No stable social environment without pension coverage for informal sector.
The informal sector is vital to our economy and deserves careful attention. In my previous article, I emphasised using microcredits to help formalise and develop this sector. Extending pension coverage to the informal sector is another critical step toward its formalisation.
In the words of the National Pension Commission (PENCOM ) itself: “The scale of exclusion of the informal sector represents a national vulnerability.”
We cannot expect a stable social environment until the informal sector achieves some form of pension coverage. The key is creating an ecosystem that drives this inclusion. PENCOM’s strategy to rely on technology for engagement is the correct approach; digitalisation is crucial for reaching this group.
The “MoniePoint” Informal Economy report clearly states that 42 percent of this group has no savings. A properly structured pension ecosystem will help them build savings, and encourage a new culture of retirement planning, for a decent life. We must not allow those who power our everyday economy to retire poor and vulnerable, simply because we failed to include them in our pension system.
PENCOM’s new effort to include the informal sector and widen contributory pension reach is a move in the right direction. This push is reflected in the name change from Micro Pensions to Personal Pensions Plan (PPP). A more appropriate and inclusive name for an easily targeted group.
The PPP is for everyone. This includes self-employed individuals, entrepreneurs, and even formal sector workers who already have an employer-sponsored plan, but choose to save more. This new, enlarged definition alone, will significantly increase the number of new pension contributions.
PENCOM’s target of 80 million contributors in the informal sector may even need to be much higher. The expanded definition, combined with digitalisation, and mobilisation, stands to bring millions more into the scheme. A simplified process and mass media sales of this scheme will yield quick results.
Mobilising long-term domestic capital.
The enduring benefits of these plans are paramount. PENCOM recently reported that its pension assets have reached N26 trillion. This amount comes from only about 10 million contributors over the last two decades. Imagine the potential when another 10 million formal-sector contributors, plus say, 20 million informal-sector contributors, are added. Mobilised capital, on this scale, means true development.
It will help finance many infrastructure projects we currently cannot fund. For instance, the railways are a major infrastructure opportunity this mobilised capital can develop. Railway transportation is not only needed in Nigeria, it is also a commercially viable long-term project, given our large population and the vast areas that railway coverage can reach. This is the type of infrastructure project to fund. It benefits everyone: the economy, the people, and the pension companies themselves.
The pensions to be paid out in 20 years, are being collected now. Matching this long tenure with the long-term development of railways, provides enough time to mitigate risks, develop a revenue model, and establish recurring revenues. Investing early in these projects can de-risk them. They can then be listed on a Stock Exchange, providing an exit for early-stage investment, with potentially huge returns.
For the last two decades pension funds have mainly invested in fixed-income government securities. It is time to diversify away from these financial securities. We can reduce the concentration risk, and add alternative real assets that will be able to produce long-term regular revenues. It should be noted that pension funds prioritise liquidity, from a sustainable source, to profits. But pension money must also help the economy in other ways.
Infrastructure financed by our pension money will support the economy and generate more employees, who, in turn, will pay more pensions. If pension companies form a consortium to push these projects, they can gradually build assets that produce steady, recurring revenues for years.
Even today, the pension industry is slow in growing. While its cautious start was necessary, it is time to properly evaluate what it can achieve with its unique long-term capital. It can use its resources to drive infrastructure development, which has positive implications for the growth of the industry and the economy. Nigerian pension companies must imitate what the banks did only two decades ago to finance projects and grow the economy. Nigerian banks formed syndications, coming together to take on large financing projects too big for a single bank. These syndications pooled skills and experience, to execute projects like financing the Styer Truck Assembly in Bauchi, the Battery factory in Ibadan, and a new chocolate line for Cadbury.
These were accomplished by small banks collaborating to create businesses. In those days, banks saw themselves as service businesses that needed to help create the businesses they would service. Our pension companies need to follow the banks’ example. They must collaborate to finance much-needed infrastructure that currently exceeds budgetary funding. It is insincere to say we must wait until we can borrow enough to fund what is needed today. The population and the problems are growing.
A creative pension industry can work with other long-term capital-rich companies, like insurance companies, to fund our railway development.
Pensions are a national imperative and must be steered in a direction that benefits all.
