Pension Insight: How pension funds boost infrastructure financing in Nigeria

Under the contributory pension scheme (CPS), pension funds have emerged as a formidable force in addressing the infrastructure financing gap in Nigeria, providing essential support for the development of vital projects throughout the country. As pension funds increasingly establish themselves as a viable alternative source of infrastructure funding in Nigeria, they play a pivotal role in stimulating economic growth and addressing the nation’s urgent infrastructure requirements.

As of September 2023, pension funds have channelled N672.1 billion to finance infrastructure projects in the country. The breakdown of the amount indicated that N261.79 billion has been committed to investments in real estate properties, reflecting a strong focus on this sector to bolster national infrastructure.

Also, N136.03 billion has been invested in the infrastructure funds, demonstrating a keen dedication to supporting vital infrastructure initiatives. N154.76 billion has been strategically allocated to sukuk bonds, a critical financial instrument for infrastructure development. N98.55 billion has been invested in green bonds, underlining the commitment to environmentally sustainable projects.

In addition, N20.97 billion has been invested in real estate investment trusts (REITs), aligning with the overall strategy to boost infrastructure financing. These substantial investments collectively signify a proactive approach to enhancing the nation’s infrastructure with pension funds.

LEGAL BASIS FOR PENSION FUNDS INVESTMENT

The Pension Reform Act of 2014 (PRA 2014) and the revised regulation on investment of pension assets issued by the National Pension Commission (PenCom) laid the foundation for this transformation by permitting pension funds to invest in infrastructure assets. These investments take shape through various financial instruments and vehicles, including infrastructure funds, real estate investment trusts (REITs), private equity funds, and Sukuk.

The revised regulation on investment of pension assets has opened new avenues for pension funds to channel their investments, establishing them as essential participants in the country’s infrastructure development landscape.
Under the revised regulations, pension funds can only invest in infrastructure funds that have up to 60 percent of their investments within Nigeria, ensuring a substantial portion of funds is directed towards domestic infrastructure projects.
One of the most noteworthy developments is the allowance for pension funds to invest in government-issued infrastructure bonds and Sukuk bonds. This progressive step has paved the way for financing infrastructure projects through debt instruments, offering stable returns for pension funds while bolstering critical national projects.

The primary objectives of pension fund investments in infrastructure are the safety and security of pension funds. Furthermore, maintaining sufficient liquidity is crucial to meet pension obligations promptly, ensuring retirees receive their benefits as scheduled. To meet these objectives, pension funds invested in infrastructure adopt strategic asset allocation strategies that carefully balance risk and return.

The revised regulation on investment of pension assets sets high standards for accountability and governance. The requirements set by the revised regulation on investment of pension assets in infrastructure funds/assets include: having audited financial statements, predefined liquidity/exit routes and the presence of experienced infrastructure financing professionals. The requirements are all geared towards enhancing the safety of pension funds.

‘PENSION FUNDS BRIDGE INFRASTRUCTURE FINANCE GAP’

Investing pension funds in infrastructure has gained considerable traction as countries seek innovative ways to fund and support essential development projects. With their long-term investment horizon and significant asset base, pension funds are increasingly recognized as ideal partners for financing infrastructure ventures. Globally, various countries have implemented regulatory reforms and policies to facilitate pension funds’ participation in infrastructure investments.

By allocating a portion of their portfolios to infrastructure assets such as roads, bridges, energy facilities, and public utilities, pension funds aim to achieve attractive risk-adjusted returns while contributing to their nation’s economic growth and social progress. Through prudent risk management and collaboration with public and private stakeholders, pension funds have become vital contributors to bridging the infrastructure finance gap and creating sustainable, resilient infrastructure for the benefit of present and future generations.

SIDESTEPPING THE OBSTACLES

In Nigeria, despite the positive momentum, some challenges persist. Concerns about long-term political commitment and uncertainties surrounding investment opportunities continue to pose hurdles for pension fund administrators (PFAs). To overcome these obstacles, PenCom is collaborating with relevant government agencies and the private sector to create a conducive environment for infrastructure investments.

The involvement of pension funds in infrastructure financing marks a significant milestone in Nigeria’s journey toward economic prosperity. The commitment of pension funds to support infrastructure development will undoubtedly play a pivotal role in closing the infrastructure finance gap, ensuring the realization of critical projects, and fostering sustainable growth in the nation.

In conclusion, as pension funds assume a central role in infrastructure financing, PFAs are guided by the priorities of safeguarding pension savings and achieving fair returns on investments. By harnessing the substantial pool of retirement funds, Nigeria’s pension system is securing the future well-being of workers in retirement while instigating transformative change in the country’s infrastructure landscape.

Based on information by the National Pension Commission (PenCom).