PENSION REFORM--A MONEYMAKING SCHEME FOR POLITICAL

C O N F I D E N T I A L SECTION 01 OF 03 LAGOS 000035 SIPDIS DEPT PASS TO EX-IM KENNETH VRANICH AND BERT C. UBAMADU DEPT OF TREASURY FOR LKOHLER USDOC FOR 3317/ITA/OA/KBURRESS PASS OPIC FOR ZHAN AND MSTUCKART STATE PASS TDA FOR NCABOT STATE PASS USTR FOR ASST USTR SLISER E.O. 12958: DECL: 01/11/2015 TAGS: EFIN ECON EINV PREL PGOV NI SUBJECT: PENSION REFORM--A MONEYMAKING SCHEME FOR POLITICAL ELITES Classified By: Consul General Brian L. Browne for reasons 1.4(b) and (d). ¶1. (C) Summary. Nigeria's pension reforms face numerous legal, infrastructural and accountability challenges that have not been properly addressed. Nigeria's National Pension Commission (PenCom) recently granted licenses to seven Pension Fund Administrators (PFAs),one Closed Pension Fund Administrator (CPFA),and three Pension Fund Custodians (PFCs) under the 2004 Pension Reform Act, but have limited their scope of operations. PenCom said the approved licenses would bring Nigeria one step closer to establishing a fully funded pension system for the public and private sectors, thus creating a large pool of funds for long-term investment, but several experts believe the "reforms" are aimed more at creating a pool of investment capital to benefit the country's political and economic elites than to improve the living standards of the average Nigerian pensioner. End Summary. -------------- Background -------------- ¶2. (U) President Olusegun Obasanjo signed the Pension Reform Bill into law in June, 2004, repealing the Pension Act of ¶1990. The new pension regime is a mandatory one, under which every month, employees would deposit 7.5% of their total compensation into a Retirement Savings Account (RSA),and employers would contribute a minimum of 7.5%. The 2004 Act also established the National Pension Commission (PenCom),to supervise and administer the new pension plan. Nigeria has a pension system that creates a division of labor that should minimize abuse of the fund. For the first time, management of pension funds, which will be performed by PFAs, will not be by the same entities that have custody of the funds. PFCs will control the custodial function. ¶3. (SBU) Market analysts predict the aggregate of RSAs will exceed naira 250 billion (USD 1.9 billion) per year, including contributions from federal and state government officials and private sector workers, and will achieve a projected nominal growth rate of between 10-15%, due in part to inflation and population growth. Industry experts and government officials said pension fund contributions for Federal Government employees alone totaled about naira 120 billion (USD 923 million),and while figures for State government employees and private sector employees have not been released, those figures, when combined with the contributions of Federal Government employees, could possibly reach 300 billion (USD 2.3 billion). Lagos Business School Director Professor Pat Utomi said the figures could be much lower, however, citing layoffs of large numbers of federal government employees and overall distrust in the pension system. -------------- PenCom Granted 11 Licenses; National PIN System Scheduled for March -------------- ¶4. (U) PenCom Director General Muhammad Ahmad announced December 8 the grant of license to seven Pension Fund Administrators (IBTC Pension Managers, Premium Pension, Pensure PFA, Sigma Vaughn Sterling Pensions, Pensions Alliance, ARM Penion Managers, and First Alliance Pensions and Benefits),one Closed Pension Fund Administrator (Shell Nigeria),and three Pension Fund Custodians (UBA Pensions Custodian, Zenith Pensions Custodian, and First Custodian Nigeria). ¶5. (C) PenCom Chairman Tajudeen Afolabi Adeola said additional companies would be granted approval in 2006. Full implementation of reforms, originally scheduled for January 2006, would not take effect until March, he said. He cited inadequate Information Technology (IT) capacity as one reason. (Note: PenCom initially had announced its goal to create a national data bank to issue Personal Identification Numbers (PIN) for each person by January, 2006, but it has not been able to meet its IT goals. End Note.) -------------- Challenges -------------- ¶6. (C) Besides IT challenges, financial experts expressed concern about enforcement. United Bank for Africa (UBA) Executive Director Chika Mordi said the GON would face challenges collecting and keeping track of data and enforcing compliance. The GON does not have an efficient data collection and enforcement system, he said. This could, in turn, breed corruption. Adeola did not deny data collection and enforcement would pose challenges, but he argued that employers would comply in order to avoid being fined and that employees, especially Nigerian military personnel, would find the mandatory contribution scheme advantageous. (Note: Under the Act's contribution scheme for military personnel, employees would contribute 2.5% of their total compensation to a RSA, while employers would contribute 12.5%, as opposed to a minimum contribution of 7.5% for all other government employees. End Note.) Critics, however, argued that even when full-scale reforms are implemented, many might chose not to comply because of lack of education or distrust of the pension regime. ¶7. (C) PenCom's greatest concern, according to Adeola, is the market's capacity to absorb the influx of funds. Each PFA