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Q&A: Why PenCom issued regulation on investment of pension fund

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The National Pension Commission (PenCom) has issued regulations on the investment of pension fund assets. PenCom’s Executive Director, Aisha Dahir-Umar, answers Pension Fund Administrator (PFA) questions about investing in pension funds.

Pension Fund Managers invest all contributions made under Contributory Pension Plans (CPS) for the purpose of safety and fair return on investment. What will guide his PFA investment decisions under the CPS?

All Licensed Pension Fund Managers (LPFOs) are expected to conduct their investment activities in line with the requirements of the Regulations on the Investment of Pension Fund Assets (the Investment Regulations) issued by the National Pension Board. The Investment Regulations are the reference document for all investment activities conducted by the LPFO and set out the rules and standards for investing in pension funds. Specifically, the Investment Regulations stipulate acceptable markets, acceptable instruments, quality requirements, rating requirements, and general principles for investing in pension fund assets by LPFOs.

It is appropriate to clarify that the European Commission as regulator is responsible for establishing rules, guidelines and standards for LPFO investments in pension funds. As a result, making investment decisions is the sole responsibility of PFA, based on its internal investment guidelines and governance framework. Therefore, all LPFOs are required to conduct internal due diligence prior to investing in any security or issuer in line with their investment objectives of safety and fair returns.

Pension funds and assets may only be invested in accordance with the regulations and guidelines issued by the Commission. To what extent does the PFA comply with investment regulations issued by the Commission?

The Commission has put in place oversight mechanisms to ensure proper conduct by LPFOs in the pension fund investment process. The monitoring system is intended to mitigate potential risks in LPFO investment activities and ensure compliance with investment regulatory requirements. Violations of the 2014 Investment Regulations and PRA are therefore monitored and flagged by the Commission’s Investment Oversight Division. However, LPFOs are largely compliant with investment regulations and PRA 2014 requirements in investing pension fund assets. Additionally, LPFO conducts internal due diligence when identifying and selecting investment products in order to minimize risk to its investment portfolio.

In particular, the PRA 2014 and Investment Regulations provide appropriate sanctions for violations by LPFOs in the investment process. The Commission therefore applies appropriate administrative sanctions to LPFOs that violate the provisions of the Investment Regulations.

Since the CPS’s inception, pension funds and assets have only been able to invest in certain products. What are the permissible investment vehicles for investments under the CPS?

The acceptable products/asset classes for investment by pension funds are:

1. Ordinary shares and redeemable preferred shares of listed companies: Common stock is the unit of ownership of a listed company. In contrast, redeemable preferred stock is preferred over common stock upon the payment of dividends or liquidation of the company.

ii. FGN/State/LG Debt Securities approved by the SEC:These debt instruments (bonds and Treasury bills) are issued and guaranteed by federal, state, and local governments.

iii. Corporate bonds (including infrastructure bonds, asset/mortgage-backed securities): A corporate bond is a certificate of debt issued by a corporate entity.

iv. Money market instruments: These include term deposits, term deposits, bankers acceptances issued by financial institutions, and commercial papers issued by corporate entities.

v. Open/Closed End and Hybrid Funds (including Real Estate Investment Trusts and Exchange Traded Funds): These are professional/managed investment funds that invest in securities and are tradable or memorandum listed on a stock exchange.

vi. International Bonds: These are bonds issued by eligible multilateral development financial institutions such as the International Finance Corporation and the African Development Bank.

vii. Private Equity Funds: These are designated investment capital pools for all stages of private equity investment.

viii. Infrastructure fund: A specialized investment fund that primarily invests in infrastructure companies or projects.

State governments must comply with the investment rules laid down by PRA 2014. What conditions must state governments meet in order for the PFA to invest in securities such as bonds?

State governments can access pension funds through state-issued bonds or other securities. However, state governments must comply with the provisions of the Investment Regulations. The regulation requires issuers to fully implement CPS by opening Retirement Savings Accounts (RSA) for their employees and transferring pension contributions. The state must also procure group life insurance cover that guarantees at least 300% of an employee’s salary. Other state government requirements for access to pension funds include the following minimum requirements:

1. Legislation establishing CPS should be enacted and pension contributions given the same priority as salaries.

2. Establish state and local government pension offices to coordinate state implementation of the CPS and other related pension matters.

