Pension Insight: How pension funds support Nigeria’s infrastructure development

Under the contributory pension scheme (CPS), pension funds have emerged as a powerful force in tackling the nation’s infrastructure finance gap, providing a much-needed boost to support the development of critical projects nationwide. As pension funds become an increasingly viable alternative source of financing infrastructure in Nigeria, the funds are playing a crucial role in driving economic growth and addressing the nation’s pressing infrastructure needs.

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 the transformation, allowing pension funds to invest in infrastructure assets.

The investments are made through instruments and vehicles such as infrastructure funds, real estate investment trusts (REITs), and private equity funds. The revised Regulation on Investment of Pension Assets has opened up new avenues for pension funds to channel their investments, making pension funds essential players in the country’s infrastructure development landscape.

Under the revised regulations, 60 percent of infrastructure investments via pension funds must be domiciled within Nigeria, ensuring that a significant portion of funds is directed towards domestic infrastructure projects.

The investment limit based on jurisdictions serves as an incentive to promote investment in Nigeria’s infrastructure. Investment in foreign infrastructure is permitted but with restrictions. Direct investment in infrastructure projects is limited to 5 percent.

One of the significant developments is the allowance for pension funds to invest in infrastructure bonds and Sukuk bonds offered by the government. This move has paved the way for financing infrastructure projects through debt instruments, offering stable returns for pension funds while supporting critical national projects.

OBJECTIVES OF PENSION INVESTMENT

The main goals of pension investment in infrastructure are centred around the safety and security of pension funds. Also, maintaining sufficient liquidity is crucial to meet pension obligations promptly, ensuring retirees receive their benefits as and when due.

To achieve these objectives, pension funds invested in infrastructure adopt strategic asset allocation strategies that strike an optimal balance between risk and return. Accordingly, PFAs seek to maximise returns while mitigating potential risks by prudently diversifying investments via infrastructure investments.

The revised Regulation on Investment of Pension Assets sets high standards for accountability and governance. The requirement for audited financial statements, predefined liquidity/exit routes, and experienced infrastructure financing professionals at the helm of the management firms, are all meant to boost investor confidence.

INVESTMENTS IN INFRASTRUCTURE FUNDS SURGE TO N127 BILLION

As of June 2023, investments in infrastructure funds have surged from N88.37 billion to N127.44 billion. Similarly, real estate investment trusts (REITs) and real estate investments have shown remarkable growth, standing at N21.18 billion and N218.60 billion, respectively, as of the same period.

Investing pension funds in infrastructure has gained traction recently as countries seek innovative ways to fund and support critical development projects. With their long-term investment horizon and vast pool of assets, pension funds are increasingly viewed as ideal partners for financing infrastructure ventures.

Across the globe, 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 and contribute 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 players in bridging the infrastructure finance gap and creating sustainable, resilient infrastructure for the benefit of current and future generations.

CHALLENGES TO PENSION FUND INVESTMENT

In Nigeria, however, despite the positive momentum, some challenges remain. The fear of political commitment in the long term and uncertainties regarding investment opportunities, continue to be hurdles for pension fund administrators.

To overcome these obstacles, PenCom has continued collaborations with the government, regulatory bodies, and the private sector to create a conducive environment for infrastructure investments.

Pension funds’ involvement in infrastructure financing is a significant milestone in Nigeria’s journey towards economic prosperity. The commitment of pension funds to support infrastructure development will undoubtedly play a pivotal role in bridging the infrastructure finance gap while ensuring the realisation of critical projects and fostering sustainable growth in the nation.

In conclusion, as pension funds take centre stage in infrastructure financing, PFAs are guided by the priorities of the safety of pension savings and fair returns on investments.

By leveraging the vast pool of retirement funds, Nigeria’s pension system is securing workers’ future in retirement and driving transformative change in the country’s infrastructure landscape.

Based on information by the National Pension Commission (PenCom)