AN OVERVIEW OF THE PENSION FUNDS AS A MAJOR SOURCE OF HOUSING FINANCE: USING THE PENSION REFORM ACT AS A GUIDE
BY
KUYE OLUSEGUN
Department of Estate Management Yaba College of technology, Yaba, Lagos.
ABSTRACT
Finance is generally regarded as a fundamental issue in real estate development. It then means that the ability of any real estate investor to mobilise enough funds for development projects will determine the level of success of such projects. It is a common knowledge that mobilisation of project funds has continually constituted a herculean task in the country due to a great number of factors. Basically, it derives from the absence of viable and well- organized real estate development finance system. In the light of the above, this paper explores the possibility of sourcing the much needed long-term funding of real estate projects through the recently established pension funds scheme. In the paper, the background, philosophy, aim, objects and the relevance of the Pension Reform Act in financing real estate projects were explored. Even though enough long-term funds could be obtained from this source, the Act neither prescribed the proportion of the Funds that could go into housing projects finance nor the cost of such borrowing. To this end, it is recommended that the Act be amended to reflect that at least 30-40% of the Fund’s savings should be lent to real estate investors and thus allowing a substantial amount of the funds to flow into housing provision. Furthermore, the interest rate on such borrowings should be at a single digit. By so doing, housing funds from this source will not only be attractive to investors but would also serve as another source of cheap funds other than through the existing National Housing Fund.
1.0 INTRODUCTION
It is a general consensus that housing is the largest single investment that most individuals aspire to make and home-ownership is the highest priority for the assets formation for many. This renders it one of the most significant ways to make economic growth tangible to people. It makes housing also an important factor in social development. Housing is a very expensive capital investment, which forms substantial proportion of every nation’s gross fixed formation. No nation in the world can boast of having economic capacity of providing housing and the basic facilities and services that complement housing without other amenities suffering.
The United Nations Organisation defines housing as the environment of a residential neighbourhood which includes the physical structure used for human habitation and all the essential facilities and services necessary to maintain good public health and social well- being of every individual family members living in the neighbourhood. Housing is one of the three basic needs of man coming after food and clothing. Housing can be defined as a social function of human habitation to include the provision of security, privacy, protective and social status to the owner. Furthermore, housing can also be said to be a structure that includes provision of all the auxiliary facility and services and which are useful for human well being.
Due to the huge cost of construction relative to average incomes, most urban families are unable to pay immediately for housing as a capital good from their savings. But they cannot do without its services while they save. This makes borrowing necessary for housing development for either home-ownership or rental occupancy. Since the house is a durable good, long-term borrowing would spread and relieve the burden of repayment. But much as would need to borrow, finance is in short supply; more so for long term lending. Government can and does intervene; but this cannot be without some controls otherwise it could be consistent with economic behaviour.
Finance is an essential factor in the development of housing and without it, property development cannot take place. Financing housing development is a micro area of the finance sector of the economy. There are a lot of different types of financing available at any moment depending upon the individual circumstance. The methods are: flexible but diverse, innovative but cautious, yet competitive but secretive and statistics are scarce. Financing takes two forms, which are internal and external sources. Internal sources are funds provided by developer, while external sources such as the commercials banks, insurance companies, merchant bank, etc.
The aim of this paper is the appraisal of the pension funds as major sources of housing finance. In this regard, the paper considered following issues:
- Evaluation of the existing sources of finance hitherto opened to financing real estate
- Looked at the background, philosophy, aim, objectives of the Pension Reform Act 2004.
- X-rayed the pension fund as a veritable source of housing
- Make executable
2.0 EVALUATION OF THE EXISTING SOURCES OF REAL ESTATE FINANCE
In any development project, the factor next to land in importance is finance, which can procure other factors. Housing development usually involves a considerable capital outlay. More often than not, this cannot be met from the developer’s savings alone and recourse has to be made to the financial market for assistance. Finance determines what, when, where, and how much building will be accomplished. As a result, a clear understanding of the precise role and types of financing is critical for all these involved in the development process.
