Report exposes corporate governance abuse by pension fund managers
Category: Frauds & Scandals
September 4, 2011
In 2009, shortly after Sanusi Lamido Sanusi was made governor of the Central Bank of Nigeria, he carried out a stress test on all Nigerian banks to determine the actual cause of the nation’s financial system crisis at that time.
That test revealed that 10 of the 22 banks were white elephants with serious corporate governance compromises. The managing directors of eight of the compromised banks were sacked and subsequently dragged to court for financial misappropriation.
“In fact, failure in corporate governance at banks was indeed a principal factor contributing to the financial crisis,” Mr Sanusi said in a lecture in Bayero University Kano in February 2010.
The crises cost the nation $620 billion in bailout funds and later led to the recent nationalisation of BankPHB, Afribank and Spring Bank, three of the rescued banks.
Similar corporate governance compromises have now been noticed, creeping into the pension fund administration sub-sector.
Last year, the National Pension Commission, the regulator of the pension fund system, carried out a routine assessment of pension funds administrators in Nigeria. That assessment opened a window into questionable activities in some of the pension funds administrating companies.
For instance, in its general assessment, the commission found that First Guaranty Pensions Ltd have had four CEOs in six years. Each of these resigned due to alleged poor corporate governance and interference by the vice chairman of the company, Nze Chidi Duru. The average duration in office of the three former CEOs was one year.
Similarly, seven management staff have resigned in the past five years stating similar reasons.
The commission, therefore, embarked on a target examination of First Guaranty Pensions and its report, obtained exclusively by NEXT, reveal severe corporate malfeasance.
The report reveals how Mr Duru constituted pseudo-management teams behind the board, taking up management responsibility in the company and awarding himself more allowances and loans and shares to companies related to him.
The reports also show the PFA was run by a dysfunctional board, headed by Orlando Ojo who did not have up to five percent equity in the company. Mr Ojo had 2.33 percent, while the third member of the board, Umar El-Yakubu had 1.17 percent. Mr Duru, the vice chairman, held a collective 22.72 percent interest.
Before 2004 when the current Pension Reform Act was enacted, pension schemes in Nigeria were fiendishly problematic. The Public Service operated an unfunded Defined Benefits Scheme and the payment of retirement benefits were budgeted annually but the annual budgetary allocation for pension was often one of the most vulnerable items in budget implementation.
In the private sector, many employees were not covered by the pension schemes. This situation necessitated the enactment of the new pension scheme in 2004.
The new scheme requires pension funds to be privately managed by Pension Fund Administrators (PFAs), duly licensed to open Retirement Savings Accounts for employees, invest same and manage the pension funds.
The target assessment of First Guaranty Pensions Ltd, however, reveals that the company has gone beyond its constitutional scope of business and ventured into lending.
Between August 2008 and December 2010, Novare Holdings, a South African company who became a shareholder in the PFA, transferred a total of N224.059 million to the PFA as Novare’s equity contributions, in 10 tranches.
“A review of the records, however, revealed that the 8th tranche of N16,123,646.58 was diverted to BP Outsourcing Services Ltd and GT Retail Limited, a property company,” P.O. Aghahowa, the lead examiner, said in his report. “Both companies were related to the Vice Chairman by virtue of the fact that he was a shareholder in both.”
The diversion was on the order of the vice chairman, the report added.
“The records obtained from the PFA showed that the MD/CEO was instructed to disburse the N16.123 million by the vice chairman and the instructions, as documented by the MD/CEO, were confirmed vide an email by Derrick Roper, a Board member representing Novare,” the report added.
The company’s board, which is chaired by the vice chairman, confirmed that the said N16.123 million was a loan to GT Retail Limited. They added that it was in compliance with clause 12.1(t) of their subscription and shareholders agreement.
The board also explained that the loan was an opportunity for the company to earn income higher than the prevalent bank rates at the time, indicating that the loan was given at five percent interest while the bank rate at the time was two percent.
