The National Pension Commission (PenCom) has introduced stricter guidelines for Licensed Pension Fund Administrators (PFAs) investing in Commercial Papers (CPs). This move aims to enhance risk management while safeguarding pension fund assets, following concerns over the inherent risks of CP investments.
A commercial paper (CP) is a short-term debt instrument issued by a corporation or financial institution and large corporations as an alternative to costly methods of funding.
In a circular on the commission’s X handle (Ref: PenCom/TECH/ISD/2024/403) issued on December 3, 2024, PenCom emphasized the need for due diligence in evaluating prospectuses and offer documents in line with Section 2.9 of the Regulation on Investment of Pension Fund Assets.
Under the updated guidelines, pension funds can only invest in CPs issued by corporate entities with a minimum credit rating of ‘A.’ However, investments in CPs with a lower credit rating of ‘BBB’ are permitted if they are guaranteed by:
An agency backed by a sovereign entity, A Multilateral Development Finance Organization (MDFO) with a minimum credit rating of ‘A,’ or A commercial bank with a minimum credit rating of ‘A.’
PFAs are mandated to strictly comply with these requirements, supported by robust internal controls and documentation to demonstrate adherence.
“In line with the Commission’s commitment to enhancing risk management in the investment of pension funds, the following additional requirements shall apply when investing in Commercial Papers:
“Minimum Credit Rating:
“Pension funds shall invest in CPs issued by corporate entities with a valid minimum credit rating of ‘A’.
“Exceptions for Entities with Lower Credit Ratings:
“Investments in CPs issued by corporate entities with a credit rating of ‘BBB’ may be considered if such CPs 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’.
“Licensed Pension Fund Administrators (PFAs) are hereby advised to comply with these requirements strictly,”
Omolola Oloworaran, Director-General, PenCom reiterated the importance of CPs in facilitating corporate capital raising while acknowledging their risks. In a post on her official X handle, she stated, “@PenComNig is enhancing regulations to safeguard pension funds without disrupting capital flow.”
According to the commission, updated regulations reflect PenCom’s commitment to balancing risk management with the need for a vibrant capital market, ensuring pension funds are protected while allowing corporate entities to access much-needed financing.
Lifting the suspension on certain CP investments
PenCom announced the lifting of the October 23, 2024, suspension on CP investments involving non-bank capital market operators acting as Issuing and Paying Agents (IPAs). This decision follows the development of draft rules and amendments by the Securities and Exchange Commission (SEC) to regulate such transactions.
The commission noted that the SEC is addressing the absence of regulatory boundaries for non-bank IPAs by introducing new guidelines. With this assurance, PenCom lifted the restriction to facilitate capital raising while maintaining market stability.
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