The concept of real estate development finance relates to the provision of necessary capital through an appropriate sequence of arrangement. In the real estate finance market today, there are numerous financing arrangements, it will therefore depend on the knowledge and understanding of the market and quality of the housing package. There is now a need for means of financing than those used before because financers are only interested in returns in this age of high cost of construction. Some of the existing methods of real estate finance are:
a. Traditional Methods: Prior to the colonial period, many methods of housing finance were adopted in different parts of the country. Amongst these are esusu and ajo, age grade association, village development scheme, and town unions of people living outside their place of birth. Others are Men’s Revolving Loan Association, loans from traditional moneylenders, social club contributions, aaro or owe where members contribute in kind by providing labour on members’ site until the circle is completed. All of these methods were successful in the provision of finance for housing and its delivery in the traditional setting. But with the complexity in economic activities, these methods faded away and are “to be replaced” by modern methods.
b. Modern Methods: The sources of housing finance in existence today can be grouped into two that is, Formal and The formal sector comprises institutions operating within the statutory guideline stated by Federal Government. Among these are:
- The Federal Mortgage Bank of Nigeria (FMBN) started operation in 1977 with the following main functions: The provision of long term credit facilities to mortgage institutions in the country; the encouragement and supervision of the activities of the mortgage institutions; provision of long term loan to individual and property developers for house building, produce saving facility, carry out research on mortgage finance. These activities have been marred by administrative ineptitude, political instability and uncoordinated policy.
- Commercial Banks: These categories of bank are retail bankers by operation. They only lend on short-term basis because they have to meet the withdrawal request at the shortest This has not been compatible with housing finance, which requires long term finance. This has limited their success in housing finance.
- Merchant Banks: These accept only large time deposits, from corporate organisations and high net worth individuals, with maturity dates up to five years. They hold little cash reserves and unlike commercial banks, offer bridging loans or interim funds to real estate developers and others at very competitive rates of interest, usually on short-term basis.
- Specialized Development Banks: This category includes the Nigerian Industrial Development Bank (NIDB), Urban Development Bank etc. they are established to grant long term finance that could last sometimes up to 25 years for industrial, commercial, agricultural and housing Though perfect for housing finance, their success in housing finance has been very limited due to inadequate funding and diversion of the little available funds into the short-term sector.
- Insurance Companies: Life funds of insurance companies are long term savings in form of annuities or endowment policies, which can only mature at the occurrence of certain known events, like death, accident or retirement. Their long term sources of funds enables life assurance companies to invest primarily on long term capital assets like real estate investment and get involved in the following: Loan for real estate development based on capital value of the policies, investment in mortgage and debentures; direct investment in or development of real property, i.e. acquiring or developing landed properties apart from those meant for their own Insurance companies are suited and equipped to finance housing development but due to their preference for higher return, the Nigerian Insurance industry has not played a significant role in housing finance, so far.
3.0 THE PENSION REFORM ACT 2004: THE REVIEW OF RELEVANT PORTIONS
- Commencement and establishment of the scheme: The Act was enacted by the National Assembly of the Republic of Nigeria and took effect from the 25th of June Section 1 (1) states that there shall be established for any employment in the Federal Republic of Nigeria, a contributory Pension Scheme (in this Act referred to as “the scheme”) for payment of retirement benefits of employees to whom the scheme applies under the public service of the federation, Federal Capital Territory and the private sector. In the case of public sector who are in employment in an organization in which there are five or more employees.
- Objectives of the scheme: This is to:
- Ensure that every person who works in the public service or private sector receives his or her retirement benefit as at when
- Assist improvident individuals by ensuring that they save in order to cater for themselves during age and ;
- Establish a uniform set of rules, regulations and standard for the administration and payment of retirement benefit for the public service sector.
3.3 Withdrawal from the retirement savings accounts
- The Acts provides that as from the commencement of this Act no person shall make any withdrawal from the retirement savings account opened before attaining the age of 50 years.
- Notwithstanding the provision of one above, any employee who is retired on medical ground for reason of not being capable of carrying out the functions of his office or he is retired due to total or permanent disability or retired before the age of 50 years in accordance with the terms and conditions of his employment would be capable to make withdrawal from the retirement saving savings account opened under section 2 of the Act.
