Closing the infrastructure gap with pension fund investment

The recent Pension Sector Forum organized by the FSS2020 Secretariat brought together experts from various sectors and regulatory environments, sharing their rich experience and knowledge for the development of the Nigerian pension sector. Ayodeji Ake reports

As part of the campaign to tackle the infrastructure deficit with pension funds, the FSS2020 Secretariat organized the 2022 Q1 Pension Sector Forum titled: “Unlocking the Investment Potential of Pension Funds in Nigeria”. The forum provided stakeholders with an opportunity to identify and discuss critical issues and prospects for pension fund investment in Nigeria.

One of the selected participants and expert in real estate, Mr. Olaide Agboola, who is the managing director of Purple, explained how to open doors of opportunities in the real estate sector by supporting the sector with pension funds and attracting investors to the sector. and see their money grow with transparency and accountability.

“I come to the table with the practical side of the equation as a practitioner in the field of real estate and infrastructure in Nigeria. Take the example from South Africa of a company called Grit Real Estate Income Plc; they are listed on the London Stock Exchange, with a dual listing on the Mauritius Stock Exchange and they are a South African entity. Grit is a REICO, which benefits REITs; it is a mixed platform. Of course, it was grown locally and emanated from South Africa from development to the position it is in today, where it is acquiring assets and developing new ones as it goes. It was actually promoted and supported by the South African pension fund industry to create and grow assets into positions, which then got them listed on the Mauritius Sock Exchange and dual listed on the Mauritius Stock Exchange. London. Today, their gross asset value is $900 million, which equates to about half a trillion naira, or about 4% of the pension industry’s war chest of 13 trillion naira of which we’re all talking here. And it is just a unique real estate platform in South Africa.

“If you look at it in that context, you’ll see that the destination is still way off 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 in relaxing roles, but in terms of supporting progress towards achieving a destination and a goal, and the goal has an impact while ensuring that safety is paramount. We need to start from a mixed fund perspective before moving to a specialist perspective because those aspects need to be developed, but someone needs to take the risk and the initial front line to be able to place those assets in the space before we can start talking about individual assets.

“Repos should be used to support products and platforms, which will help them grow globally. Until then, we can start discussing edge cases within the PFA portfolio. The only way to successfully assess yourself is to also start having dollar-denominated assets in that portfolio. I think there should be some level of flexibility and understanding because economies are cyclical and allow portfolio or investment managers and other platforms to be able to take positions in different jurisdictions to build their positions .

“Do we have the right product that does the risk-reward profile?” A risk-return profile is a function of return. When you have an interest or coupon regime on a five or 10 year instrument, even around 13% and asking for strictly income generating assets, implies that we should be able to buy an asset at 15 or 16 % so that I still have a good spread while offering returns on a fixed security to the Pension Fund Space. And that’s kind of the challenge because the return on acquiring real estate in space is around 9, 10%, so how do you acquire assets so low and deliver at 13, 14, or 15% at the market when using your warranty? It’s a practical perspective. The only way that could happen within a REICO structure is to have a portfolio of development assets. You have to balance the portfolio.

“Only when there is a balance in the wallet, then we can start discussing: dedicated REICO, supermarket, hospital tariffs, etc. The pension talks about rates but does not talk about REICOs and the Finance Act has obviously made it more attractive and attractive to institutions like ours, which means we should be treated as a special company by the PFA and not under the guidelines of the collective investment scheme of the guidelines. PFA investment, but more under the business side of the equation, which means we need to have pre-qualifiers that we do and we’re positioned to do that,” Agboola said.

Speaking further, he pointed out that Purple has created an equity participation platform and provided flexible investment opportunities at all levels.

“For us at Purple, one of those things we’ve done, includes both mortgage and equity in terms of income-generating assets and brownfield assets in retail, residential, student housing, medical, etc., in a way that more or less suited most of the fears of PenCom and the pension fund space. A Shariah-compliant bond instrument, which has a credit guarantee portion of seven to 10 years, an IFD participation on the construction site which limits the construction elements of the PFAs within a single platform.

“A platform that also provides the mortgage solution from a third party and internal fourth party perspective. Also provide equity participation that looks at the ability to come in and trade at any time. That’s what PFAs haven’t seen with the private equity funds they’ve invested in. It’s a chicken and egg situation, which means we have to deliver these products that are scalable and big enough to continue to be able to acquire and absorb, while the private equity industry continues to take equity risk in some of these areas, but they need to balance the return profile.

“There should be a balance between how products are developed, expectations and how to balance the risk-reward profile demanded by PFAs. And I think that’s how we’ve positioned ourselves as Purple in terms of what we bring to market and how the products that we bring to market can fit the criteria that we’ve been discussing. But then there still needs to be alignment within the SEC and PenCom, particularly in terms of how those might be tested and executed, because that hasn’t been done in this domestic space; the rules exist but they were never made. The rules also need to be changed in terms of the level of corporate governance and regulation required to ensure this is a success,” he said.

ARM Pension, which is also one of the participants in the forum, made a diagnosis of the issues and solutions for development. In her presentation, Abimbola Sulaiman of ARM Pensions highlighted the low coverage, insufficient awareness and negative real return as part of the pension sector challenges.

“With low coverage, only 13.5% of the working population are currently enrolled in the contributory pension scheme; devaluation risk comes with the inability to adequately hedge returns against devaluation; insufficient awareness in terms of the benefits and operation of the scheme as well as the distinction between other government schemes which are fraught with pitfalls still need to be more publicized.

“There are negative real returns on providing real returns, which has been a challenge due to high inflation. Also, we cannot ignore the non-compliance of some state governments who have not not demonstrated enough political will to implement the PSC,” he stressed.

Looking ahead, Sulaiman stressed the importance of expanding coverage, increasing government support, closer collaboration and capacity building, to grow the pension industry.

“Expanding coverage by pursuing increased coverage through the micro-pension program and continued enforcement of penalties for non-compliance is important. We can also talk about increased government support through legislation, policy and regulation to reduce investment risks and stimulate increased private sector participation. Closer collaboration with other regulators to achieve deep financial markets that constantly create new asset classes capable of absorbing growth in pension assets.

“Capacity building will continuously strengthen the industry’s ability to assess and manage the risks associated with new types of asset classes. Promoting diversification removes impediments to pension funds’ efforts to diversify their investments into offshore assets or other alternative assets in search of positive real returns. Also, finalize consultations on the methods of securing Mortgages with RSA Balances in order to make the system more socially relevant.

The CEO of Stanbic IBTC Pension Managers, Mr. Olumide Oyetan, in his presentation, made recommendations such as: “Need to develop a framework in which PFAs can leverage profitable offshore investments as an alternative source of foreign exchange revenue for the country. De-risking available infrastructure investment projects, including the use of government guarantees to increase PFA allocation to the asset class

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

“Using part of the RSA balance as an equity contribution can directly improve the lives of RSA holders by ensuring good housing before retirement and supporting the real estate and construction sector, as well than by stimulating job creation.”

Dolores W. Simon