Uduanu: It is Time to Relax Pension Fund Investment Guidelines



The Managing Director and Chief Executive Director, Sigma Pensions, Mr. Dave Uduanu in this interview, spoke extensively on the progressive reforms in the pensions industry and how pension funds can impact the lives of Nigerian citizens. Nume Ekeghe presents the excerpts:

Being that we are still in the first quarter of the year, what is your outlook for the pensions industry for 2018?

We expect growth to continue in the pension industry. The industry is now growing at about 20 per cent per annum and we expect it to grow slightly higher this year on the back of good investment returns. So if you look at pension growth from three sources, which are firstly, investments, secondly contribution from existing customers and thirdly from new customers.  So we expect more job creation this year based on the budget that was read and the ruling party’s view of the year which has a lot of interest in construction and reviving the agricultural and industrial sector. We are beginning to see a bit of that coming though in the new customers we are enrolling and we also expect more states to key into the scheme. We have seen about three states announce their intention to join the scheme this year.

So generally, we think that we should be able to end the year with maybe N8.5 trillion of assets under management from the N7.5 trillion which is adding an additional N1 trillion again on the back of investment returns and contributions. So I think it would be a good year generally.

There has been a lot of emphasis on Micro Pensions recently, what has been done and what do you think can be done to enhance participation to this scheme?

The guidelines have been finalised and it is taking a while to get micro pensions going because micro pension is unlike the regular pensions. It is for people who do not have regular jobs and regular income; so they are not able to save every month as those of us that regular jobs. So there is a lot of incentive PenCom is trying to build into this scheme to encourage people to save.

The key challenge with micro pension is ability to save. A lot of the people we are targeting are people that barely make enough to pay their bills, send their children to school and so on. So we need to create additional incentive to enable them to save. So one of the things PenCom is looking at is allowing them to withdraw some of that money maybe after four or five years rather than wait for when they retire. Because technically, business owner like taxi drivers or a business owner they really do not retire.

So the incentives would work such that if you save up to N1 million, you are allowed to withdraw 50% of it and maybe we can come up with a scheme where we can allow you to get access to funds to reinvest into their business or acquire assets. The other thing is collection. Collection would certainly have to be electronic because collecting physically is going to be tedious. The last thing is making sure the returns on their savings are stable and not volatile. So the idea is to have another fund where the savings would be invested in instruments that are safe and secure and not so volatile. Therefore they don’t earn the highest returns and therefore don’t take undue risk but they earn decent returns to encourage them to save more. So we think this is the year micro pension should kick off.

Last, a lot of talks were going on about using the pension funds to finance infrastructure. Are there any developments to this regard?

Yes and No. Yes because in the industry, we have gone far and we are preparing ourselves to make infrastructural investment. I think there is a general believe that PFA’s don’t want to invest in infrastructure. However the response is that we are simply trying to safeguard the monies that belong to every Nigerian because it is not our money, it is pensioners’ money and pension by itself would have to be risk advance.

So what we are doing now is to work within ourselves is to create structures that allow us to invest in infrastructure. We are very close to doing that so that is why I say there has been some progress.

No, because we haven’t actually made investments in infrastructure. However, there are two infrastructure funds that have been set up and they have raised some monies. One is a debt fund and the other one is an equity fund. But I think that once we get the appropriate guarantees and support from government, we can be able to deploy into infrastructure in a meaningful way.

Some states presently are not funding their workers retirement savings account, what do you think is responsible for this and how can they change to make this pension scheme work in states?

The first thing is the political will to make pensions work. Once there is a will, you would find a way. I have seen some states like Lagos state, Niger state, Rivers state, Delta state, Zamfara state, Kaunda state and some others have started and are funding.  These states have shown that with the right political will it can be done.

Secondly is prudent management of resources. The reason why a lot of states run away from pensions is that once you start, you cannot stop because the workers know their rights. So once you register and start funding their accounts, any month they don’t get an alert, they would know something has gone wrong somewhere. There is a particular state that started off well and they just couldn’t sustain the contributions.

States have to first of all take a holistic view of their finances, get an actuary to value liabilities and advice how much they would be contributing and then put that amount in the budget and then test it. If the budget can accommodate it then I think they should start. But if the budget cannot accommodate it you can go into the bond market to raise money to some project type bonds and infrastructure type bonds that would generate more income for the states. But more importantly, I think that if you are part of the contributory pension scheme, your workers would generally be happy and they would be motivated to work.

Also more importantly, by not being in the scheme, you are postponing the dooms day. The defined benefit is broken and is difficult for any state government to continue to pay pensions on a regular basis to workers. So it is better for you to make the workers bear some of the costs, pay their own contributions and match their contributions so that when they retire, the PFA’s take care of their pensions.

In the case of private sectors where some companies don’t remit their staff pensions whereas it is being deducted from their salaries. What can be done to ensure that employers remit these monies every month?

