PenCom’s new investment guideline seeks safety, fair returns

Pension regulatory authority, the National Pension Commission (PenCom) has released its new investment guideline, demanding Pension Fund Administrators (PFAs) to drive the objective of ensuring safety and maintenance of fair returns of the funds under their management.

The guidelines, titled ‘Regulation on Investment of Pension Fund Assets’ states that PFAs   shall   recruit   and   retain   highly skilled personnel in their investment departments.

It also stressed investment limits, stating that PFAs  shall  not  invest  Pension  Fund  Assets  in  instruments  that  are subject to any type of prohibitions or limitations  on the sale or purchase of such instrument, except for open/close-end/hybrid funds and specialist investment funds allowed by this regulation.

The guidelines also seek that PFAs shall not trade on margin accounts with pension fund assets; shall not engage in borrowing or lending of pension fund assets; and shall not trade in financial instruments with pension fund assets at prices that are prejudicial to the pension fund assets.

Other highlights of the new guidelines includes the permission to invest pension fund assets in Bonds, Sukuk, Treasury Bills, Global Depository Notes and other securities issued by the Federal Government of Nigeria and CBN or their agencies as well as Special Purpose Vehicles and Companies created/owned by the Federal Government of Nigeria, provided that the securities are guaranteed by the CBN or Federal Government of Nigeria.

The fund is also to be invested in Global Depositary Receipts/Notes (GDRs/Ns) and Eurobonds issued by eligible Nigerian corporate entities as well as Naira-denominated Depository Receipts/Notes issued by Foreign companies and listed on a securities exchange that is a member of the World Federation of Exchanges (WFE).

Pension Fund Custodians (PFCs) on the other hand may be required to establish accounts with Euroclear, Clearstream, the Depository Trust Company (DTC) or any appropriate offshore clearing platform, in order to ensure ability to provide a comprehensive and robust settlement platform for PFA transactions in GDRs, GDNs and Eurobonds.

The accounts opened with Euroclear, Clearstream, DTC or any appropriate clearing platform would work in similar manner as the Central Securities Clearing System (CSCS) used for trading domestic securities in the Nigerian market, where each PFC will maintain sub-accounts for each PFA and will hold and trade all securities related to each PFA from their respective sub-accounts.

“Alternatively, PFCs can enter into settlement and sub-custody arrangements with Trustee/Nominee Companies in Nigeria that are registered with SEC and have professional arrangement with a global Custodian Bank or member of Euroclear, Clearstream, and DTC etc,” the document reads.

Another major highlight of the guidelines is the creation of long awaited multi-fund structure for Retirement Savings Account Funds.

According to the guidelines, all PFAs shall offer the Multi-fund Structure for the RSA Fund and there shall be a transition period of 6 months, effective from the commencement date of the Multi-Fund Structure for all PFAs to restructure their respective portfolios. 

“The multi-fund Structure shall comprise Fund I, Fund II, Fund III and Fund IV (Retiree Fund). Funds I, II, III and IV shall however differ among themselves according to their overall exposure to variable income instruments.”

“The exposure to variable income instruments is defined as the sum of a PFA’s investments in Ordinary Shares and participation units of Open Close-ended and Hybrid Funds; Real Estate Investment Trust; Infrastructure Funds; and Private Equity Funds comprising its current holdings and any future financial commitments to the acquisition of participation units in these Funds.”

According to the guidelines, the maximum exposure to variable income instruments by the Fund Types, are as follows: Fund I:   75 percent of portfolio value; Fund II:  55 percent of portfolio value; Fund III: 20 percent of portfolio value and Fund IV: 10 percent of portfolio value.

“PFAs are also expected to invest in such a way that the actual exposure to variable income instruments in Fund I is higher than the exposure in Fund II. Likewise, the exposure in Fund II shall be higher than the exposure in Fund III. Accordingly, the minimum exposure to variable income instruments by Fund Types shall be: Fund I:   20 percent Fund II:  10 percent Fund III:  5 percent Fund IV: 0 percent.

Effective from the date of implementation of the Multi-fund Structure, the PFAs shall allocate contributors to various fund types according to the following criteria: Membership of Fund I shall strictly be by formal request by a Contributor; active Contributors who are 49 years and below as at their last birthdays shall be assigned to Fund II; active Contributors who are 50 years and above as at their last birthdays shall be assigned to Fund III and Fund IV shall strictly be for RSA retirees only.

Subsequent to the implementation of the Multi-fund Structure, contributors are allowed to choose the Type of Fund in which they desire to be with guiding rules.

On quality requirements of allowable instruments, the guidelines states that any bank in whose money market instruments pension fund assets are to be invested shall have a minimum credit rating of ‘BBB’ issued by, at least, two rating agencies, one of which must be a rating agency incorporated in Nigeria and registered with SEC. 

“Whilst for Commercial Papers, pension fund assets are to be invested, only if the issuer or issue satisfy the minimum requirements stipulated in the CBN Guidelines for Issuance and Treatment of Bankers’ Acceptances and Commercial Papers as well as has a minimum credit rating of ‘BBB’ issued by, at least, two rating agencies, one of which must be a rating agency incorporated in Nigeria and registered with SEC.”

“If at any time an existing investment is no longer authorized as a result of credit rating downgrade, resulting in a new rating that is not more than one grade below the stipulated minimum, the pension fund may retain such investment to maturity. But if at any time an existing investment is no longer authorized, as a result of either a credit rating withdrawal or a credit rating downgrade by more than one grade or for any other reason, the PFA shall forward its exit strategy to the Commission within 10 working days.”

“If a bank fails to fulfill the rating requirements stated in the guidelines of this regulation, the PFA shall divest itself of all money market instruments issued by the bank within the following 3 months.”

On performance benchmark, the guidelines states that the annual Rates of Return on all RSA Funds shall be publicly disclosed by the PFAs on their websites, and this shall be based on the audited financial statements of the Funds; and on a 3-year Compound Annual Growth Rate (CAGR) of the Fund.