Pension funds have emerged as a formidable force in addressing Nigeria’s infrastructure finance gap under the Contributory Pension Scheme (CPS). This new avenue of funding is proving to be a significant boost to critical development projects across the nation, driving economic growth and meeting the pressing demands of infrastructure development.
The transformation of pension fund investments in infrastructure was made possible by the Pension Reform Act of 2014 (PRA 2014) and the revised Regulation on Investment of Pension Assets issued by the National Pension Commission (PenCom). These regulations paved the way for pension funds to invest in infrastructure assets through various instruments and vehicles, such as Infrastructure Funds, Real Estate Investment Trusts (REITs), and Private Equity Funds. Consequently, pension funds have become essential players in Nigeria’s infrastructure landscape.
To ensure a substantial portion of funds is directed towards domestic projects, the revised regulations mandate that 60% of infrastructure investments must be domiciled within Nigeria. While limited foreign investment is permitted, direct investment in infrastructure projects is capped at 5%. Additionally, pension funds are now allowed to invest in government-issued infrastructure bonds and Sukuk bonds, offering stable returns while supporting national projects.
The main objectives of infrastructure investment by pension funds revolve around the safety and security of pension savings and maintaining sufficient liquidity to meet retirees’ obligations promptly. Pension Fund Administrators (PFAs) adopt strategic asset allocation strategies to strike a balance between risk and return, diversifying investments in infrastructure to maximize returns and mitigate potential risks.
The revised regulations also emphasize accountability and governance, requiring audited financial statements, predefined liquidity and exit routes, and experienced infrastructure financing professionals managing the funds, all aimed at boosting investor confidence.
The numbers speak to the success of these reforms, with investments in Infrastructure Funds increasing from N88.37 billion to N127.44 billion, and Real Estate Investment Trusts (REITs) and Real Estate investments showing remarkable growth at N21.18 billion and N218.60 billion, respectively, as of June 2023.
While investing pension funds in infrastructure is gaining traction globally, Nigeria faces some challenges. Concerns over long-term political commitment and uncertainties regarding investment opportunities pose hurdles for Pension Fund Administrators. To overcome these obstacles, PenCom is actively collaborating with the government, regulatory bodies, and the private sector to create a conducive environment for infrastructure investments.
In conclusion, the involvement of pension funds in infrastructure financing marks a significant milestone in Nigeria’s journey towards economic prosperity. By channeling retirement funds into critical development projects, the pension system is securing workers’ future in retirement and driving transformative change in the country’s infrastructure landscape. As these initiatives continue to evolve, pension funds are playing an instrumental role in bridging the infrastructure finance gap and fostering sustainable growth for the benefit of current and future generations.