3.4 Rate of contribution to the scheme: Act provides that the contribution of any employee under the scheme shall be made in the following circumstance relating to the employees monthly emoluments.
a. In the case of the public service of the Federation and Federal Capital Territory
- A minimum of seven and a half percent by the employer;
- A minimum of seven and a half percent by the employee;
b. In the case of the military
- A minimum of twelve and a half percent by the employer;
- A minimum of two and a half percent by the employee; and
c. In other cases: private sector
- A minimum of seven and a half percent by the employer; and
- A minimum of seven and a half percent by the
Notwithstanding the foregoing, an employer may agree or elect to bear the full burden of the scheme provided the employer’s contribution is not less than 15% of the monthly emolument of the employee. Also in addition to the rate specified above, the Act provides that employers shall maintain life insurance policy in favour of the employee up to a minimum of three times the annual total emolument of the employee and in addition to the total contributions being made by the employees and his/her employers. The employee may make further voluntary contribution to his or her retirement savings account.
3.5 Contribution under the scheme to form part of tax: Deductible expenses and retirement saving accounts and remittance of contributions:-
- Contributions by an employee to the scheme under the Act shall form part of tax-deductible expenses in the computation of tax payable by an employer or employee under the relevant income tax
- Every employee shall maintain an account in his or her name with any pension fund administrator of his or her choice.
- The employee shall notify his or her employers of the pension fund administrator chosen and the identity of the savings account opened.
- The employees shall not have access to his or her retirement savings account accept through the pension fund administrator.
- The employer shall deduct at source the monthly contribution of the employee in his employment and within seven working days from the day the employee salary is paid, remit some in addition to the employer’s contribution to the pension fund administrator of the employee.
3.6 Transferred from one employment to another: Where an employee service is transferred from one employer or organization to another, the same retirement saving account shall continue to be maintained by the employee.
3.7 Establishment of the National Pension Commission: The Act provides for the establishment of the National Pension Commission whose main objectives shall be to regulate, supervise and ensure the effective administration of pension shall have power amongst other to:
- Formulate, direct and oversee the overall policy on pension matters in
- Establish standard, rules and regulations for the management of the pension fund under the Act.
- Investigate any pension fund administrator or any other party involve in the management of pension funds.
- Impose administrative sanctions or fines on erring employers or pension fund
3.8 Investment of Pension Fund: All contribution made under the Act shall be invested by the pension fund administrator with the objective of safety and maintenance of fair returns of amount invested. The funds and asset shall be invested in any of the
- Bonds, bill and other security issued or guaranteed by the Federal Government or Central Bank
- Bonds, debenture, a redeemable preference shares and other debt instrument issued by corporate entities and listed on the stock exchange
- Ordinary shares of public limited companies listed on the stock exchange
- Bank deposits and bank securities
- Real Estate Investment and
- Such other instrument as the commission may from time to time
4.0 MODUS OPERANDI OF THE NEW CONTRIBUTORY PENSION SCHEME
PenCom commenced operation in December 2004. In accordance with the powers vested on it by the Pension Reform Act 2004, the Commission has evaluated several applications for licences to operate as either Pension Fund Administrators (PFAs) or Pension Fund Custodians (PFCs). So far, twelve (12) PFA licences, four (4) PFC licences and one (1) Closed PFA licence have been issued. This has allowed employees that are covered by the new pension scheme to start opening RSAs with the PFAs of their choice. In exercise of its regulatory role, the Commission has also issued regulations and guidelines for the supervision of the pension industry.
The Scheme entailed the establishment of a National Pension Commission (PenCom) that regulate, supervise and ensure the effective administration of pension matters in Nigeria. The Commission is expected to perform these functions by ensuring that payment and remittance of contributions are made and beneficiaries of retirement savings accounts are paid when due. Above all, the Commission will ensure the safety of the pension funds by issuing guidelines for licensing, approving, regulating and monitoring the investment activities of Pension Funds Administrators.
Under the contributory pension scheme, the National Pension Commission as the regulator of pension matters shall receive and investigate any complaint of impropriety levelled against any Pension Fund Administrator, Custodian or employer or any of their staff or agents. Basically, PenCom stands as a watchdog, with the overriding objective of ensuring that all pension matters are administered with minimum exposure to fraud and risk. PenCom will employ the use of approved risk rating agencies to determine the viability of an investment instrument.
