ABSTRACT
The housing finance component of the housing system has remained an intractable component of Nigeria’s funding development debacle. The absence of adequate long term law interest funds has continued to deny low income earners, the chance of owning their own houses. Over the past three decades, there have been a number of policy attempt at improving access to affordable housing finance which have all been unsuccessful.
However, when the pension reform Act, (2004), was designed into law in the middle of 2004 both government and housing sector stakeholders expressed options that a long term pool of find beneficial to housing finance and development would at last be created. This study therefore appraises the provisions of the Act with particular reference to housing finance as well as the immediate and potential impact that it will have in the housing sector. The study also examines the extent to which the pension reform act, 2004 has been implemented.
While the potential for increased funding to the housing sub sector are truly enormous, it is still a negligible fraction of the essential National housing funding gap. The infrastructure to fully utilize this potential is not also yet in place. The limitations on the means through which pension funds translate into housing finance and regulations on how, have seriously obscured the value of the reform in-terms of benefit to the average law income earner.
The pension reform act, 2004 is laudable in its potential for providing a long term pool of funds for the entire economy. However, a multi-sectoral approach tackling retrogressive legislative provisions such as the land use Act, amending the PRA 2004 act itself as well as providing an enabling environment for the take off of the secondary mortgage market is urgently required if the reform Act will substantially beneficial to the housing sector.
TABLE OF CONTENTS
Title page
Abstract
Table of contents
Introduction 1
Definition 2
Reasons for pensions 4
Objectives of pension fund 5
Pension funds as a source of finance for housing 7
Summary 12
Recommendations 13
Planning implications of the pensions section reform 13
Conclusion 14
References 15
INTRODUCTION
Real estate development is said to be characterized with large gestation period, huge capital requirement and it demands proper and adequate funding to make it realizable. Developers a times find it difficult to raise the required capital for housing, as such recourse are made to borrowing from financial institutions. To procure capital and credit from financial institutions meets with problems of affordability, security recoverability and viability under a harsh macro economic climate in this country (Okoror, 2000).
In recent time, securing finance from financial institution has become problematic by reason of almost impossible pre-qualification requirement imposed on borrowers. As pointed out by Omirin (2004), the short term investment opportunity in the foreign exchange market has also made it more difficult for financial institutions to grant loan for real estate development which is basically on long term basis. Perhaps, this is due to the finds available to financial institutions which are obtained on short term basis. The problems associated with the available sources of housing finance, no doubt calls for an alternative source that will give no or little problems to barriers and suit long term finance that housing required.
The objective of this term paper is to analyze how pension fund has been able to provide finance for housing
DEFINITION OF TERMS
What is housing: Housing according to the principles of land use economics (A. O Oyebanji October, 2003), in his book he defined housing as a shelter together with the surrounding environment of a house made up of roads, drainage, electricity, water supply and open spaces. Housing had been expressed to be more than mere shelter but to include all those facilities that make the environment a livable one (NHP, 1991).
The Nigerian National housing policy defines housing as the process of providing fundamental shelter in a proper setting in a neighbourhood supported by sustainable maintenance of the built environment for the day to day living and activities of individuals and families within the community.
What is finance: The term “financing” refers to the process of obtaining funds or capitals generally for the purpose of supporting a development and/or investment by gaining control over assets.
The most notes worthy aspect of real estate development is finance (Okoli, 1986). The reason for this is not far fetched, real estate development requires huge amount of capital for its completion and coupled with time needed before new development start to satisfy the need for which they were built. Finance is pecuniary resources used in the acquisition of goods and services either for consumption or for the production of goods and services. It is the engine of any sector of the economy and housing provision is not an exception. Adibua (1979) observed that a well conceived grandiose architectural design will perpetually remain a paper dream if there is no finance to transform the design into concrete. Same believed that the tangiest bundles in the development of real estate are finding capital. Thus, money is the game in real estate development, the goal therefore is to source for it.
The issue of finance in housing provision is the most important factor that ultimately determine the success or otherwise of any type of estate development. No matter how simple or sophisticated a project may be, whether it is a private dwelling or a public, roads construction project, without the solid financing arrangement it will remain unachievable. Financing determines the marketing policy for the finished products.
