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N3.124trn Debt Servicing May Impact Pension Accrued Right Liabilities

Pension industry experts have lent their voices to the conten­tious issue of debt servicing for which the Federal Govern­ment has provisioned a whop­ping N3.124 trillion in the 2021 Appropriation Bill currently before the National Assembly.

They said it would be counter­productive if the provision did not cover the payment of pension accrued right of retirees under the Contributory Pension Scheme (CPS).

In an exclusive chat with Daily Independent they ar­gued that the Accrued Pen­sion Right has been a conten­tious issue since the inception of the CPS in 2004 due to the inability of the Federal Gov­ernment to make adequate budgetary provision to settle the beneficiaries whose pen­sion assets were moved to the CPS.

While N501 billion is pro­visioned for pension, gratu­ities and benefits in the sub­sequent year, no fewer than 60 percent of pension fund is currently invested in the Fed­eral Government securities, bond, treasury bills, and other debt instruments.

For them, making provi­sion for the settlement of the outstanding Accrued Right in the 2021 appropriation would make more positive impact on the pension industry, agree­ing that timely servicing of debts, particularly bonds and treasury bills, would sustain investors’ confidence in those instruments.

“As earlier discussed, I have not seen the full details of the draft budget or details of the N3.124 trillion provi­sion for debt servicing.

“However, timely servicing of debts, particularly bonds and treasury bills, will sustain investors’ confidence in those instruments. As you may be aware, the PFAs have invested over 60 percent of their Funds in bonds & treasury bills.

“If the provision was to cover debts to local contrac­tors and all outstanding ac­crued rights to existing em­ployees with accrued rights & retiree, those yet to be paid their benefits, the impact on the pension industry would be phenomenal,” said Mr. Samuel Inyang, a pension expert and former manag­ing director, Oak Pensions Limited.

According to Suleiman Usman, former managing director of the now Veritas Glanvills Pensions Limited, the provision is for principal and interest payments in re­spect of total Federal Govern­ment debt exposure, as such payments fall due during the budget period.

The Pension Fund is highly exposed to FGN debt instruments, hence this pro­vision which takes account of the forecasted maturing liabilities during the period is a good indicator for the in­dustry that the government is most unlikely to default.

He noted that any default by the government would have grave consequences for the industry due to the high exposure level, adding that the amount of provision in the budget is an assurance that just as in 2020, the govern­ment is not going to default in 2021 and that the FGN securi­ties remain the most secure instruments for investment of the Pension Fund.

Analysing the budget, Mayowa Adeduro, managing director and chief executive, Law Union & Rock Insur­ance Plc, said as at Q1 2020 the Federal Government’s debt service to revenue was about 99 percent, adding that the budget projected around 37 percent of revenue for debt service.

Adeduro contended that if the revenue assumptions were not met, the debt ser­vice to revenue ratio would go up, noting that the pro­jected gross domestic prod­uct (GDP) growth rate of 3 percent was even less than the population growth rate of the country, showing that the country would become poorer per capita income.

“The Federal Govern­ment has projected to expend N3.124 trillion on debt service in 2021 from the budget of N1.308 trillion.

“This is roughly 24% of the budget size. Much as this is quite alarming, there is little which the government can do in as much as rooms to borrow exist.

“The fact remains that the government is under pres­sure to provide infrastruc­ture capable of attracting private sector investment and creating employment opportunities for millions of youths that have become disillusioned and now find solace in petty and organised crimes.”

As at Q1, 2020, the Feder­al Government debt service to revenue was about 99%. However, the budget project­ed around 37% of revenue for debt service.

“If the revenue assump­tions are not met, the debt ser­vice to revenue ratio will go up. The projected GDP growth rate of 3 percent is even less than the population growth rate of the country showing the country would become poorer per capita income.

“The implications of this huge debt service budget are that the government has very little remaining to cater for capital and recurrent expen­ditures.

“The government, like I said earlier, will keep rely­ing on borrowing. It became smarter though by embark­ing on economic repression using administrative control to force down the cost of bor­rowing far below inflation rate.

“This may allow the gov­ernment to borrow more do­mestically in the short term. In the long run, however, it will dry up savings through the banking sector,” he said.

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