The key objectives of the new scheme are to:
- Ensure that every person who has worked in either the public or private sector receives his retirement benefits as and when due;
- Assist improvident individuals by ensuring that they save to cater for their livelihood during old age;
- Establish a uniform set of rules and regulations for the administration and payment of retirement benefits in both the public and private sectors; and
- Stem the growth of outstanding pension liabilities
The new pension scheme is contributory, fully funded, based on individual accounts that are privately managed by Pension Fund Administrators with the pension funds assets held by Pension Fund Custodians.
4.1 Contributory system: Under this system, the employees contribute a minimum of 7.5% of their Basic Salary, Housing and Transport Allowances and 2.5% for the Military. Employers shall contribute 7.5% in the case of the Public sector and 12.5% in the case of the Military. Employers and employees in the private sector will contribute a minimum of 5% each. An Employer may elect to contribute on behalf of the employees such that the total contribution shall not be less than 15% of the Basic Salary, Housing and Transport allowances of the employees. An Employer is obliged to deduct and remit contributions to a Custodian within 7 days from the day the employee is paid his Salary 2 while the Custodian shall notify the PFA within 24 hours of the receipt of Contribution. Contribution and retirement benefits are tax exempt.
4.2 Individual accounts: The contributions are deducted immediately from the salary of the employee and such deductions are transferred to the relevant retirement savings By so doing, the pension funds exist from the onset and payments will be made when due. The employee opens an account to be known as a ‘Retirement Savings Account’ in his name with a Pension Fund Administrator of his choice. This individual account belongs to the employee and will remain with him through life. He may change employers or pension fund administrators but the account remains the same. The employee may only withdraw from this account at the age of 50 or upon retirement thereafter. This withdrawal may take the form of a:
- programmed monthly or quarterly withdrawal;
- purchase of annuity for life through a licensed life insurance company with monthly or quarterly payments; and
- lump sum from the balance standing to the credit of his retirement savings account: provided that the amount remaining after the lump sum withdrawal shall be sufficient to procure an annuity or fund programmed withdrawals that will produce an amount not less than 50% of his monthly remuneration as at date of his
With any of the above options, there is an assurance that the pensioner has sufficient funds available to him for his old age. Although many have contended that at the end of the working period, they should be allowed to collect their savings in one lump sum, experience has shown that very few individuals have the discipline to manage funds effectively over a long period of time. The above was considered a better process than to allow the individual withdraw his accumulated savings at once, spend it all and then have no income when he is no longer in a position to work.
4.3 Eligibility for the scheme: The law makes it mandatory for all workers in the Public Service of the Federation and the Federal Capital Territory, and workers in the private sector where the total number of employees is 5 or more to join the contributory scheme at commencement. Existing pensioners and workers that have 3 years or less to retire are exempted from the scheme. Also, exempted are the categories of persons under Section 291 of the Constitution of the Federal Republic of Nigeria. However, they may join of their own volition. The existing Pensioners are also exempted.
4.4 Safeguards for the pension scheme: The importance of safety of the pension fund assets cannot be overemphasised as the success of the pension reform is hinged on the availability of funds to contributors when they retire. Since the pensioner will utilize the fund at the end of his working life, it becomes imperative that adequate measures be taken for its protection. Consequently, there are a number of stringent provisions contained in the Act with the singular objective of protecting the pension fund assets. The Act embodies a number of checks in order to preserve the pension fund assets. These include:
a. Separation of PFA and Custodian: Although they both deal with pension fund assets, the functions of the PFA and Custodian are so clearly delineated that it is difficult for either to misuse the pension funds assets to the detriment of the At no time will the PFA have the custody of contributions of the employee. The contributions go directly from the employer to the Custodian. On the other hand, the Custodian will not invest the pension assets except to the order of the PFA.
b. Pension Fund Custodian Guarantee: Applicant Custodian shall issue a guarantee to the full sum and value of the pension fund and assets held by it or to be held by it.
c. Government Pension Contribution: Government contribution shall be a first charge on the Consolidated Revenue Fund of the Federation.
