Bridging Infrastructure Deficit with Pension Fund Investment

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The recent Pension Sector Forum organised by FSS2020 Secretariat witnessed experts across various industries and regulatory environments, sharing their wealth of experience and knowledge for the development of the Nigerian pension industry. Ayodeji Ake reports

As part of the campaign to tackle infrastructure deficit with pension funds, the FSS2020 Secretariat organised the Pension Sector 2022 Q1 Forum tagged: ‘Unlocking the Potential of Pension Fund Investment in Nigeria’. The forum provided stakeholders the opportunity to identify and discuss critical issues and prospects of pension fund investment in Nigeria.

One of the select participants and real estate expert, Mr. Olaide Agboola, who is  the Chief Executive Officer, Purple, pointed out how to open doors of opportunities in the real estate industry by supporting the industry with pension funds and attracting investors to the sector and watch their money grow with transparency and accountability.

“I’m coming to the table with the practical side of the equation being a practitioner within the real estate and infrastructure space in Nigeria. Take an example out of South Africa of a company called Grit Real Estate Income Plc; they are listed on the London Stock Exchange, with dual listing on the Stock Exchange of Mauritius and they are a South African entity. Grit is a REICO, which has the benefit of REITS; it’s a mixed platform. Of course, it was home grown and emanated out of South Africa from a development to the position where it is today, where it is acquiring assets and developing new ones as it goes along. It was actually promoted and supported by the South African Pension Fund industry to build and develop assets into positions, which then made them list on the Sock Exchange of Mauritius  and dual list into the London Stock Exchange. Today, their Gross Asset Value is $900 million which is equivalent to about half a trillion naira, which is also about four per cent of the N13 trillion of pension industry war chest that we are all talking about here. And that’s just a singular real estate platform out of South Africa.

“If you look at it from that context, you will see that the destination is still very far away in terms of the size of the pension fund industry and also the size of the infrastructure and real estate space. This implies that there is a level of flexibility, not relaxation of roles, but in terms of supporting the progress in achieving a destination and a purpose, and the purpose is making impact while ensuring that safety is paramount. We need to start from a mixed fund perspective before we move into the specialised perspective because those aspects have to be developed, but somebody has to take the risk and the initial frontline to be able to put those assets in space before we can start talking about individual assets.

“Pensions should be used to support products and platforms, which will help them grow into world scales. By then we can start discussing edge cases within the PFA portfolio. The only way to benchmark yourself successfully is also to begin to have dollar-denominated assets within that portfolio. I believe that there should be a level of flexibility and understanding because economies are cyclical and allow portfolio or investment managers and other platforms to be able to take positions within different jurisdictions to edge their positions.

“Do we you the right product that makes the risk return profile? A risk return profile is a function of yield. Where you have an interest or coupon range regime on five, 10 years’ instrument even around 13 per cent and asking for strictly income generating assets, implies that we should be able to buy an asset at 15 or 16 per cent so that I still have a good spread while delivering returns on a fixed security to the Pension Fund Space. And that is a bit of the challenge because the yield on acquisition of the real estate within the  space is about 9, 10 per cent, then how do you acquire assets that are so low and deliver at 13,14 or 15 per cent to the market when you use your guarantee? This is a practical perspective. The only way that could happen within a REICO structure is to have a development asset portfolio. You have to balance out the portfolio.

“It is only when there is balance within the portfolio, then we can start discussing about: dedicated REICO, supermarket, hospital rates etc. The pension talks about rate but doesn’t talk about the REICOs and the Finance Act has obviously made it more enticing and interesting for institutions like us to tap into, which means we would have to be treated like a special company by the PFA and not under the collective investment scheme guidelines of the PFA investment guidelines but more under the corporate side of the equation which means which we need to have some pre-qualifications which we are doing and we have positioned ourselves to do,” Agboola said.

Speaking further, he highlighted Purple had created a platform for equity participation and providing flexible investment opportunities at all levels.

“For us at Purple, one of those things we have done, includes both the mortgage and equity side in terms of both income generating assets and brown field assets across retail, residential, student accommodation, medical etc., in a manner that more or less fit into most of the fears of PenCom and the  pension fund space. A Sharia-compliant bond instrument, which has a credit guarantee portion of seven to 10 years, a DFI participation on the construction site which limits the construction elements of the PFAs within the same platform.

“A platform that also provides the mortgage solution from a third and fourth party perspective that is internal. Also providing equity participation that looks at the ability to get in and trade off anytime. Which is what the PFAs have not seen with the private equity funds that they’ve invested in. It’s a chicken and egg situation, which means we must provide these products that are scalable and large enough to continue to be able to acquire and absorb, while the private equity space still continues to take equity risk in some of these areas but they need to balance the return profile.

“There should be a balance on how the products are developed, the expectations and how to balance the risk reward profile that the PFAs are asking for. And I feel that is how we have positioned ourselves as Purple in terms of what we are bringing into the market and how the products we are bringing into the market can fit into the criteria we have discussed. But then, there still need to be an alignment at SEC and PenCom, especially with  regards to how these could be tested and run because it has not been done in this domestic space; the rules exist but they have never been done. The rules also need to be amended as regards the level of corporate governance and regulations that is required to ensure that this is a success,” he said.  

ARM Pension, which is also one of the participants of the forum, gave a diagnosis of the challenges and solutions for development. In his presentation, ARM Pensions’  Abimbola Sulaiman highlighted low coverage, inadequate awareness and negative real return as part of the challenges of the pension industry.

“On low coverage, only 13.5 per cent of the labour force are currently enrolled in the Contributory Pension Scheme; devaluation risk comes with the inability to adequately hedge returns against devaluation; inadequate awareness in terms of the scheme’s benefits and operations as well as distinction between other government schemes that are fraught with challenges still need to be more publicised.

“There are Negative Real Returns on delivering real returns which has been a challenge due to high inflation. Also, we can’t overlook Non-compliance by some state governments who have not shown enough political will to implement the CPS,” he highlighted.

Looking forward, Sulaiman, highlighted the essentiality of expanding coverage, increased government support, closer collaboration and capacity development, to grow the pension industry.  

“Expand Coverage by pursuing increased coverage through the Micro Pensions Scheme and continuous enforcement of sanctions for non-compliance is important. We can as well talk about increased government support by way of legislature, policy and regulation to de-risk investments and drive increased private sector participation. Closer collaboration with other regulators to achieve deepened financial markets that is constantly creating new asset classes that can absorb pension assets growth.

“Capacity Development will continuously strengthen the industry’s capacity to evaluate and manage associated risk with new kinds of asset classes. Promoting diversification removes barriers to pension funds efforts to diversify their investments in offshore assets or other alternative assets in search of positive real returns. Also, finalising the consultations on the modalities for securing Mortgages with RSA Balances in order to make the scheme more socially relevant.

CEO of Stanbic IBTC Pension Managers, Mr. Olumide Oyetan, in his presentation, gave recommendations which include: “Need to develop a framework within which PFAs can take advantage of profitable offshore investments as another source of FX earning for the country. De-risking available infrastructural investments projects including the use of government guarantees to increase allocation by PFAs to the asset class

“A modification to existing investment guidelines to allow PFAs to invest in co-investment and PEs with less than 60 per cent allocation to Nigeria should enable PFAs to better target private companies with superior growth opportunities and support job creation. Introduce initiatives that will improve market depth and liquidity such as security lending & repos to further enhance returns for contributors

“Using part of RSA balance as equity contribution can improve the lives of RSA holders directly by ensuring they can secure a good accommodation prior to retirement and support the real estate and construction sector as well as drive job creation.”