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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.