d. Risk Rating Institutions: These are institutions that will be responsible for rating the instruments that pension funds will be invested in. PenCom requires that these risk-rating institutions possess the professional capacity and are licensed to rate the risk of investment instruments.
e. Compliance Officers: Every PFA shall employ a Compliance Officer who will be responsible for ensuring compliance with the provisions of the law regarding pension matters as well as the internal rules and regulations of the particular PFA. They will be required to liaise with PenCom and the Board of Directors of the PFA with regard to the activities of the PFA.
f. Reporting requirement for PFAs and PFCs: In order to keep track of their activities, the licensed operators are required to make a regular report of its activities to. PenCom Many consider this an onerous requirement by PenCom but in view of the volume and nature of the funds the PFAs will handle, it becomes necessary to be able to spot any wrongdoing early. Besides this information is expected to be passed on to PenCom electronically and would not constitute a hardship for any fully automated
g. Statutory Reserve Fund; A PFA shall maintain a Statutory Reserve Fund, which shall be credited annually with 12.5% of the net profit after tax, or such percentage of the net profit as may be stipulated by PenCom to meet claims.
h. Sanctions: Clear legal and administrative sanctions have been provided for non- compliance with rules and regulations.
i. Public Disclosure of Information: PFAs and Custodians are required to disclose their rates on return and publish their audited accounts.
4.5 Benefits of the new contributory pension scheme
Since the individuals own the contributions, the pensioner is no longer at the mercy of government or employer and is assured of regular payment of retirement benefits. Employee has up-to-date information on his retirement savings account. The scheme allows the contributor the freedom to choose who administers his retirement benefits account and this promotes competition among the PFAs. A major benefit of the scheme to the worker is that the individual accounts are portable and as such, the worker is able to change employment and still maintain the same account. He is merely required to provide the details of his account to the new employer.
Furthermore, the scheme imposes fiscal discipline on the nation and is a solid foundation for economic development. There is an expansion of convertible funds, creation of a huge pool of long term funds and enhanced accountability. The scheme introduces clear legal and administrative sanctions and there is a separation of investment, administration and custody of assets. Transparency is also ensured by the requirements for published rate of returns, regular statements of contributions and earnings and annual audited accounts.
5.0. INVESTING THE PENSION FUNDS AND ASSETS: General guidelines
“All contributions under this act shall be invested by the PFAs, with the objectives of safety and maintenance of fair returns on amount invested.” Subject to guidelines issued by the Commission, the funds and assets may be invested in bonds, bills and other government securities, debentures, redeemable preference shares or ordinary shares of companies listed on the Stock Exchange and with good track records in the last five years. Others include bank deposits and bank securities; investment certificates of closed-end investment fund or hybrid investment funds listed on a Stock Exchange registered under the Investments and Securities Act 1999 with a good track records of earning; units sold by open-end investment funds or specialist open-end investment funds listed on the stock exchange recognized by the Commission; bonds and other debt securities issued by listed companies; real estate investment; and such other instruments as the Commission may, from time to time, prescribe.
“The PFA may invest the pension funds assets in units of any investment funds,” but not outside the above classification of investments. In addition, the funds and assets may be put in investments outside Nigeria. However, this can only be done subject to the approval of the President of the Federal Republic of Nigeria, acting on the recommendations of the Commission.
The Act places specific restrictions on investment of pension funds and assets: they are not to be invested in shares and other securities issued by the PFA or PFC, or the shareholder of the PFA or PFC. In addition, the PFA should not sell the assets to itself or anyone directly or indirectly related to it; neither must it purchase such pension fund assets nor apply them by way of loans and credits or as collateral for any loan taken by any person. The Commission may impose other restrictions in order to protect the interest of the beneficiaries of the RSAs.
In making investment choices, the PFA must have due regard to the risk rating of instruments made by a risk rating company registered under the Investments and Securities Act 1999. Default by the PFA in complying with any provision of the Act attracts a penalty not exceeding N500,000 for every day the non-compliance continues, in addition to forfeiture of the profit from that investment to the beneficiaries of the RSAs. If the default led to a loss, the PFA shall make up for the loss.
