Spread the love

By Moshood Ayeni

The Issue:

The news broke recently that the Federal Government and States have perfected plans to borrow the pension fund to finance some infrastructural projects.

Mixed reactions met the news as it appeared to most people as something new that should not be allowed especially judging from the past experience of mismanagement and corruption at different levels of government regarding the management of public funds.

The Fact:

It is true that there are plans and moves by the government at different levels to access the pension fund for infrastructural projects. However, having access to the fund or borrowing from the fund have its own rules and regulations. It is not like going to the PFAs or approaching PenCom and the fund will be transferred on application. It does not work like that.

However, at the moment, Government borrowings from the pension fund constitute a huge chunk. Out of the total ₦12.4 trillion pension fund assets, over ₦8.4 trillion (which is about 68.2% of the total pension assets) represents government borrowings in the form of government securities at both state and federal levels.

Here is how it works.

What it takes to borrow from the pension fund?

To borrow from the pension fund, the borrower or debtor must satisfy some stringent rules already laid down by the regulator of the pension industry and this is backed by the Pension Reform Act (The Law).

The ONLY way to borrow from the pension fund by the government is in the form of issued government securities. These include Treasury Bills, FGN Bonds, State Bonds, Other bonds such as Agency Bonds, Sukuk, etc.

For state governments willing to borrow from the pension funds, one of the conditions is that the state must have passed the pension law and implemented the Contributory Pension Scheme (CPS).

The Commission’s Regulation on the Investment of Pension Fund Assets allows only States that have fully implemented the Contributory Pension Scheme (CPS) to access pension funds for the purpose of infrastructural development.

According to a Circular released by the National Pension Commission (PenCom) on the Minimum Requirements for the inclusion of State Bond as an investible instrument in the pension industry, the following conditions must be satisfied by any state willing to borrow funds from the pension industry:

i) Enact a Law to establish the Contributory Pension Scheme, which must give pension contributions the same priority as salaries. Such law must also have fully addressed every inconsistency observed by the National Pension Commission in its review.

ii) Establish a State Pension Bureau and a Local Government Pension Bureau to coordinate the implementation of the Contributory Pension Scheme and other related pension matters in the State.

iii) Open Retirement Savings Accounts with PFAs for all the employees that are covered under the Contributory Pension Scheme in the State.

iv) Fully remit both employer and employee pension contributions into the employees’ RSAs for a minimum of six consecutive months from the date of commencement of the Scheme in the State.

v) Secure a group life insurance cover that guarantees a minimum of 300% of the annual total emolument of all the employees covered by the Contributory Pension Scheme. The insurance companies engaged for this purpose must be eligible life insurance companies, licensed by the National Insurance Commission (NAICOM), and duly certified by the National Pension Commission as being compliant with the provisions of the Pension Reform Act 2004.

vi) Must have consistently funded the Retirement Benefits Bond Redemption Fund Account with the Central Bank of Nigeria or any PFA, from the date of commencement of remittance of pension contributions by the State.

vii) Must execute an Irrevocable Standing Payment Order (ISPO), to mandate the Accountant General of the Federation (AGF) to deduct at source and remit monthly pension contributions from the State’s share of the Federation Account Allocation to the State to a designated Lead Pension Fund Administrator in line with the Guidelines issued by the Commission.

As of the end of 2020, reports released by PenCom show that out of the 36 states in the country, only 5 states have fully complied with the CPS law while others at different implementation levels. Others have series of backlogs of pension arrears or have not even joined the CPS.

The implication of this is that only VERY few states will qualify to borrow from the pension fund and if they do, they must satisfy the above conditions as required by the pension industry regulator.

At the Federal level, however, the Federal Government borrowing is already in the forms of FGN securities which include bonds and treasury bills. These instruments are deemed to be risk-free and as such, it is not surprising that over 67% of the total assets of the pension industry are already in the forms of FGN securities (according to 2020 data released by PenCom).

It is believed that government will always settle its debt obligations by printing money or raising taxes to settle its domestic debts obligations in the forms of bonds and treasury bills as the issuance of these instruments often align with its economic and borrowing policies already contained in its annual budget and other strategic economic documents.

Therefore, to the fund managers, FGN borrowings in the forms of bonds and treasury bills remain the preferred investment instrument because of their risk-free nature. This is not only peculiar to Nigeria, it is a normal investment practice over the world where fund managers prefer high-yielding and low-risk investment to low-yielding and high-risk instruments.


All over the world, governments at different levels borrow from pension funds to finance infrastructural projects.  Government borrowings from the pension fund is nothing new and it follows very stringent rules and guidelines and this is international best practice. These borrowings are always backed by underlying instruments upon which the agreement to borrow is tied and all obligations attached.

Follow for more articles like this. Visit our website www.pensiontalk.com.ng to learn more about pensions in Nigeria.

Spread the love
Need help?
Pension Talk
Thank you for visiting PensionTalk.
How may we help you?