That is an unfortunate situation. It is a bad precedent from a private sector standpoint. Because once you deduct from a worker, you are supposed to make the contributions. So what the workers should do is report to us and we would get across to PenCom because it has an enforcement unit that goes round to deal with such employers. The employers would be made to payback all the remuneration and they would be asked to pay a penalty on those unremitted monies. And finally, because the Act Pensions Reforms Act 2014 which is an act by the federal government of Nigeria and any contravention on that act has consequences and the employers would be dealt with in accordance to the law.

What you would find is that a lot of workers don’t have the boldness to report their employers because they are scared of losing their jobs. We are telling workers that they don’t have to do it openly; they can tell their PFA’s or write PenCom with evidence to be investigated.

What are your thoughts on the multi-fund structure which was introduced last year by PenCom, does the worker have a say in where they placed?

The worker has a say. The way the multi-fund is done in such a way that people who are in different stages in their lives have vary risk appetite and the fund is structured in such a way that it would differ depending on their age.

So we have four funds. The first fund is for very young people who can take a lot of risk because they have many years to work; so if you are 25, you still have about 35 years to work.  The second fund is for the bulk of the contributors between ages 30 and 40 years old. The third fund is for people who are close to retirement above the age of 50 but yet retired. So the worker would have the choice of two funds but not more than that. So if you are 40 you can choose to be in fund1 or fund 2 but everyone would go into the second fund which is the default fund. But if you are below age 49 you can either choose to remain in fund 2 or move to 1 or you can also choose between fund 2 or fund 3 and when you are retired you would be in the retirement fund. So the multi structure fund structure is done in such a way to address risk appetite and returns disparities in PFAs.

It is a question of buyers beware and what risk appetite to they have, you attitude towards risk and then you would sign up to what you want.

The default fund is fund 2. However before you can get into fund 1, you would have to sign understanding clearly the risk you are getting too knowing that if the market do well you would make a lot of money and if the markets don’t do well you could lose money.

What are your thoughts on the reforms made in the pensions industry?

I think the reforms have been progressive. The one area I think we should reform is on investment side. Having done this scheme for 14 years now, it is time to relax investment guidelines a bit to allow PFA’s discretion in investments particularly in real estate for instance. PFA’s should be allowed some discretion within bounds to invest in properties. It could be residential properties mostly for workers because these workers own the money or office blocks. We live in an environment where there is debt of long term financing and pension funds can provide long term financing. It harkens to a place where people are hungry and you are the only person with agric line and food while people are starving. After a while you should say to yourself that haven operated this fund for 14 years, we have learnt some lessons so let us relax the guidelines to allow PFA’s some discretion.

I think PenCom should seriously look at that and rather insist PFA’s employing the best investment managers with investment skills to make sure these funds are well managed.

The other area is in the area of credit to SMEs. PFA’s should be allowed as a group to work on credit for SMEs.

Those are the areas I think the reforms should be tailored towards. So we can begin to see the impact if these pension funds on the economy. You can imagine if pension’s funds decide to finance housing estate for workers, it would be huge. Talking about 100 thousand homes, think of the jobs it would create and also the multiplier effect in the construction industry and the confidence it would it create in the minds of the public. They would see that their contribution is impacting their lives directly. If pension funds finance toll roads, think about the impact of that in the economy and people would see first-hand the impact on their lives. Also, pension funds can invest in water schemes.

We are not saying that pension funds should do social infrastructure, we are saying pension funds can invest in infrastructure that is commercially viable that would give a return to the fund but would also create a significant impact to the economy.  So I think that is the area I think PenCom should look at relaxing.

What structures are Sigma Pensions putting in place to add value to its customers?

In Sigma, we have about 700,000 RSA accounts and large chunk of it are in the formal sector and the other chunk is in the public sector. In the formal sector, we discovered is that there are a lot of people who have registered and they have become dormant. So we are working with relationship managers to reactivate these accounts. We are going to reaching out to those customers to start contributing. We have assigned all our contributors relationship managers to get across to them with their issues. We also have a benchmark and target on how many people to reach every week.

One of the big things we are doing in Sigma is a loyalty scheme. And that loyalty scheme is to reward our contributor’s for being loyal to us. It is harkening to loyalty schemes being run by airline companies and hotels. We would launch it soon.

Finally, in the last one year, we have significantly improved our investment returns so people who are saving with Sigma are getting to see the benefit and more returns in their investments. I often tell people to compare your investments with Sigma or any PFA to what you have as savings account in a bank. In a savings account you would be happy to get maybe 3 per cent in your savings. But in a PFA, there is no way you wouldn’t at least 10 per cent in your savings. There are a lot of free monies in banking not doing anything but you can disintermediate the banks and bring this money into the micro pensions scheme where all the benefits goes back to the worker. As far as I am concerned, the pension structure is the most efficient structure for savings money all the returns goes the workers.

What we are looking at in Sigma is how we impact the lives of our contributors so that they can live well in retirement. What we are focussing our minds in doing is to give them a decent place to save, good customer service, good call centres. Also we are modernising our branches and it is because we want them to come to a decent environment to talk to their pension managers to resolve any issues or enquires.