One of the high points in the new pension scheme, apart from crediting the employee’s retirement savings into the RSA with the PFA, is the fact that the pension fund assets are to be privately managed and invested by professional pension fund managers. This is with a goal of bringing appreciable returns on investment, accruable to the benefits of the beneficiaries of the RSAs. This is important, considering that the funds and assets are to be held by the PFA over a long period while the employee is still in employment and even after he has gone into retirement. Indeed, the scheme is designed to survive the death of the employee, at any point, be it in service or in retirement.
Arising from this, quite apart from the safeguards put around the manner and class of investment of these funds and assets, there should be a stipulation of a minimum return on investment, which these funds should attract, for the benefits of the beneficiaries of the RSAs. In the private sector, existing pension schemes are permitted to continue, if the employer so wishes. The scheme must be fully funded; funds and assets under the scheme shall be held by a PFC; contributions in favor of an employee with the attributable income shall be computed and transferred to a RSA opened for the employee; every employee shall be at liberty to choose to come under the Scheme established under the Act; the RSA and the funds transferred therein shall be maintained with a PFA of the employee’s choice. The employer shall undertake to the Commission that the scheme shall be fully funded always and any shortfall made up within 90 days. In addition, it shall demonstrate possession of managerial capacity to manage pension funds and assets, in the preceding five years. The employer who wishes to manage the pension funds under its scheme shall apply to the Commission for license as a closed pension fund administrator, provided it holds minimum pension funds and assets of N500 million and satisfies other requirements specified under the Act. Otherwise, the scheme shall be administered by a licensed PFA.
All existing pension schemes shall submit to the Commission a statement of affairs including assets, liabilities, list of members, current statements, in the case of contributory scheme, and pensionable salary in the case of benefits. Scheme A closed pension fund administrator shall be subject to supervision and regulation by the Commission. It is required to function just as any PFA. To date, the only licensed Closed PFA is Shell Nigeria Closed Pension Fund Administrator.
6.0 PENSION FUNDS AS A MAJOR SOURCE OF HOUSING FINANCE
Although we have earlier mentioned other sources of housing finance which can be seen as the traditional methods of Financing Housing Scheme. This is so because most of the methods have been with us and have been is use for a very long time. However, with the coming into being Pension Reform Act of 2004, another major source of housing finance has been introduced. The Act specifically provides that the funds contributed by the scheme would be invested into amongst others, real estate development – (land, building and the needed infrastructure) which is housing. If the provision of the Act is followed religiously, the amount of money that would be contributed by the scheme would run into trillions of naira. Also, the portion or proportion of this money that would be given out to retired contributors from time to time is just a little fraction of the amount contributed at that point in time.
Firstly, the Act provides that the scheme is compulsory and applies to all employees is the public sector as well as the private sector. In the case of public sector, it applies to all those in employments and in the case of the private sector, it applies to all those who are in employment in an organization in which there are more than five (5) employees. Section 14 of the Act goes further to provide that on monthly bases in the case of both public and private sector, the employers would contribute seven and a half percent (7½%) of their employers emoluments to the scheme while the employees would contribute same. In the case of the military, the employers would contribute at a rate 12½% while the employees would contribute at a rate 2½%.
From the above, it is obvious that at any given time, the quantum of funds in the coffers of the scheme would be huge taking into consideration the number of employees in both the public and private sector of the economy including the military making this contribution as well as their employers.
Section 3(7) of the Act provides that no person shall be entitled to make any withdrawal from the retirement saving account opened under the Act before attaining the age of 50 years. This brings to mind the fact that only few people will at any point in time attain the age of 50 years. This presupposes as earlier mentioned that only a very small fraction of the amount so contributed at any given time is withdrawn leaving the bulk of the money for investment in real estate development and other investment as specified by the Act.
With this amount of huge capital fund provided by the pension scheme, one can safely conclude that the pension scheme is a major source of housing finance investors in housing could go for.
7. IMPACT OF THE PENSION REFORM ACT ON THE FINANCE SECTOR
Investment windows for pension funds include using the money market instruments government securities as a tool for pension fund investments and using the mortgage market instruments (real estate investment) as a tool for pension fund investment. With pension Reform which has taken off fully in year 2005 this means estimated 30million Nigeria workers will be making contributions to pension Funds and such funds will be invested in long term investments in the mortgage market and other investment windows approved by the reform act. There will be a huge pool of long term funds available for investment, which will form a good foundation for economic development, most especially in mortgage market investment. The expected amount available for mortgage businesses is put at N3.6 trillion.
