PenCom Unlocks New Investment Avenues for PFAs Amidst Domestic Market Constraints
The National Pension Commission (PenCom) has announced a significant regulatory adjustment, extending a two-year forbearance to Pension Fund Administrators (PFAs). This strategic move aims to broaden the investment universe for pension assets, allowing PFAs to engage with a wider array of securities issued by the parent companies of their respective Pension Fund Custodians (PFCs). The extension, effective for 24 months from July 3, 2026, is a direct response to prevailing market realities, including operational challenges and a discernible scarcity of high-quality investable instruments within the domestic landscape.
This regulatory relief, detailed in a circular signed by AM Saleem, Director of PenCom’s Surveillance Department, is designed to enhance portfolio flexibility and diversification for PFAs. By widening the eligible investment universe, the commission seeks to empower PFAs to generate optimal risk-adjusted returns, thereby fulfilling their fiduciary responsibilities to Retirement Savings Account (RSA) holders. However, PenCom has been unequivocal in stressing that this forbearance does not signify a dilution of investment discipline.
PenCom has underscored that all investments involving custodian-related entities must adhere to the same stringent fiduciary standards applicable to all pension fund investments. The commission explicitly stated that the mere affiliation between a security issuer and a pension fund custodian should not confer any preferential treatment. Transactions must be conducted strictly on an arm’s-length basis and at prevailing market terms, acknowledging that governance safeguards alone are insufficient to mitigate correlation and contagion risks.
To this end, quantitative prudential limits have been instituted to prevent undue concentration of pension assets. Under the revised framework, PFAs are permitted to invest in equities and financial instruments issued by the holding companies of their custodians, provided these parent companies are licensed financial institutions regulated by the Central Bank of Nigeria (CBN), publicly quoted on an SEC-recognised securities exchange, and possess a robust track record of financial soundness. Essential criteria also include sustained profitability, a history of dividend payments, consistent regulatory compliance, and the absence of unresolved enforcement actions.
According to ThisDay, further risk mitigation measures have been implemented through detailed exposure limits across various RSA fund categories. For ordinary shares, investments in custodian parent companies are capped at 1% for Funds I, II, V-Growth, and VI-Active, while Funds III, IV, V-Conservative, and VI-Retiree can invest up to 3%. Bond investments are limited to 3% for Funds I, II, V-Growth, and VI-Active, and 5% for Funds III, IV, V-Conservative, and VI-Retiree. The combined exposure of an RSA fund to equities and bonds issued by a PFC’s parent company must not exceed 5% of the portfolio’s consolidated net asset value (NAV). Overall exposure to all securities, including money market instruments, issued by the custodian’s parent company is capped at 10% of the portfolio’s consolidated NAV.
Restrictions have also been placed on participation in corporate bond issues involving custodian parent companies. PFAs are prohibited from subscribing to more than 20% of any bond issue rated “A” or above, with participation in “BBB” rated bonds capped at 15%. These thresholds will operate in conjunction with existing broader investment regulations.
Recognising the heightened fiduciary sensitivity inherent in related-party transactions, PenCom has mandated rigorous independent scrutiny for every proposed investment. This includes review by the Investment Committee, Risk Management Unit, and Compliance Department. The Risk Management Unit must certify that the investment will not expose the pension fund to excessive concentration, liquidity, or correlation risks, while the Compliance Department must confirm full legal and regulatory adherence, including conflict-of-interest requirements and exposure calculations.
Extensive conflict-of-interest management protocols have been introduced to bolster transparency and accountability. PFAs are now required to maintain a formal register detailing all investments involving custodian-linked entities, including the nature of the relationship, decision-makers, conflict declarations, and mitigation strategies. Officials with overlapping affiliations to either the issuer or the custodian group must disclose their interests and recuse themselves from the approval process.
Disclosure obligations have also been reinforced, with PFAs mandated to submit quarterly reports on their holdings in custodian parent companies. These reports must detail acquisition dates, valuation methodologies, percentage exposure to portfolio NAV, and changes from previous reporting periods. Furthermore, PFAs must notify PenCom within 48 hours of any breach of exposure limits or instances of financial distress experienced by a custodian’s parent company.