3. Open and fund a retirement benefit bond redemption fund account with the Central Bank of Nigeria or any PFA from the date the state remits the pension contribution.

4. Must execute an irrevocable continuing payment order (ISPO) directing the Federal Accountant General (AGF) to withhold and remit monthly pension contributions to the state from the state share of the federal account allocation .

Are PFAs allowed to invest in offshore securities? If not, why?

Section 87(1) of PRA 2014 permits foreign investment of pension fund assets in accordance with regulations and guidelines issued by the Commission. In addition, section 87(2) of PRA 014 provides that, subject to existing CBN regulations, the Commission may recommend that the President approve a portfolio limit on the investment of pension funds or assets outside the territory of the Federal Republic of Nigeria. says it can. To implement the provisions of Section 87 (1 & 2) of the PRA 2014, the Commission is drafting guidelines for foreign investment of pension fund assets by pension fund managers. The purpose of this guideline is to hedge pension funds against inflation and currency devaluation and provide greater diversification to pension fund portfolios. The committee is now engaging key stakeholders, including CBN, before the guidelines are finalized.

Given inflation, the Covid pandemic and the general downturn in the global economy, what are your thoughts on pension fund investment returns over the past three years?

Despite the Covid-19 pandemic and a general economic slowdown in early 2020 and late 2021, pension funds have continued to grow due to monthly pension contribution inflows and subsequent market reaction to the early impact of Covid-19. , achieved modest growth. A steady recovery in the market began in early 2021 with the easing of restrictions related to the containment of the Covid-19 pandemic. The economy grew by 3.41% in 2021 compared to his 1.92% annual contraction in 2020. However, inflation remained a concern due to constant disruptions in the domestic food supply chain and expansionary government policies. In early 2022, the global energy crisis triggered by the conflict between Russia and Ukraine put exchange rate pressure on the Nigerian economy.

Pension fund assets over the past three years have been primarily invested in traditional fixed income assets and equities as the alternative asset space has been relatively stagnant. The pension fund has recorded an average return on investment of 13% over the past three years (2019-2021) and recorded the highest return in 2020 of 17.59%. Given the long-term investment horizon, the fund is expected to outperform inflation. Moderate growth in pension funds is expected to continue. At the same time, the industry is focused on increasing allocations to alternative assets to mitigate the effects of inflation and provide contributors with reasonable returns.

How has the PFA ensured the safety of pension funds while investing in various instruments across the financial markets?

The overall investment objective of pension funds is to ensure safety and fair investment returns. The PFA is expected to act as a fiduciary of the pension fund assets under its control and to follow the directions of the Investment Regulations in its investment activities.

What steps is the Commission taking to prevent PFAs from ignoring the Commission’s investment regulations and global best practices in investing in pension funds?

The CPS institutional framework allows for the separation of investment and custody functions between the PFA and the Pension Fund Custodian (PFC). Under this arrangement, PFA and PFC submit daily returns on their investment portfolios to the Commission. The Commission therefore ensures that the investment of pension contributions is safe by daily monitoring investment decisions made by the PFA to ensure compliance with the 2014 PRA and investment regulations.

The PFA presents the daily returns of its investment portfolio to the Commission via its Risk Management and Analysis System (RMAS). RMAS is a supervisory application for monitoring LPFO investment activity. The Commission reviews returns transferred by the PFA to ensure that investments are being made in line with investment guidelines to ensure the safety of pension fund assets.

It is worth noting that investment regulations set limits (globally, by issuer and security) to ensure adequate portfolio diversification and mitigate potential concentrations and market risks. Per-issuer limits are specifically intended to limit a pension fund’s exposure to a single issuer, in line with the core objectives of pension fund investments. In addition, corporate and security rating reports are important risk management tools deployed within investment regulations to determine an issuer’s ability to repay its debt at maturity. Therefore, PFAs are required to invest in pension assets based on the credit rating of the company/securities and to conduct due diligence on their investment activities. In addition, investment regulations have strict provisions that guarantee ring-fencing of assets and only allow investment in instruments with minimal risk. Investment regulations prescribe these requirements to manage counterparty risk.

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