Everything you need to know about Governors borrowing N17 Trillion from Pension Funds

December 12, 2020July 28, 2022 PensionNigeria Infrastructure Fund, National Pension Commission (PenCom), SERAP, State Government

Introduction

Governors in Nigeria were heavily criticized last week because several media organizations shared an headline saying “Governor to Borrow N17 Trillion from Pension Funds”. If you have been following the industry closely, the first thing that will stick out for you is that the total Pension Funds under the Contributory Pension Scheme is around N11 Trillion, so how can Governors borrow N17 trillion from N11 Trillion.

Source of the news

The news emanated from a Communiqué released after the 22nd Nigerian Governors’ Forum (NGF) in which the 36 State governors endorsed a proposal to borrow about N17 Trillion from the Nigeria Sovereign Investment Authority (NSIA) and the Accumulated Pension Funds to finance the proposed National Infrastructure Investment Fund (NIIF). The Communiqué clearly states that N2 Trillion at 9% interest will be accessed through NSIA and N15 Trillion through INFRACREDIT at 5% interest. The Communiqué did not reference any pension operator or state how the pension funds will be borrowed. You can read the Extract from Nigerian Governors’ Forum Communiqué here

Agitations against borrowing from Pension Funds for infrastructural development.

SERAP writes Buhari

Shortly after the news broke, Socio-Economic Rights and Accountability Project (SERAP) sent a well worded open letter to President Muhammadu Buhari urging him to use his “good offices and leadership position to urgently instruct the Director-General and Board of the National Pension Commission to use their statutory powers to stop the 36 state governors from borrowing and/or withdrawing N17 trillion from the pension funds purportedly for infrastructural development.”

Some of the reasons why SERAP is against the idea of using pension funds for infrastructural development is because the proposed borrowing faces the risks of corruption and mismanagement, and would ultimately deny pensioners the right to an adequate standard of living and trap more pensioners in poverty. You can read the SERAP letter to Buhari here

Nigeria Labour Congress (NLC) threatens nationwide protest

The Nigeria Labour Congress (NLC) vehemently opposed the proposal by the governors to borrow pension fund for infrastructural development. The NLC specifically said that less than 5% of the states are keying into the contributory pension scheme yet they want to borrow the funds. NLC said it is ready to mobilize a full fledged protest if governors should borrow from pension funds. You can read the full NLC statement here

Pension Operators response

Pension Fund Operators Association of Nigeria (PenOp), released a statement to clarify a number of points on the media reports about the government/governors borrowing N17 trillion from pension funds to finance infrastructure. PenOp revealed that there have been various discussions and proposals spanning months regarding how best to structure a framework to invest in infrastructure development and attract local pension funds and other investors – local and international.

PenOp emphasized that the final decision to invest pension funds in any financial instruments lies with the PFAs, there are several PFAs with different investment decisions, so there is no guarantee that PFAs will invest in infrastructure development funds even when available. You should read the full PenOp statement here

Questions that beg to be answered

Can anyone Borrow from Pension Funds?

The short answer is NO, nobody can borrow from pension funds, even the owners of the funds, the Retirement Savings Account (RSA) holders are not allowed by law to borrow from the pension funds or use it for collateral. Sections 89 sub section 1c of Pension Reform Act 2014 states that Pension Fund Administrators (PFAs) shall not apply pension fund assets under its management by way of loans and credits or as collateral for any loan taken by a holder of retirement savings account or any person whatsoever.

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Is there a way Governors can access pension funds for projects in their states?

The frank answer is Yes, state governments can access a portion of pension funds but under strict guidelines. Section 2.8 of the Amended Investment Regulation February 2019 states that “Pension fund assets shall only be invested in bonds, Sukuk or other debt instruments issued by eligible State/Local Governments and Corporate Entities that are fully implementing the Contributory Pension Scheme. In addition to the above there are global limits, per issuer limits and per issue limits that limits the amount Pension Fund Administrators (PFAs) can invest in state financial instruments. Furthermore, there are specific requirements that States must meet before PFAs can invest pension funds in their State Bonds.

Minimum Requirements for PFAs to Invest in State Bonds.

State Governments desire to access pension funds have been noticed within the industry for years and the major means through which States can access pension funds is through the issuance of State Bonds. To this end, the National Pension Commission (PenCom) had since November 2012 released a Circular on the “Minimum Requirements for the Inclusion of State Bonds as Investible Instruments in the Pension Industry”. You can check out the minimum requirements for PFAs to Invest in State Bonds here

How much has PFAs invested in States financial instruments

As at 30 September 2020, Pension Fund Operators, that is Pension Fund Administrators (PFAs) and Closed Pension Fund Administrators (CPFAs) have invested a total of N150.33 Billion in State Governments Securities, which represents 1.3% of the total pension assets which is N11.57 trillion as at 30 September 2020. The September 2020 report referenced above is a quarterly report and it did not split the investment in State Govt Securities for PFAs and CPFs, for this we have to refer to the monthly report for August 2020.

In the monthly report for August 2020, the total pension assets invested in State Govt Securities was N148 billion which was 1.31% of the total pension assets of N11.35 as at end of August 2020. The analysis shows that out of the N148 billion, N16 billion was from Existing Schemes, N18 Billion from Closed Pension Fund Administrators (CPFAs) and N114 billion from Retirement Savings Accounts (RSAs) with Pension Fund Administrators (PFAs). You can check out the full report here Status of Contributory Pension Assets as at end of August 2020

Which states have Pension Operators invested in their State Bonds

Pension Operators have invested in the State Bonds of Lagos State, Niger State, Osun State, Ekiti State and Bayelsa State, these were tracked in 2020 PenCom reports. We noticed that investment in State Government bonds are predominantly in bonds issued by Lagos State.

PenCom in its letter to PFAs in February 2015 reminded all Pension Fund Administrators (PFAs) of its existing policy on the investment of pension funds in State Bonds. PenCom reiterated that PFAs may only invest in Bonds that have been approved by the National Pension Commission (PenCom) as qualifying for investment of pension funds. PenCom also said that such approval must be sighted on its website. We can confirm that we sighted approvals for Lagos State, Niger State and Osun State on PenCom website.

Conclusion

The investment of pension funds in State Government Securities is minimal compared to the total pension assets, N150 Billion which represents 1.3% of the total pension assets of N11.57 trillion as at September 2020. The chances that states will be able to access a significant portion of the pension funds is low because there are strict guidelines on the investment of pension fund assets in state government securities and most states are yet to meaningfully implement the Contributory Pension Scheme. You can check out the Status of Implementation of CPS in States as at September 2020 here

Below are all the links referenced in Everything you need to know about Governors borrowing N17 Trillion from Pension Funds

Everything you need to know about Governors borrowing N17 Trillion from Pension Funds

Extract from Nigerian Governors’ Forum Communiqué which revealed Governors plan to Borrow N17 Trillion From NSIA & Pension Fund

SERAP letter to Buhari to stop Governors from borrowing N17trn from Pension Fund

NLC warns Governors that Workers’ Pension Fund is not for borrowing

PenOp Statement to clarify Governors borrowing or using Pension Funds for Infrastructure

Minimum Requirements for PFAs to Invest in State Bonds.

Status of Contributory Pension Assets as at end of August 2020

Status of Implementation of CPS in States as at September 2020 here

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