PFAs’ returns to drop on new commercial paper policy

Pension Fund Administrators (PFAs) are likely to see a reduction in returns from commercial papers (CPs) following policy restrictions by the National Pension Commission (PenCom).

The updated regulations issued by PenCom on commercial papers in December 2024 mandate PFAs to invest only in A-rated companies. PFAs willing to invest in B-rated companies must do so with guarantees.

The challenge, however, is that A-rated companies are usually multinationals which often do not issue CPs. This means that several PFAs may not be able to invest as much as they did in the past years due to the policy.

“As PFAs struggle to navigate the tighter market conditions, the policy is likely to impact the overall performance of our portfolios because we are being forced to seek alternative investment opportunities that have lower returns,” a chief finance officer (CFO) in one of the top PFAs, who pleaded anonymity, said.

According to the CFO, “We are likely to lose returns from that space, which has seen tremendous growth in allocation over the past two years.”

He said the shift is expected to have a major impact on PFAs’ participation levels in the market and possible returns from that segment of the market.

According to analysts at Pension Fund Operators Association of Nigeria (PenOp), Nigeria’s pension funds significantly increased their allocation to commercial papers to N262.79 billion in 2023, though their investment dropped to N161.16 billion in 2024.

According to PenOp, the high-yield environment has made commercial papers attractive for pension funds, even though it increased the cost of borrowing.

“This instrument still represents an important asset class for pension funds and a veritable source of capital for corporations,” PenOp said.

Oguche Agudah, chief executive officer at PenOp, said pension funds are increasingly turning to commercial papers as a viable investment option due to the high interest rate environment.

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“With interest rates on the rise and economic conditions creating a high-yield environment, these funds are seeking higher returns to meet their short-term obligations.”

Agudah described commercial papers as short-term debt instruments, usually between 90 and 270 days, meant to help businesses meet short-term operational or capital obligations.

“It offers a promising alternative to traditional bond markets, which may no longer provide the same level of returns.”

Requirements in full

PenCom recently released additional requirements for PFAs investing in CPs. It said that the decision was taken to enhance risk management in the investment of pension funds.

PenCom noted that PFAs can only invest in CPs issued by corporate entities with a valid minimum credit rating of ‘A.’

The 20- year-old regulator further said that investments in CPs issued by corporate entities with a credit rating of ‘BBB’ may be considered if they are guaranteed by an agency backed by a sovereign entity, a multilateral development finance organisation (MDFO) with a minimum credit rating of ‘A,’ or a commercial bank with a minimum credit rating of ‘A.’

‘Clipping’ the market

Some analysts believe that these new requirements will further crowd out financing for small firms who are already struggling with high interest rates on loans from banks.

“PenCom is going to clip this market. Only a few big names will have it good with this latest development, and it means that the cost of capital will be higher for smaller companies and relatively lower for the big companies, ” Abdulrauf Bello, portfolio manager, Cowrywise, said.

In 2024, Nigerian companies faced funding squeeze as investors flocked to high-yield government debt instruments.

Sanitising CP system

Michael Oyebola, an analyst at Moneycounsellors, said that the previous commercial paper regime was a free-for-all, noting that while the issuing houses did a good job trying to protect the safety of funds, it was difficult in Nigeria’s current environment for such stringent rules not to be put in place.

“It is important to sanitise the system and enforce certain rules and regulations to make sure that the issue has been complied with. Once the issue has been complied with, then they will relax a bit of the rules.”

Oyebola further said that though smaller businesses need facilities and are at risk of being crowded out, the rules are needed. He hinged his reason on smaller businesses’ vulnerability to payment defaults.

He however noted that the rules will not affect the returns on pension funds as there are other high-yield instruments to invest in.

“In terms of whether it will affect rates, no, the market is competitive enough. They also invest in other instruments, which include treasury bills,” he added.