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Pension funds, by definition, are monies put aside on behalf of employees, which are then paid to them in monthly instalments upon retirement from full-time work. For millions of retirees, it’s the only source of living in old age. Many have toiled day and night for decades, putting a little on the side for upkeep in the twilight of their lives. The people in charge of the funds, Pension Fund Administrators, owe the utmost ‘fiduciary’ (i.e. sacred) duty to their members not to do anything that could put the funds in the slightest jeopardy. A breach of that duty quite rightly attracts the severest punishment under the law across all jurisdictions. The funds are to be treated not only with the highest due diligence, but also treated as if millions of lives depended on it, which indeed is the case. For employers, (be it government or company bosses), pension funds are the holy grails of investment savings; they are the nearest thing to God’s personal property in the financial world. They are the only ‘thing’ no government, governor, minister, or company executive wants to dip into, ever. You would sell your own house first, before considering dipping into pension funds for whatever purpose, because it carries such enormous moral burden.
So, it came as bewildering that the Nigerian Governors’ Forum last week approved a “borrowing” requirement of some N2tn from the pension funds for “infrastructure”. The effortless, breezy nature of the announcement (via a virtual meeting of the governors) was breath-taking, even more so are the ramifications.
Public knowledge or interest in pension funds administration has never been at an all-time high in any jurisdiction, unless, and until some scandal has occurred involving its handling. It is also appropriate to declare my own interest here as a capital markets lawyer. Pension funds play a big role in capital markets. The funds are used not only for the long-term benefits of retirees, but more significantly, for the immediate benefits of the market. A retiree would normally expect to receive up to 2/3 of their last final salary on a ‘defined benefits’ scheme. So-called, because it is specified in the setup. Nowadays, the emphasis is on ‘defined contributions’ or money purchased scheme, as what an individual takes out depends on how well the contributions have performed in the markets.
Pension funds managers are really big players in the markets, the largest of which are linked to state-owned enterprises. The Dutch post office in Europe is one such huge scheme. And, CalPERS (the California Public Employees’ Retirement System) with assets close to $200bn is the largest in the world. Pension funds administrators invest in a whole gamut of financial instruments; government and corporate bonds, shares in leading companies, private equity funds, real estates, derivatives, currencies, even loans to companies or what is generally known as the ‘credit market’.
In Nigeria, the total pension assets, (market capitalisation), currently stands at N11.65tn (or US$31bn) according to data from the National Pension Commission, out of which N7.5tn (US$19bn) has already been used for investment in the Federal Government Securities. As if that was not enough exposure, the Federal Executive Council had, in January this year, concluded plan to borrow N2tn from the funds, gulping close to 80% of the pension funds’ market capitalisation. The Nigerian Pension Funds are effectively being used as the Federal Government’s official piggy bank. It is even more galling that governments in this country are not known for diligently paying their employees’ contributions, but now so willing to dip into the funds by fiat; as if by entitlement. The hands of the pension funds administrators are willy-nilly tied to the government’s apron strings, as they are no longer able to diversify and maximise the funds at their own discretion.
While not being illegal, it is a major breach of the administrator’s fiduciary obligation. ‘Legality’ and ‘fiduciary’ obligations are two different things in law. A fiduciary does not need to have acted illegally to be in breach. That is what makes it such an onerous responsibility, as it extends far beyond the confines of civil or criminal law. Now, can government commandeer, or compel a loan advance from the pension funds? The answer is categorically NO. “Pension Funds Administrator and Pension Fund Custodian shall take reasonable care to ensure that the management or custody of the pension funds is carried out in the best interests of the retirement savings account holders” (Pension Reform Act, 2014, S. 69(b) ).
To buttress this provision even more solidly, Section 85 (1) of the same Act states: “All contributions made under this Act shall be invested by the Pension Funds Administrators with the objectives of safety and maintenance of fair returns on amount invested”. The operative word is “invest”, not gratuitous lending to government. It is not the business of pension funds administrators to promote, let alone assist the objective of government. Their only concern is the “best interests of the retirement savings account holders”. Government cannot, repeat, CANNOT mandate a loan agreement on pension funds administrators in aid of any infrastructure programme. That is a judgement call for the administrators alone. Then, how could they (the funds administrators) choose to ‘invest’ in a paper infrastructure programme? The programme only exists as a wish of the governors in cahoots with the Federal Government at this point in time. The guidelines for pension funds administration issued by PenCOM make no reference to government or anyone for that matter, borrowing from the funds. The commission reports directly to the President of the Federal Republic of Nigeria, and can issue fresh guidelines permitting government borrowing from the funds. It is not sure if this has been done. Again, when commercial banks are charging 20-30% interest rate for borrowers, is the government proposed borrowing from the funds at the juicy rate of nine per cent per annum the fairest deal considering its duration?
Apart from the above technical details, what many people would find most disconcerting about the whole idea of a government’s raid on the pension funds is simply that it distorts the market by moving money away from industry to government. It is like robbing Peter to pay Paul. As pointed out earlier, when government acquires interest in 80% of the pension funds’ total market capitalisation, it leaves the funds overexposed to risk from a singular source. We are told that the funds are to be diverted into the “sovereign wealth” account, which provides guarantee of its security, but that is not the main point. While not being illegal, the cosy deal is illogical, and probably unethical, especially if, and a BIG if, the ‘infrastructure’ funds are later converted into revenue, or worst, turned into some type of “stomach infrastructure” at the implementation stage. In that scenario, the funds would have metamorphosed from pension to slush funds. I know this sounds rather harsh on the governors whom, I am sure, are acting in good faith, but I equally hope they find some illumination in this analysis as well. Having a good intention is not nearly enough when dealing with pension funds.
In their fiduciary duty, the funds administrators ought not to be kow-towing to government’s requests, but should maintain focus on prudential investment at all times. They seem to have taken their eyes off the ball at the moment. It is also not certain whether the relevant National Assembly committees have taken an interest in this as they should. The raid on the pension funds smacks of desperation on the part of government, but it is also clear evidence of sloppiness on the part of PenCom.
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