would manage only one fund, and investment allocations would be set by PenCom to restrict the proportion of assets a PFA could allocate to one asset category such as equities, government securities, and so forth. Under PenCom's current guidelines, PFAs can place a maximum of 70% of pension funds into government securities, 30% into corporate bonds and debt, 25% into money market investments, 20% into mortgage and asset-backed investments, and 20% into ordinary shares. Some financial analysts feared a sudden influx of pension funds to the Nigerian stock market would cause stock prices to rise, but no one really knows the market's absorptive capacity, others argued. Mordi said the real questions are where the pension funds are invested and the returns on those investments, not whether the market could or could not absorb funds. -------------- -------------- Real Beneficiaries--Political and Business Elites -------------- -------------- ¶8. (C) The new pension plan benefits elites, critics complained. For instance, the current plan does not allow PFA's to invest overseas, which would significantly enhance the ability of PFA's to maximize the returns on investment. Moreover, PFA's can only invest in common shares of companies that have proven dividend returns for the last five years, effectively eliminating over 200 companies publicly traded on the Nigerian Stock Exchange (NSE). In effect, the publicly traded small and medium-sized businesses and companies that would most effectively benefit from greater investment are shutout, while established companies will reap greater benefits because of the uncompetitive features of the pension scheme. Industry experts said on paper, there appear to be "checks and balances" limiting abuse. In reality, things may be a bit different. Evidently, waivers can be granted so that companies disqualified from participation may be allowed into the scheme. As a practical matter, some observers state, PenCom would not refuse waiver applications endorsed by the Presidency, since the players involved in both the pension and bank reforms are Obasanjo's allies. ¶9. (C) Critics argued the true beneficiaries of Pension reform are large and politically connected domestic organizations and perhaps new corporations like Transnational Corporation Nigeria (Transcorp),a multinational corporation run by Obasanjo's political allies. PenComm Chairman Adeola is also Transcorp Nigeria's Group Managing Director, while Nigerian Stock Exchange Director General Mrs. Ndi Okereke-Onyiuke serves as the Transcorp "Start-Up" Chairman and her Technical Adviser, Nicholas Okoye, assumes the role of Group Executive Director. Other powerful board members include: Nigerian Breweries CEO Festus Odimegwu, Dangote Group President Aliko Dangote, Zenith Bank Managing Director Jim Ovia, First Bank of Nigeria Managing Director Jacob Moyo Ajekigbe, UBA Group Managing Director Tony Elumelu, Zenon Petroleum and Gas Limited CEO Femi Otedola, Orange Drugs CEO Tony Ezenna, Charterhouse Group CEO Jacob Moyo Ajekigbe, and Adonai-Net Nigeria Chairman Adegboyega Olulade. A respected economist, Professor Utomi, said Transcorp has received all forms of waivers from the Bureau of Public Enterprises, and he expects Transcorp to receive waivers from PenCom to allow PFAs to invest pension fund money into Transcorp and any other corporation aligned with President Obasanjo. -------------- PFAs Complain -- One Fund Not Enough -------------- ¶10. (C) Personnel in some PFAs complain that a single fund is insufficient to meet the needs of a variety of investors. IBTC Asset Management Managing Director Yinka Sanni argued, for example, that a 25-year old Nigerian might have very different needs than a 60-year old Nigerian nearing retirement, and thus he would advocate different investment strategies, something he could not do with only one fund. Due to this constraint, some PFAs have pushed PenCom to allow PFAs to manage more than one fund. Adeola, however, said the pension regime was new and that PenCom wanted to begin initially with only one fund as an experiment. He did not, however, leave out the possibility that PenCom would allow for more than one fund in the future. -------------- Comment -------------- ¶11. (C) The creation of the pension scheme apparently has two objectives. The most obvious is to improve the pension system and thereby help Nigerian workers. The second objective is to use the funds to create an investment pool for indigenous business. What is hard to tell is whether the scheme strikes the correct balance or, in practice, whether it will lean too heavily toward the latter at the expense of the former. Moreover, the impact of these reforms in spurring greater consumer lending will remain minimal in 2006 without accompanying reforms in private property rights and registration of title recording systems. It is probably an inaccurate assumption that pension reform would also liberalize consumer lending and financing without first tackling fundamental institutional and legal barriers that hinder property rights and enforcement of contracts. Without eliminating PFA investment barriers, including bans on investing abroad and restrictions on the number of companies and funds a PFA can invest in, pension reform will benefit the average Nigerian, but not as much as it could. The big winners might be the small roster of already successful Nigerian companies. End Comment. HOWE