However, because of inadequate finance form the government in the provision of housing for the people, various means have been adopted in order to raise revenue for housing/real estate development hence there may be reasons why there is no good housing finance sector; these are
a) A majority of the population is simply too poor to save in a bank or
b) The population does not trust the banking system or
c) The bank do not want to lend money for housing or
d) The banks are only prepared to lend for a short period of time or for small portion of the house price. Interest rates have an be enormous on the cost of a house purchase and interest rates depend on the economic situation in the country. Long term borrowing (such as mortgage loans) requires long term lending which is often not available in developing countries, because pension’s funds and other long term investors are small or non existence.
Nonetheless, some convectional sources of housing finance/real estate development finance have been established in order to solve the problem of fund for housing finance.
Emoh (2001), Ratclifee & Stubba (1994), Omerin (2004), identified convectional sources of finance to include:
(1) Equity funds,
(2) Loans from banks,
(3) Insurance companies,
(4) Developer’s funds,
(5) Pension’s funds,
(6) Various employers loan scheme.
REASONS FOR PENSION REFORM
1) Most scheme were under funded or unfunded
2) Unsustainable outstanding pension liabilities
3) Weak and inefficient pensions administration
4) Demographic shift and aging make defined benefit scheme unsustainable
5) Most workers in the private sector not covered by any form of retirement benefit agreement
6) Scheme not regulated
OBJECTIVE OF PENSION FUND
The establishment and objectives of contributing pension scheme for employee in the public and private sectors are as summarized as follows in accordance with Pensions Funds Act 2004
1(i) There shall be established for any employment in the federal republic of Nigeria, a contributory scheme for payment of retirement benefits of employees to whom the scheme applies under the act
(ii) Subject to section 8 of this act, the scheme shall apply to all employee in the public service of the federation, federal capital territory and private sector
(a) In the case of the public sector who are in employment?
(b) In the case of private sector who are in employment in an organization in which there are 5 or more employees in employment in an organization
2) The objectives of the scheme shall be
(a) Ensure that every person who worked in either the public service of the federation, federal republic of Nigeria or private sector receives his retirement benefits as and when due.
(b) It is also designed to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age and
(c) Establish a uniform set of rules, regulation and standards for the administration and payment of retirement benefit for the public service of the federation FCT and private sector.
3 (i) Subject to section 3(2) as from the commencement of this act, no person shall be entitled to make any withdrawal from his retirement saving act before attaining the age of 50 years.
The major operators under the new pension dispensation in the country are the pensions fund administration (PFAs) and pension fund custodians (PFCs). The PFA manages pension funds and asset, while the PFC holds off pension funds and assets. Every employee is required to maintain an account referred to as retirement savings account in his name with any pensions fund administrator to another without adducing any reason for such transfer. The employee is however required to notify his employee of the pension fund administrator chosen and the identity of the retirement saving account opened but the employee does not have access to his retirement savings account nor have any dealing with the custodian with respect to the retirement savings account except through the pension fund administrator.
Stakeholders in the operations of the pension Reform Act, 2004 and their respective contributions to housing finance
The pension Reform Act and the potential impact it may have on housing finance depends on the synergic role of various stakeholders within and outside the pension sector. This chapter as a prelude to the analysis of existing investment trends from pension funds, seeks to examine the individual roles of these stakeholders and low their operation contribute to housing finance from pension funds. The following are the identified relevant stakeholders.
1) The national pension commission. This is the pay regulatory body for the pension sector
2) The Securities and Exchange Commission (SEC) this is the apex regulatory body for the Nigeria capital market where all the investment activities of pension funds (enclosure of investments in the real estate sector) take place.
3) The Federal mortgage bank of Nigeria. This body is the pay mortgage institution in Nigeria and as such is relevant to any study on housing finance. This is more so in terms of its statutory role of regulating the secondary mortgage market.
4) Pension funds administrators: These are licensed by PenCom can to manage pension funds. They have the payment responsibility of choice and volume of investments.
PENSION FUNDS AS A SOURCE OF FINANCE FOR HOUSING
Pensions fund came about as an alternative to the National Housing Fund. It was established on the 25th June 2004 as enacted by the National Assembly of the Federal Republic of Nigeria. The reform in the pensions industry is one the major reforms the federal government of Nigeria embarked upon in recent time after many years of calls for the regulation of the industry by APFN. The reform will provide for a regulatory body called National Pensions Commission (PENCOM) who will provide regulatory framework and guidelines for efficient management of pension fund in Nigeria.