“If indeed the said amount of N16.123 million was a loan granted by the PFA to GT Retail as explained by the board, then the PFA has violated the PRA 2004 and one of its licensing conditions which clearly states that the PFA cannot be involved in any other business other than pensions,” Mr Aghahowa argued.
The examiners also observed that the vice chairman was collecting the sum of N5 million annually as Board Executive Allowance, in addition to the board approved N2.6 million.
“Records revealed that he had so far collected N10 million being Board Executive Allowance for two years, 2010 and 2011,” the target examination report said.
The examiners also observed that he was the only director collecting this amount.
“The PFA could not explain the rationale or basis for this allowance,” the examiner’s report said. “The PFA was also unable to provide Examiners with the Board approval for the Vice Chairman’s additional allowance.”
First Guarantee Pensions, however, said the N5 million extra allowances was paid to the Vice Chairman in 2010 and 2011 as compensation for his work on the “Board Executive Committee” – the pseudo-management team set up by the vice chairman.
According to the examiners, the fact that First Guarantee Pensions confirmed the extra allowances and justified it is indeed a confirmation that the vice chairman was part and parcel of the PFA’s management team, “an issue which had been highlighted by Examiners severally and is contrary to good corporate governance practice.”
The report also went ahead to detail other funds manipulation schemes by the vice chairman. In one of the schemes, the company was paying a board member, Novare Investments, for services not rendered.
Examiners observed that Novare Investments had been paid a total of $99,000 for “consultancy services” for three quarters.
“The basis for this payment was not clear to Examiners, as the PFA could not provide any consultancy agreement executed between Novare and the PFA in this regard,” the examiners stated.
In addition to the $33,000 quarterly payment to Novare Investments, two staff of Novare were deployed and fully engaged as staff of the PFA. One of the staff was employed as an Investment Research Analyst (IRA) while the other was the Chief Operating Officer (COO).
The Chief Operating Officer of the PFA, Hein Du Plessis, was on a salary of N15 million per annum and was entitled to 10 paid trips to South Africa in a year as well as furnished accommodation, a car and a driver.
The other Novare staff in the employment of the PFA was Pieter de Wet, who was employed as an Investment Analyst. He was on a salary of N7 million per annum and was entitled to four paid trips to South Africa in a year.
“Given the full employment status of these Novare staff with the PFA therefore, it was puzzling that the PFA was further saddled with the responsibility of paying quarterly consultancy bills of $33,000,” the report said.
First Guaranty Pensions Limited is owned chiefly by some members of the Federal House of Representatives and a few senators. Mr Duru, the vice chairman, was elected into the House of Representatives in 1999 and played a key role in the enactment of the Pension Reforms Act. But the reports detailed how he attempted to manipulate the company’s shares to favour two other companies he had interest in.
Following the examiners’ recommendation, the commission expelled the board and took over the management of the PFA.
In a letter to the Economic and Financial Crimes Commission (EFCC), some shareholders of the PFA, led by Tengu Tsegba and Patrick Asadu, both members of the House of Representatives, supported the commission’s takeover and invited the EFCC to investigate Mr Duru, as was the case with the bankers involved in compromising corporate governance practices. Some of the petitioners include Annie Okonkwo, Ibrahim Imam and Ahmed Salihu.
Mr Duru, irked by his removal, is however in court seeking redress. Efforts to reach Messrs Duru and Tsegba were unsuccessful, as both failed to pick calls made to their telephones.
But industry analysts believe the compromising corporate governance issue is not limited to First Guarantee Pensions.
An official of the commission told NEXT that the practice is widespread in the industry but the commission keeps curbing it through regular assessments.
“Chances are that it will also happen in others over time because not all of them have a clue on what to do to get the kind of return they want,” Tope Fasua, CEO of Global Analytics Consulting said.
“Corporate governance is a slippery terrain and a lot depends on whether the company wants to compromise or not,” he added. “But I think the commission is monitoring the fund managers so well that at a point they may even begin to get desperate about making money.”
Emeka Onuorah, the spokesperson of the commission, however, assured that pensioners’ funds were “very safe”.