PenCom forbearance gives PFAs more flexibility to lift pension returns

The National Pension Commission’s (PenCom) recent forbearance policy is expected to give Pension Fund Administrators (PFAs) greater flexibility to optimise portfolio construction and improve long-term returns, easing mounting pressure caused by a shortage of quality investible assets despite the rapid expansion of pension funds.

With industry assets continuing to climb, the regulatory relief broadens the investment horizone, enabling PFAs to deploy fresh contributions more efficiently while maintaining prudent risk management and regulatory safeguards.

The policy circular, which grants PFAs a two-year regulatory forbearance enables them to invest in a broader range of securities issued by the parent companies of their Pension Fund Custodians (PFCs), a move expected to improve portfolio diversification and strengthen long-term returns for Nigeria’s N31 trillion pension industry.

The temporary regulatory relief comes as fund managers grapple with a shortage of high-quality investable assets in the domestic market despite the rapid growth of pension assets under management. By widening the pool of eligible investments, PenCom aims to give PFAs greater flexibility to optimise portfolios while maintaining strict safeguards to protect contributors’ retirement savings.

According to a circular and addressed to all licensed Pension Fund Operators, the Commission said the extension of the regulatory forbearance reflects “prevailing market realities,” including operational constraints within the financial system and the limited availability of quality investment instruments.

PenCom noted that the 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.”

Under the new framework, PFAs may invest pension assets in equities and other eligible financial instruments issued by the holding companies of their respective custodians, provided such companies are licensed financial institutions regulated by the Central Bank of Nigeria, listed on an SEC-recognised securities exchange, and have demonstrated strong financial performance, consistent profitability, dividend payments and regulatory compliance.

To mitigate concentration and conflict-of-interest risks, PenCom retained stringent exposure limits. Investments in the quoted shares of a custodian’s parent company are capped at three per cent for active RSA funds and one per cent for retiree and conservative funds, while exposure to bonds is limited to five per cent and three per cent respectively.

Overall exposure to equities and bonds issued by a custodian’s parent company must not exceed five per cent of a fund’s consolidated net asset value, while total exposure across all securities is capped at 10 per cent.

The Commission also strengthened governance requirements, mandating independent reviews by investment, risk management and compliance units before any such investments are approved. Boards of PFAs are required to establish dedicated investment policies governing transactions involving custodian-related entities, while conflict-of-interest registers and enhanced disclosure obligations have also been introduced.

PFAs will be required to submit quarterly reports detailing their holdings in custodian-linked entities and disclose these investments in their audited RSA Fund financial statements to ensure transparency for both regulators and pension contributors.

The forbearance will remain in force for 24 months, after which PenCom is expected to review its effectiveness and determine whether the expanded investment framework should be retained, modified or withdrawn.