Pensions fund as source of finance for real estate development are not yet well developed in Nigeria. Pension’s funds are significant providers of long term finance for capital investments in developed countries. The income derived from such loan investment in accordance with the policy of the pension fund would be to cover the cost of servicing the funds and to meet the demand of the contributor when they retire. Conventional wisdom holds that pensions reform from Pay As You Go to fully funded system spur the development of stock market through a corporate governance channel ie. Pension fund became large shareholders of publicity traded firm and therefore have the incentives to monitor, manage and improve investors protections. Though pension’s funds are not yet large shareholders of publicity traded firm in developing countries. However, econometric results suggest that pension’s reform lead to stock market development but do not allow us to identify and separate the corporate governance channel.
The important and magnitude of the housing problem is a well documented topic. A vigorous and buoyant housing sector is an indication of a strong programme of National investment and is indeed the foundation of and the first step to future economic growth and social development (Ajanlekoko, 2001). However, in spite of the above, the Nigeria housing sector performances has been pathetic. Peterside (2005) classified Nigeria’s drive toward “housing for all” so far as an uphill test that seems more of an illusion than reality. He said successive effect to meet every set target have failed as housing deficit nor stand at over 16 million unit in Nigeria. How Nigeria will offset the huge finding gap required for housing development has agitated the mind of government and other stakeholders in the housing sector to no small measure as various attempt and subsequent failure by successive fed governments of Nigeria at tacking housing finance is well documented in literature. Some of the initiatives included the taking over by government of Nigeria building society (NBS) in 1970 with the aim of mobilizing long term funds for lending to deserving applicants while expanding services to all part of Nigeria (Ogime, 2006). The NBS metamorphosed into federal mortgage bank of Nigeria (FMN) which was conferred with powers to carry out both primary and secondary mortgage finance. In 1991, the federal government launched the National housing policy which was the first attempt to provide a codified framework to guide government intervention in the housing sector, however other institutions have been established in order to provide a long term loan to mortgage institution for on lending to contributor to the fund and encourage property development.
According to Lemo (2008), it is incontrovertible that the national housing fund has proved inadequate to meaningfully address the housing need of the country. the aim of the NHF is to provide mortgage loan for an average worker for a decent accommodation but the readily on ground seems to be that the number of beneficiaries of the scheme is far below the expectation of the workers and the resources available to the NHF which has prevented WHF from making the desired impact as envisaged (Ogun 2006). In 2004, the Nigerian government embarked on reforms that replaced the then prevailing Pay As You Go system with the defined contributory pension scheme because in the past the various scheme were largely unfunded, pension obligation were unsustainable and majority of Nigerians were not covered by any form of scheme. Pension commission official reason for reforms states simply that the Pay As You Go defined benefit scheme that is currently operated on Nigeria is burdened with a lot of problems and increasingly became unsustainable against the backdrop of a huge deficit, arbitral increase in salaries and pensions as well as poor administrative structures, the need for pension reform became glaring.
The new pension scheme, according to the National Pension Commission is contributory, fully funded and based on individual account that are privately managed by Pension Fund Administration (PFA), with the Pension Fund Assets held by pension fund custodian (PFCs). As a contributory scheme, employees contribute 7.5% of their basic salary, housing and transport allowances while their employees make up the additional 7.5%. Being fully funded means contributions are deducted immediately from the salary of the employee and transferred to the relevant retirement savings account. By so doing, the pension find exist from the asset and payment will be made when due. The individual accounts are known as retirement saving account (RSA) and are held by the employee’s chosen PFA.
It remains with the subscriber for life and can be transferred to a different PFA if the need arises but the employees may only withdraw from this account at the age of 50 or upon retirement thereafter. The major difference between the pension system and the 2004 pension reform act are tabulated below:
Differences | Old system | Pensions reform act 2004 |
| Type | Largely defined benefit | Defined contribution |
| Funding | Mostly unfunded and PAYG | Contributory and fully funded |
| Membership/coverage | Voluntary in private sector | Mandatory for all employees |
| Pension portability | Non portable | Personalized and very portable |
| Management | Largely state and management union influenced | Public sector and individual choice |
| Supervision | Fragmented and unregulated | Strictly regulated by PenCom |
| Pension liabilities | Implicit and not transparent | Explicit thorough retirement bond and capped |
| Tax exemption | Limited | Contributory and retirement benefit |
| Retirement benefits | Discriminatory | Uniform Application |
From the table, it is shown that there are more than 10 areas of differences between pre-2004 reform act pension scheme and the reform act itself. Largely, the Act is to address area of deficiencies in the old system. However, the most significant areas of departure are in the areas of funding, private sector involvement fund management and regulation. The previous scheme had become characterized by under funding, unsustainable outstanding pension liabilities and a very weak and inefficient form of administration.
