA should be given 28 days notice of intention to revoke their licence. 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 meet 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 anything 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; 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 PFAs 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.
How would the over N18 billion industry new capital impact on the economy?
The industry’s shareholders’ fund is more than N18 billion. N1 billion is the minimum for a PFA, but some PFAs have N2 billion, while others have 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 in the money market, bond, capital market, infrastructure and others that would impact the larger society.
PFAs need capital to run their business. They need capital to rent offices, employ staff and do marketing and branding activities. It is not really the capital of the PFAs 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 outside main areas of Lagos, Abuja and Port Harcourt to other areas of the country.
How would the increase in capital impact on contributors and returns on pension funds?
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 PFA would be able to give better services to pensioners. If an operator does not have enough capital it will not be able to open offices across the nation.
One of the emphasis operators are making is to ensure that they deliver their service close to 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 deliver service very close to retirees and that gives them assurance that their pension assets is available and they can access it any time they need it.
Again, all profits made from investments belong to the contributors. The only thing we collect is management fees. We need to distinguish between the capital and the fund. The fund belongs to the contributors and the company raises capital to grow the funds and from the fund, we collect our management fees which belong to shareholders and are used to run the company. The statutory fee is 2.25 per cent.
What percentage of accumulated pension fund is invested in the capital market?
Pension fund invested in the stock market is now about 11 per cent. Some people want pension fund to invest up to 30 per cent in stock but it is not going to happen. This is because nobody can decree how pension money should be used unless PenCom and the money do not belong to the PFAs.
It belongs to workers and retirees. There is a moral hazard in using pension fund to support the stock market. What that simply means is that stockbrokers or investors in the market would take reckless risks knowing that if anything goes wrong they would fall back on pension fund.
If there is any body that can finance the stock market, it is government. If the government wants to bail-out the stock market, it can. When the banking crisis happened, it was the government that bailed out 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 of dishonesty in the argument about the stock market recovery. The stock market losses are larger in the financial sector, banks and insurance companies, because of the loss of confidence that happen in this sector.
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 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 borrowed 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 good results. PFAs cannot be forced to invest in companies that are not doing well. On infrastructure, we are engaging PenCom to see how practicable this would be because we want to invest in critical sectors that would create jobs.
How do pension operators perceive the clamour for investment of pension fund in infrastructure?
There is a clamour for pension funds to be invested in every sector of the economy. Stockbrokers want pension fund to pump-up the equity market, the housing sector wants pension funds to be used to finance housing, the Ministry of Power wants 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 issue was why can’t we use pension fund to support the equity market? Our response was that pension fund is not national savings. It belongs to individuals who need it when they cannot afford to lose 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 retires, 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 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 funds to be used in financing some of the deficits we see in infrastructure but it 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 projects must have a guarantee of the Federal Government.
What are the requirements for infrastructure financing?
There are preconditions 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 can come and revoke it.
We want an irrevocable guarantee from the federal government so that the funded projects cannot be changed. Also, we want a principal guarantee; that is ensuring that the money would go into infrastructural 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 wants to do the road and would give it to a project manager who is reputable who would employ a contractor and government says it wants to issue infrastructural 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 deployed 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 guaranteed 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 have 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) because for many Nigerians 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 could be a tripartite arrangement 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 5 or 10 per cent of pension funds and invest it appropriately, we would have good projects financed with pension funds.
What we do not want is when people call 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 prop up the stock market because we know what happens 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 members indeed invested but when the market started having problems they divested the money.
Why is it difficult for contributors to get their contributions when they need them?
Nobody can collect his or her benefit until retirement. The scheme is Retirement Saving Account (RSA) not a bank account. What the regulator said is that if an employee loses his or her job, if you are sacked not when you voluntarily resigned, before age 50, six months after the employee loses the job and does 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 must have proof 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 on payment 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 spouses, but some people use their children.
If a child is below 18, he or 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 PFAs cannot reach them. We have the money of these classes of people, either their death 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 wants 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 and 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 ways of checking unethical practices among operators?
We are moving towards that, remember that we are fairly young and we are moving towards Self Regulatory Organisation (SRO). However, it is important to make the point that though we can intervene, we do not have the powers to mete out sanctions.
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 involved 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. We are now working out collaborative bases to capture the biometric data of everybody that has a pension account in Nigeria.
If one´s 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 concluded very quickly. Once that biometric enrolment is completed, the transfer window would be opened by PenCom.
Why do PFAs promote programmed withdrawal over and above life 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 or she is given an option and told the features of annuity and programmed withdrawals. A lot of people choose programmed withdrawal because the money is within the pension system which is regulated by PenCom and they feel their money is better secured in there.
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 life annuity. In fact, insurers market more aggressively than pension operators but a lot of people still choose programmed withdrawal.
Profile of Dave Uduanu
Uduanu is bagged a degree in Civil Engineering from the University of Nigeria in 1989 and became a chartered accountant n 1994. He is an alumnus of the CFA Institute and the Harvard Business School where he majored on building businesses in emerging markets.
The PenOp President also studied at the Said Business School, University of Oxford in the United Kingdom where he bagged an EVCA Certificate in Institutional Private Equity Investing
He worked as an Auditor with Ernst and Young between 1991 and 1993 and was Lead Financial Advisory and Transaction Services for the Financial Services Industry working for Alliance Consulting/Frontier Capital Limited between 1993 and 2004.
He led engagements on acquisitions and restructurings for financial services industry in Nigeria and facilitated strategy seminars and courses in investment for clients.
Uduanu cofounded African Alliance Insurance Company Limited which acquired controlling shares African Alliance Insurance Plc where he worked as Executive Director in charge of strategy, finance and investment.
He is currently Managing Director of Pension Alliance Limited (PAL) and President of the Association of Pension Fund Operators (PenOp), the umbrella body of the over 29 companies managing the over N16 billion retirement savings of Nigerian workers and retirees.