Leadership (Abuja)
Jerry Uwah
25 March 2008
column
Abuja — The pension reform which was passed into law in 2004 is one of the few sensible decisions taken by the administration of embattled former President Olusegun Obasanjo.
Even before the pensioners start cashing their cheques at various banks at the end of their service to their different employers, the positive effects of the fund is already being felt in the nation's capital market.
It is also yielding dividend in the nation's hitherto comatose mortgage industry. The fund has provided invaluable long-term fund for onward lending to credit worthy developers who have in turn reactivated the mortgage industry. As at the last count a few weeks ago, the fund had netted a whopping N860 billion and is still counting. If administered in accordance with guidelines set down in the statute books, it would not only save us the primitive practice of subjecting our senior citizens to the humiliation of having to queue for months for pensions that hardly come by; it would also create a larger pool of long-term fund that could be tapped to finance key infrastructure projects.
Perhaps, it is in the capital market that the effect of the fund is being felt most. The Pension Act of 2004 stipulates that 35 per cent of the fund be invested in equities quoted in the Nigerian Stock Exchange (NSE). The architects of the law were very conscious of the fact that the fund was not only a long-term fund but the life line of millons of senior citizens which cannot be toyed with. They, therefore, built into the enabling act, several checks and balances that would curb the excesses or misadventure of the fund managers.
One of such checks and balances is the provision that even in the capital market, the fund can only be invested in stocks with good history of dividend payment. Consequently, for a stock to be qualified to attract pension fund investment, the company would have been paying dividend consistently for five years. In the NSE, there are only 25 stocks with such history of dividend payment, and that is where all pension fund managers are scrambling to pitch their tents. The law forbids fund managers from investing their funds in private placements, no matter how viable the company is.
They are also not allowed to start new businesses with the fund. Besides, they cannot invest the funds in capital markets off the shores of Nigeria. Because of those stringent measures designed to protect the Nigerian pensioner, something close to N300 billion is chasing just 25 stocks in the NSE now. Some capital market operators are convinced that the market is over-heating as a result of the pressure from excess liquidity in the system, especially from the pension fund. Although no one expects the type of financial meltdown in Wall Street that consumed America's largest investment bank, there are fears that most of the stocks in the NSE have attained market prices that could no longer be justified by their dividend pay outs.
The current price levels at the NSE is sustained by liquidity rather than market fundamentals. For instance, a recent report by a team of examiners sent to examine the books of Wema Bank indicated that the fundamentals of the stock could not sustain the N15 per 50 kobo ordinary share which the stock rose to just before the management of the bank filed application to source funds from the capital market.
The bank had not paid dividend for two years. Even the profit it declared when it was eventually compelled by the regulators to hold an annual general meeting has now been found to be paper profit. The report traced the hype in the bank's share price to manipulation by its management which pumped money into the stock broking firm which is a subsidiary of the bank for the creation of artificial demand which hiked the price of the stock.
Since the bank has been churning out losses in the last three years, the share price could only appreciate through a combination of artificial manipulation and pressure from excess liquidity in the macro economy. Wema Bank may be an extreme case of glaring instance of fraudulent manipulation of prices, but there are other stocks whose prices have been inadvertently pumped up by the excess liquidity in the system. Julius Berger and Costain West Africa are two instances of stocks that have reached prices that cannot be justified by their dividend payout history. As at the beginning of last week, JB as the company is fondly called by shareholders and other stakeholders, was trading at N132.35 per 50 kobo ordinary share, while Costain West Africa was trading at N75.20. Ironically, the price earning ration of the two construction giants had sailed perilously close to unprofitable levels.
The PE ratio of Costain was 70.28 while that of JB was 28.20. The lay man's understanding of those figures is that with the dividend payment history of those two companies, it would take a minimum of 70 years and 28 years respectively for an investor to recover what he invested in a 50 kobo ordinary share of each of the companies. Even loss-churning stocks like Eterna Oil at a certain point rose to N61 before it crashed to N52 last week due to profit taking by some speculative investors and the recall of funds by some banks to balance their books for the end of financial year.
The NSE as presently constituted has become something of a speculators market. Unfortunately, pension fund managers sit on long-term funds that cannot be gambled with the way speculators do. In other words, they depend more on dividend than capital gains. The picture painted above shows the commencement of a sharp decline in return on investment in the NSE in terms of dividend pay out. A stock like JB has never paid more than 50 kobo as dividend. Even with the hype in activities in the construction industry, no one expects the company to pay more than N1. The loser in the emerging decline on returns on investment in terms of dividend pay out in the NSE is the pension fund manager.
Right now, pension fund managers are in dilemma on where to invest their money for reliable and reasonable yield. The way out of the dilemma is to amend the Pension Act of 2004 to allow fund managers a wider room for manipulation in terms of investment avenue. There is nothing wrong with allowing pension fund managers to invest in off shore markets. If foreign fund managers could trust the NSE enough to invest their funds, there is no reason why we cannot invest in their own markets which are even more firmly established.
Another area of viable investment is private placement. There are a number of well managed companies in Nigeria that are not quoted in the NSE. One such company is the West African Milk Company (WAMCO). The company is firmly in the hands of foreign managers who deliver good returns on investment. The Act could be amended to set stringent rules on how to invest pension funds in private placements for good returns.
MTN Nigeria, the profiteering GSM network which has become notorious for poor services and huge profit, is well managed and profitable enough to be trusted with pension fund. The company recently raised $1 billion in private placements. An amendment to the act should allow fund managers to invest in such unquoted companies.
In the final analysis the current over-heating of the Nigerian capital market is, not only the function of macro-economic liquidity over-hang. It has to do with an acute dearth of investment avenues in the country engendered by decaying infrastructure and a hostile investment environment. The high mortality rate of new ventures in the land has discouraged investors from starting new businesses.
Consequently, everybody is scrambling to invest in the few that are seen to be making it. The NSE presents a reliable yardstick for measuring the performance of corporate bodies, hence the hot scramble by investors to have a piece of the cake. The long-term solution to the over-heating of the capital market lies in the federal government fixing the infrastructure and making it attractive for people to start new ventures.
Besides, the Pension Fund Act must be enforced to the letter. The Pension Commission PENCOM is currently in a deep slumber. Less than 10 per cent of the firms mandated by law to register for the scheme have done so, The rest have blatantly trample upon the law with impunity. PENCOM should be wakened from its slumber to enforce the law by compelling recalcitrant employers to invest in the future of those who toil for them.
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