The Managing Director, PAL Pensions Limited, Mr. Dave Uduanu, in this interview with Nume Ekeghe, urged the federal government to ensure that pension funds are invested in viable infrastructure. He also spoke on key issues affecting the economy. Excerpts:
There has been much talk about investing pension funds in infrastructural development, what is your stand on that?
Pension funds are long-term funds. So ideally in more developed countries, pension funds invest up to 10 per cent, in some instances like in the US, in Latin America it is up to five per cent and in Canada, it is up to 20 per cent in infrastructure. One would expect that in Nigeria that should be the case. However, in Nigeria, infrastructure as an asset class is very new it is not well developed. The bulk of infrastructure has been built by government and is done through appropriations from the budget. So our initial stance is that pension fund ideally should invest in infrastructure.
However we are quick to caution that investment should be secure, investment should be well structured and investment should be through an instrument or through intermediaries who are experts in infrastructure investing. There has been news in the newspapers about how the Federal Government plans to use the pension funds for infrastructure and we say that on the face of that, it is not possible to use pension funds directly.
You cannot directly appropriate pension funds to invest in infrastructure because the funds are utilised and they belong to individuals. And one thing I need to quickly point out is unlike in Canada, Australia or in the US, the pension funds are contributions from individuals. In those other countries the pension funds are promises by the employers. They are defined benefit schemes. And the bulk of the employer being government is at liberty to decide how these funds can be used. But that is not the case in Nigeria where the pension funds are contributed by individuals, they are held in accounts and the individuals know their account balances and therefore it would be difficult to appropriate.
That would be like a confiscation of pension asset which would send a wrong signal. So my stand is that yes pension fund should seek to invest in infrastructure in a safe and secured way. So what we are doing is liaising with the Ministry of Power, Works and Housing, which is almost like the infrastructure ministry headed by Mr. Babatunde Raji Fashola, the ex-Governor of Lagos state to come up with safe and secure way to invest in infrastructure. He spoke at our last pension retreat and we seem to be in agreement that we should work together to see how we can safely channel funds from the pension funds to infrastructure investing working with investment banks, intermediaries and development finance institution (DFI) who are experts. However, we also made the point that we need government to put guarantees in place so that the pension funds are secured. And also for government to put appropriate rules and laws in place so that if anything happens, people don’t lose their pension funds.
When do you think these appropriate rules and laws would be put in place?
The first thing we agreed was to set up a committee which has been done. So we are going to have a meeting in the middle of April and that working committee team is made up of representatives from PenCom, from the industry, from the pension operators and from the ministry. And that working team is to come up with a work plan on how these things should happen. So I believe that once that meeting is held we should be able to give more clarification around timeline. You know infrastructural development take time. When talking about investments in roads, airports, power plants, water schemes, railways, these things do take time. So what we also agreed is that they would come up with a shortlist of the type of investment infrastructure that can be completed within the next three and a half to four years which is the tenure of this regime and see how we can work with government to issue out instrument so that pension funds can invest through does instrument.
Greater part of pension fund has been invested in federal government bond because the fund managers feel it is more secured, why can’t the fund be invested in other portfolios that will yield more profit and add value to the lives of the people?
Government bonds are the cornerstone of pension funds investing. I was reading somewhere that in Europe, the Germans invest up to 50 per cent of their pension funds in government bonds. And the reason is because government is the largest issuer in any market. Government bonds are used to finance the budget and in economies that are well structured, you find that these budgets are used to finance capital expenditure. So indirectly, government bonds investment is an indirect way of pension funds putting money in infrastructure. However, the problem in Nigeria is that the budget in Nigeria is skewed towards recurrent expenditure. The bonds are profitable. Two years ago, we had government bonds as high as 16 per cent. That is perhaps one of the highest investments you can make here.
The stock market over the last eight years since the financial crisis has not really done very well. In fact, it has been three good years of performance and five years of bad performance. So government bond investment has been profitable and it does add value to people’s life because this investment is used for the budget and government is still the largest employer of labour in Nigeria and some proportion of that goes into infrastructure. In fact, on the state government bonds, what Lagos state issued can appropriately be called infrastructure bonds because the bonds that were issued were used to fund all the road projects that you see in Lagos state which includes the Badagry Expressway or the rail line Lagos state is building. So it does really add value to people’s life.
How far have PenCom, fund managers and custodians gone with plans to invest in state government bonds?
We are being selective as far as state government bonds are concerned. If you take Lagos state and some of the oil producing states, you would find that a great proportion of these state governments rely on federal allocation to finance the budget. So with the drop in oil prices, there is a bit more risk in investing in state bonds because the monies that they get from the federal government has reduced by as much as 50 per cent and a lot of them have very low IGRs. I don’t expect to see a lot of investments in state bonds. However, about seven per cent of the funds are already invested in the state bonds. So there is selective appraisal of state bonds and each Pension Fund Administrator (PFA) make their own decision based on their judgement on the credit rating of the state and the ability to repay these bonds. So we don’t expect to see a lot of state bonds.
What is your assessment of performance of pension funds in 2015 and what is your company’s experience like?
2015 was a difficult year for the pension industry. Simply because of two things- the elections and the year oil prices dropped. And because of that, the stock market didn’t do well at all and also bond yields started to come down because the central bank decided to reduce rates. So you find that bond yields dropped from as high as 15 per cent to as low as 10 per cent last year. Stock market was negative.
