Nigerian Bank Nigeria – New Draft Guidelines To Increase Pension Coverage

Source: Vanguard, 14 Sept.2010

Finance experts have said that the new pension guidelines may increase pension coverage in Nigeria from the currently dismal level, but that funds under the new codes would have to be properly appraised if pension funds are to be safe. Last week, Nigeria’s Pension Commission (PENCOM) released the much awaited exposure draft on the new guidelines on investment of pension funds. Pension Fund Administrators (PFA) and other interested stakeholders are expected to forward suggested amendments to the exposure draft on or before Friday, September 17, after which the draft becomes finalised and ratified by PENCOM as new set of regulations.

Highlights in the guidelines include more investment options that PFAs can choose from, as well as the proposal of a new eligibility criteria for appointments of heads of investment of the Pension Fund Administrator, which experts say may involve the commission stipulating some academic criteria in addition to the minimum experience previously required.

It also stated that principal officers of PFAs are prohibited from making investment decisions where a conflict of interest exists, and are required to report to the commission on a quarterly basis in an advised format.

Investment limits

The new draft guidelines, among other changes, gave new limits to the investments options of Pension Fund Administrators. It states that PFAs shall only invest in eligible bond/debt instruments issued by states and local governments that have fully implemented the Contributory Pension Scheme and that all bonds/debt instruments in which pension funds are to be invested, which exceeds 7 years maturity shall be inflation-indexed, though it did not specify if it included FGN issuances.

It also states that pension funds can now be invested in the following allowable instruments such as supranational bonds issued by multilateral development finance organisations, of which Nigeria is a member, subject to a maximum portfolio limit of 20 percent of pension assets under management; Specialist Investment Funds such as infrastructure funds and private equity funds subject to 5 percent of pension assets under management.

“Pension funds can be invested only in an infrastructure project situated within Nigeria, subject to maximum limit of 20 percent of funds under management,” it states. Pension fund assets can be invested in bonds/debt instruments issued by any state or local government that meets rating provisions with a maximum portfolio limit of 30 percent of pension assets under management.

“Pension fund assets can only be invested in ordinary shares of public limited companies if the public limited liability company has made taxable profits and paid dividends/issued bonus shares within the preceding five (5) years. Pension fund assets can be invested in Private Equity (PE) Funds, subject to pre-approval by the Commission” and may be invested in ordinary shares of corporate entities, subject to a maximum portfolio limit of 25 percent of pension assets under management.

Investment in money market

The guidelines states that PFAs can now invest in money market instruments of a bank, with minimum credit rating of BBB by at least 2 recognised rating agencies -- down from minimum rating of A previously. It stated that any corporate entity that issues Commercial Papers in which pension funds are to be invested shall have a minimum credit rating of ‘BBB’ by at least two recognised credit rating companies.

Room for improvement
Pension Fund Administrators were not previously allowed to directly invest in Commercial Papers without deposit money bank guarantees. This guideline now allows PFA’s invest directly a maximum of 10 percent in Commercial Papers of corporate entities, which experts say increases the depth and number of instruments available.

Renaissance Capital, an investment banking firm, says the new draft guidelines would increase pension coverage in the country. According to the firm, PFA’s investment in state and local government bonds/debts would increase pension coverage.

It, however, says the requirement for long tenured bonds and debt instruments to be inflation indexed “is novel” and adds that, excluding REIT’s, most of the investment options are all new asset classes which were introduced with the new draft. “PFA’s are now permitted to invest directly in commercial papers of corporate entities without a financial intermediary or the underlying guarantee of same.”

The firm also called for more appraisals on state and local government bonds, and other sources, if PFA’s would invest in them. “Investment in state or local government bonds must be readily marketable and must be for specific projects with direct socio economic benefits. This requires additional appraisal of state and local government bonds before investment.”

The Commission has also stated that PFAs shall henceforth pay a penalty for willful violation of approved investment limits. “Penalty shall be the value of the excess over the approved limit,” the draft stated, introducing its first penalty for wilful violation.

Nigerian Bank Nigeria