Operationally pension funds collection started in February 2006 and in less than 2 years, it is potentially made available a whole lot of fund to the housing sector compared to the national housing fund by 2005 after about a decade of contributions (Lemo, 2008).
Effect on cost of finance: Funds sourced from the pension sector will ultimately be cheaper than those in the banking sector if a secondary mortgage market can be developed. The benefits of mortgage backed securities that are easily tradable will force cost of housing down.
Implication of the shortfall in servicing the housing funding cap: no single solution will ever effectively tackle housing development. However as is the case with all systems, input into the system affects not only the components in the system but also the output of the entire system. An accelerated injection of pensions fund into Real Estate in the manner will jump start housing development in a way that will positively affect other components such as policy, construction etc.
SUMMARY OF FINDINGS
This study established that previous attempts at tackling the housing debacle such as the national housing fund have proved grossly inadequate. NHF contributed little in addressing the housing needs of the nation. The failure of this attempt has made the development of a vibrant secondary market linked to the capital market imperative. The pension reform act was viewed as a real opportunity at creating the kind of long term pools of funds that sectors like housing in particular can benefit from. The research also looked at the regulations governing the act with respect to the housing sector.
However, while the pension reform act has the potential to significantly impact housing finance, there is yet to be any substantial effect years into the operation of the scheme. There has not been any significant benefit to the housing section from the pension sector 5 years after reform were introduced.
Lastly, even with huge funds coming in from the pension sector into housing, the percentage of the housing funding gap that can be effectively serviced exclusively by funds from pension is negligible.
RECOMMENDATIONS
Since one of the expected micro economic benefit of the pension reform act 2004, is the creation of long-term pool of funds, there is need to review and amend the act to take care of a number of issues that has and will continued to limit its effectiveness in this respect if unchecked. Since, it has been established that pension funds cannot possibly take care of more than a little fraction of nations funding gap, other ways of reducing this gap corporative approach to housing delivery etc must also be looked into simultaneously.
PLANNING IMPLICATIONS OF THE PENSIONS SECTION REFORM
There is a need to broaden the scope of the Reform Act to effectively accommodate over 80% of the country’s workforce that are presently excluded from the scheme as it is being implemented now. If a significant advantage of the reform is of availability of a pool of long term fund, then a large segment of the populace should not be ignored. There is need to train more planning professionals with a multi disciplinary approach to housing problems.
CONCLUSION
With the introduction of Pension Reform Act in 2004, the government of Nigeria had adopted a solution proffered by the World Bank in tackling its growing population problems. This development was viewed as having direct & indirect implication for other sectors such as housing. A successful implementation of the reform will result undoubtedly into a pool of long term funds demanding investment outlets.
The housing sector tends to benefit if properly positioned and aligned with other relevant sectors of the Nigerian economy.
REFERENCES
Emoh F. I (2001): Real Property Investment and Management, A Publication of Christon International Company Limited.
Lemo, T. (2008): How Sector Can Boost Its Performances” Retrieved on March 19 2008. From http://www.guardiannewsngr.com/homesproperty/articles
Ogwu, D. (2006): Solving the mortgage loans affordability question in a mortgage market. A case study of National Housing Fund (NHF). A paper presented on sustainable mortgage market for effective home ownership in Nigeria, November 22, 2006.
Omirin, M. M. (2004): “Securitization and Real Estate Investment in Nigeria” Paper Presented at the 30th conference at Muson Centre. Onikan, Lagos.
Oyebanji, A. O (2003): Principles of Landuse Economics
Pension Funds as a source of Housing Finance on Real Estate Development in Nigeria, An Unpublished works, November, 2008
Peterside, S. C (2005): “Ameliorating Housing Deficit in Nigeria” The Role of Pry & Sec. Mortgage Institutions and the capital market” Retrieved on 19th March 2010 from http:// Nigeriaworld.com/ feature/ publication/ Peterside2005.