So pension funds didn’t do well. The returns were at about between seven and eight per cent on the average. But that was an exceptionally bad year because over the last five years or since inception, the average return on pension fund has been about 11.9 per cent, which up until now has been above inflation. As you know, the mandate of pension funds is to generate positive returns above inflation. But as inflation is beginning to inch up, the challenge now is that the bonds are still low, the stock market is still depressed and there are very few alternative assets to invest these pension funds. That is why we are actively seeking out for opportunities in private equity, infrastructure and housing so that we can continue to invest these funds profitably for the end users.
What is the impact of current inflation trend on pension funds and its investments?
One of the biggest enemies of investments is high inflation whether it is pension fund investments, individuals or corporate investments. So as inflation begins to inch up, we need to find instruments that would give us returns that are above inflation and at the moment it only government bonds that can give you that sort of returns. Another thing is what to expect in a well-managed economy as inflation inches up: central bank begins to raise interest rates to manage inflation and money supply. And I think the last MPC decision by the central bank was in the right direction because they raised rates from 11 to 12 per cent and in response to that, the bond yield has gone up from 10.5 to as high as 12.5 per cent. And inflation is just below 12 per cent.
So government bond yields are still giving a return above inflation. But we cannot say that much for money market instruments with banks which are below inflation and also, for the stock market which is also still in negative territory simple because of the currency policies which has seen exit of a lot of the foreign portfolio managers and therefore their withdrawal is depressing the stock market prices. So we are facing a significant challenge this year with inflation and one hope that inflation would be brought under control through the activities of the central bank so that we can still see single digit inflation.
In your opinion, is the CBN going in the right direction?
They are going in the right direction as far as the monetary policy is concerned and we expect to see more rates hikes over the next MPC cycle. Our view in Pensions Alliance is that rates should go up to about 14 per cent. However with 14 per cent, it means that growth in the real sector would be affected but we believe that financial stability is more paramount at this point than growth. And if inflation begins to go up, a lot of investors would delay making investment decisions and then foreign direct investments (FDIs) would stay away from the country. We think that the CBN should raise rates by an additional 200 basis point to further moderate and reduce inflation.
When will the window transfer system take off?
This is something the public has been expecting for a while and the reason for the delay was the absence of reliable biometric data. Now that has been done by the banking system and we are hoping that perhaps it is possible for the pension industry to reach some sort of agreement to use that biometric data. The alternative is that the pension industry can do its own biometric exercise to authenticate the data. So what we feel is that this transfer window should open anytime soon. I cannot give you the real date but hopefully towards before the end of this year or early part of next year. But again it is really up to PenCom.
PAL Pension is one of the prominent players in the market, what are your plans to increase your market share?
We are about number six in the market which is a decent position but not where we want to be. At PAL Pension, our strategic plan is be one of the top five PFAs in the industry. So we are very close but not there and whilst one can begin to say we want to be the biggest, we are realistic because we also know that other pension players are not sitting down and folding their arms. We want to one of the top five but more importantly is to reach asset under management (AUM) of N500 billion over the next two or three years. How do we intend to do that? There are two ways, one is either through organic or by acquisition.
In the organic area, we have just launched an aggressive market strategy were we want to position the brand as the number one brand within the youth market segment. Today we have moved from being a distant number in the social media space to being the top two or three brands as far as social media is concerned and this is directly measured by the number of hits and likes that we have on social media platforms like Facebook, Instagram, etc. We have also launched our YouTube channel and we have a crop of very young and creative workforce that is focused on this segment of the market. The second strategy on the organic side is on micro pension where we are also coming up with plans to be one of the key players in this new space. The pension industry is still largely formal and with numbers of about seven million. However, Nigeria has a huge informal sector with well over 80 million workforce but we think realistically 20 million of this work force can enter the scheme.
So we are working alongside the industry and PenCom to launch a youth micro pension offering that would be separately branded and would rely on the best technology platforms to reach the mass market. The third strategy is by consolidation. We are actively pursuing opportunities to achieve consolidation with other players in the industry. By this we mean combining our business with another PFA. We are currently just above N200 billion in AUM and we are talking to one or two other players and if those plans crystallise, we might reach close to N500 billion in AUM before the end of 2017. However it is still in the works and these things don’t happen overnight. But we are very bullish and we believe that without consolidation, the industry remains fragmented. We see an opportunity to leap frog and move from number six to number two within 18 months.
So our strategy to build market share is based on organic growth alongside engaging in consolidation and mergers with another PFA of similar size. We are talking to PFAs of similar size not smaller so we can build scale because as you know pension fund management is a game of scale. If you reach N500 billion of AUM, you are better able to spend money on branch network, advertising, branding and employing the best skills in the market. Presently, we have arguably one of the best investment team in the country. In investment world, one of the qualification that are recognised internationally is the CFA qualification and we are the only PFA with up to four CFA chartered holders in the team and another two or three that would emerge in the next two years. So our investment team is unrivalled, I can confidently say that there is no better investment team in the industry. We are building the building blocks to create what we believe should be the second or third largest PFA in the country so we are just trying to execute on our plan. We have a five year plan which would see us reach 1 trillion in assets through a combination of organic growth, mergers and acquisition.