The National Pension Commission (PenCom) has granted a 24-month regulatory forbearance which allows Pension Fund Administrators (PFAs) to invest in securities issued by the parent companies of their respective Pension Fund Custodians (PFCs).
In the latest regulatory guidelines, issued a few months after it released the revised pension investment regulations, the commission indicated that the forbearance was designed to provide PFAs with greater portfolio flexibility, expand the universe of eligible investments, and improve diversification while supporting the generation of optimal risk-adjusted returns for pension contributors.
The statement partly reads: “The Commission hereby extends its existing regulatory forbearance to permit Pension Fund Administrators (PFAs) to invest in a broader range of securities issued by the parent companies of their respective Pension Fund Custodians.
“This measure would enhance portfolio flexibility and broaden the investable universe, enhance diversification, and improve PFAs’ ability to achieve optimal risk-adjusted returns in line with their fiduciary obligations”, the commission added.
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Under the framework, only parent companies of Pension Fund Custodians (PFCs) that are licensed financial institutions regulated by the Central Bank of Nigeria (CBN)will qualify for investment.
In addition, the eligible companies must also be publicly listed on a securities exchange recognised by the Securities and Exchange Commission (SEC) and have strong financial health, including a history of profitability, dividend payments, regulatory compliance, and the absence of unresolved enforcement actions.
According to the Notice, the PenCom introduced specific investment caps across different asset classes and pension fund categories in order to manage concentration risks.
A further analysis of the regulatory guidelines showed that for equity investments, PFAs may invest up to 3% of pension assets in the ordinary shares of a qualifying PFC parent company for Funds I, II, VI-Active and V-Growth, while exposure for Funds III, IV, VI-Retiree and V-Conservative is limited to 1%.
In addition, for corporate bonds issued by eligible parent companies, exposure is capped at 5% for higher-risk funds and 3% for conservative and retiree-focused funds.
The commission further required under the framework that total exposure to a PFC parent company’s equities and bonds cannot exceed 5% of a Retirement Savings Account (RSA) fund’s consolidated net asset value (NAV), while overall exposure to all securities issued by the parent company, including money market instruments, is capped at 10%.
The Commission also restricted investments in lower-rated debt instruments, limiting exposure to 20% of any “A”-rated corporate bond issue and 15% of any “BBB”-rated issue issued by a PFC parent company.
The PenCom stipulated in the framework that PFAs must implement enhanced governance controls before making any investment under the forbearance arrangement, while proposed investments must undergo independent review by the Investment Committee, Risk Management Unit, and Compliance Department of the PFA, just as the final approval must be obtained from the board.
In addition, the Commission directed PFAs to maintain a dedicated PFC-Party Conflict Register and submit quarterly disclosures detailing holdings in PFC parent companies, including acquisition dates, valuations, and portfolio exposure levels, and that audited financial statements must also clearly disclose all exposures to contributors.
The PenCom further directed that any breach of investment limits or any material financial distress involving a parent company must be reported to it within 48 hours, stressing that all investments involving PFC-related entities must be conducted at arm’s-length terms and be subject to the same fiduciary standards that apply to all pension assets.
Analysts believe that the latest forbearance by the commission could help improve market liquidity by allowing PFAs to allocate pension assets to qualifying shares, corporate bonds and money-market instruments, among other potential benefits.