Some of the constraints facing the mortgage market include long term nature of projects and funding, the need for clean title documents, maintenance of well finished structures by professional managers that will attract revenue, multiple title problems, long period breakeven point, small market and development at a low price and a regular liquidity crisis. Others are poor capitalization of the primary Mortgage Institution, inexperienced practitioners, lack of focus concentration on non-mortgage transaction, lack of support by government in providing infrastructures, poor quality housing schemes and uncompleted projects, inability of PMIs to compete with big banks as well as poor management and outright diversion of funds. Presentation to government and relevant authorities on capacity building of the market, provision of affordable houses for all Nigerians; and contribution of the market to the nation’s GDP.
The pension Reform Act 2004 did not specify the percentages of the total fund that should be invested in the mortgage market and no mention was made of the type of mortgage institutions that can benefit from the fund, as in the case in the capital market investment. Also, preferences for areas of mortgage investment that will benefit contributors were not stated in the law and neither was the extent of responsibility of practitioners defined in the law. The development of mortgage products that will absorb the anticipated, large long term funds is lacking, even as knowledge gap in the industry, poor quality jobs, inconsistent government policies and political crisis persist.
To address the isolated challenges, professionals should form a consortium that will produce a blueprint of how the long term fund should be applied by PMIs and other relevant operators to enhance economic development, avoid loss of pension fund as well as benefit contributions and operators. Such consortiums will make representation to PenCom to facilitate their roles under the new pension reform. Investment in this sector recommended for good returns, storage of value, capital appreciation, a hedge against inflation and a perfect match for long term pension funds. The supervisory authority should state clearly the proportion of the fund that should go into investment in the mortgage market to enhance adequate planning in the sector.
8.0 OBSERVATIONS, RECOMMENDATIONS AND CONCLUSION
Although the 1999 Constitution does not expressly provide for the right of housing in Nigeria, housing has in the recent times been given a pride of place in the scheme of the political programmes by all the three tiers of governments in the country but most especially by the states and the federal governments. This can be explained by the various housing policies of both the state and federal and number of housing programmes embarked by these tiers of government under the national housing policy of 1991. Cheap and affordable housing was expected to be provided for all Nigerian by the year 2000. The success of this policy was hinged on three major strategy amongst which was access to cheap money to finance real estate development, particularly housing. It is therefore unfortunate to observe that the Act that did not specify that proportion of the pension scheme funds that should be allocated to real estate development. The Act did not also prescribe the rate of interest to be paid by investors borrowing from the scheme for housing purposes.
It is therefore recommended that the government at whatever tier should see housing as a social need of the people, which it has to provide or give serious priority. According to a World Bank report “the Urban Poor, typically housed in slums, squatter settlement, often have to contend with appalling overloading, bad situation and contaminated water. The sites are often illegal and dangerous, forcible eviction, floods and landslides and chemical pollution are constant threats. The young ones are highly susceptible to disease and malnutrition and poverty related illness can cause permanent harm …”. The above World Bank report on housing depicts what is obtainable in most Nigerian cities and in order to give housing the type of attention it deserves and to ensure the provision of adequate and affordable housing for its citizenry, the government should amend the Pension Reform Act of 2004 to reflect the following:
a. To allocate, say, 25 – 40% of the scheme funds at any given time to be borrowed to investors in real estate development by so doing a substantial amount of the fund would be made available to the provision of housing.
b. To peg the interest rate for fund borrowed from the scheme for housing to a single digit By so doing the sources of fund for housing would not only be attractive to investors but would also provide cheap sources of housing fund as envisaged by the housing policy of 1991.
c. The government as part of its social responsibility to the people should use a large portion of the interest generated from investment of the schemes funds for he provision of affordable housing for the very poor in the society.
With the above, the pension funds would not only serve as a major source of finance for housing development, the government could also see it as free money for housing provision for the teeming homeless Nigerians.
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