In January 2019, Nigeria’s government crossed a financial rubicon, but hardly anyone seemed to notice. That month it emerged that the federal government had borrowed N6.16 trillion from Nigeria’s total pension fund assets worth N8.499 trillion in the 2018 financial year. Let me rephrase that for maximum effect – in the space of just one year, Nigeria’s cash-strapped government raided the already pitiful pension pot belonging to public and private sector employees and carted away 72.5 percent of it.
The standard government retort to this would be that the amount was merely invested in government securities and as such it would be paid back in due course. On paper that is true. Even if the government does have a woeful record of paying back its debts, the one debt category that Nigerian governments generally do not play with is bond repayments. If they took N6 trillion, they will return it plus interest. To the pension fund operators and their customers, it should be a sweet, risk-free deal. There is just one problem.
The sliding naira makes it all worthless
Speaking at an industry event recently, Muhammad Ahmad, pioneer Director-General of the National Pension Commission (PenCom) pointed out the giant elephant in the room – the falling value of the naira makes total nonsense of pension fund assets and investments in Nigeria. Using the 2012 NGN-USD exchange rate of 170-1 in comparison to the current 360-1 exchange rate, he made the point that in just 7 years, pensioners have seen the value of their pension pot decline by more than 50 percent. The bad news does not stop there.
According to the Pension Reform Act of 2014, pension fund administrators are allowed to invest in foreign currency-denominated assets. The PenCom regulation on investment of pension fund assets amended in 2019 however states that such investment is subject to “Guidelines on Foreign Investment to be issued by the Commission from time to time.” In other words, the actual ability of a PFA to preserve the value of their asset holdings by investing in stronger currencies is subject to the prevailing political atmosphere in Abuja.
Of course, we all know what the current atmosphere is regarding anything that has the word “foreign” in it. Everything from rice to asset investment is to be strictly local and home-grown. The prospect of a Buhari-led government loosening capital restrictions to permit PFAs to invest in assets denominated in less volatile currencies is about as likely as that of North Korea embracing free trade tomorrow – we know it is not going to happen.
What this means for pensioners is that the statutory deductions from their monthly salaries are effectively useless to them in the future. If a salary earner had a N3 million pension pot in 2012 (worth $17,600), seven years later their pension pot of say, N6.5 million is now worth exactly $18,000. In other words, they have spent seven years working to add the grand total of $400 to their retirement savings. The government meanwhile, uses its discretionary power to prevent these funds from leaving naira denomination, and instead uses pensioners’ money to fund itself through government securities.
The (unlikely) way forward
The problem here, as always, is both a political and an institutional one. The political angle is well known and I will not flog a dead horse – the wealth-destroying, poverty-multiplying direction of Buhari’s pseudo-communist regime is hardly news at this point. The institutional angle however, is what is not so well known.
The Pension Reform Act of 2014, signed by former president Goodluck Jonathan – who must take a lot of the blame here – gives the president the power to regulate where pension fund assets can be invested. Ahmad Muhammad believes that this should change. In his view, this power should be invested in the board of PenCom – not in the presidency. It is hard to argue with this line of reasoning, because it is clear that economically illiterate politicians are more likely to destroy the wealth of millions with their Okrika socialist policy direction than the career bankers and investment professionals who sit on the board of a public regulator like PenCom.
Whether the notoriously statist Buhari will assent to a legislative amendment that reduces his power is a matter for another day, of course. That notwithstanding, it is important that the public becomes aware that their government is using their retirement savings as a sort of daily petty cash book, and that it actively prevents their PFAs from investing these funds in safer assets.
In other words, Nigeria’s government is using its executive power to make people’s futures just that bit bleaker than they already are. The government is playing an unsustainable, high risk game of financial roulette with public finances and the economy.
Where have we heard that before?
DAVID HUNDEYIN
