Pension Fund: PenCom Monitors Operators Investment Activities To Mitigate Risks

By Bisi Bamishe

National Pension Commission (PenCom) has instituted monitoring mechanisms to ensure good conduct by Licensed Pension Fund Operators (LPFOs) in the pension fund investment process.

Director General of the regulatory body of the pension industry, Aisha Dahir-Umar made this known recently.

According to Dahir-Umar, the monitoring system is to mitigate potential risks in the investment activities of LPFOs and to ensure strict adherence to the requirements of the Investment Regulation.

She said, “noncompliance with the Investment Regulation and the PRA, 2014 are monitored and flagged by the Investment Supervision Department of the Commission. However, LPFOs have largely complied with the requirements of the Investment Regulation and PRA 2014 in the investment of pension fund assets. Furthermore, LPFOs conduct internal due diligence in identifying and selecting investment products to minimise risks to the investment portfolio.

“Notably, the PRA 2014 and the Investment Regulations have instituted appropriate sanctions for any infraction by LPFOs in the investment process. Accordingly, the commission applies appropriate administrative sanctions to LPFOs for violation of the provisions of the Investment Regulations,” she added.

Investment Regulation has instituted limits (global, per issuer and issue) to ensure adequate portfolio diversification and mitigate potential concentration and market risks. Per Issuer Limits specifically aims to limit pension fund exposure to a single issuer in line with the core objectives of Pension Fund Investments.

Aside, the institutional framework of the Contributory Pension Scheme (CPS) allows for separating the investment and custody functions between PFAs and Pension Fund Custodians (PFCs). By this arrangement, the PFAs and PFCs submit daily Returns on the investment portfolio to the commission. Accordingly, the commission ensures that investments of pension contributions are safe through daily monitoring of the investment decisions made by the PFAs to ensure compliance with the PRA 2014 and the Investment Regulation.

According to her, allowable instruments that qualify for investment by pension funds include; Quoted Ordinary Shares and Redeemable Preference Shares of publicly listed companies: FGN/State/LG Debt Securities approved by SEC, Corporate Debt Securities (including Infrastructure Bonds, Asset/Mortgaged Backed Securities) and Money Market Instruments.

Others are ; Open or Closed-end and Hybrid FunFurthermore, rating reports ds (including Real Estate Investment Trusts and Exchange Traded Funds), Supranational Bonds and Private Equity Funds as well as Infrastructure Funds.

Pension fund assets in the last three years, she disclosed were majorly invested in traditional fixed-income assets and equities, as the alternative asset space was relatively sluggish. Pension Funds recorded an average return on investment of 13% within the last three years (2019 -2021), with the highest return of 17.59% in 2020.

“Although the Nigerian economy is experiencing inflationary challenges with an inflation rate slightly above 17%, pension funds are expected to outperform the inflation rate given their long-term investment horizon. The modest growth of pension funds is expected to be sustained. At the same time, the industry focuses on increasing allocations to alternative assets to mitigate the impact of inflation and provide reasonable returns to contributors”, she stated.

Despite the Covid-19 pandemic and the general downturn of the economy in early 2020 and late 2021, pension Funds achieved moderate growth due to the inflow of monthly pension contributions and the subsequent response of the markets to the initial impact of Covid-19. The stable recovery of the markets began in early 2021 with the relaxation of restrictions associated with the containment of the Covid-19 pandemic. The economy grew by 3.41% in 2021 relative to an annual contraction of 1.92% in 2020. However, inflation remained a concern due to persistent disruption in domestic food supply chains and expansionary government policies. In early 2022, the global energy crisis occasioned by the Russia – Ukraine conflict added exchange rate pressures to the Nigerian economy.