Daily Independent (Lagos)
9 October 2008
opinion
In the month of May 2006, the National Pension Commission (PenCom) updated the regulation on investment of pension fund assets to be in tune with the realities of the present time few months after the regulation was rolled out.
Again, in December 2006, PenCom reviewed this regulation in line with the provisions of the Pension Reform Act 2004. The regulation on investment was issued to ensure the safety of pension fund assets.
Specifically, on the quality of shares, bonds and other securities, the rating requirements which states initially that all investment instruments in which Pension Fund Assets shall be invested must have a minimum investment grade level rating of 'BBB' by, at least, two recognised Risk Rating Companies, have been reviewed downward to a single Risk Rating Company.
In a similar vein, the rating requirements which provides that any company in whose instruments Pension Fund Assets shall be invested must have a minimum corporate rating of 'BBB' by, at least, two recognised Risk Rating Companies, have been scaled down to a single Risk Rating Company.
Any bank in whose instruments Pension Fund Assets are going to be invested is now required to have a minimum corporate rating of 'A' by, at least, one recognised Risk Rating Companies, instead of two Risk Rating Companies in the formal regulation.
Any instrument proposed for listing on the floors of any recognised Securities Exchange through an initial public offer, is also required to now have a minimum acceptable rating of 'AAA' by, at least, one recognised Risk Rating Companies, instead of two risk rating companies hitherto.
Pension Fund Assets can be invested in the Certificate of deposits, Bankers acceptances issued by a licensed Discount House on its own behalf subject to the certain conditions, including the fact that such a Discount House shall maintain a minimum corporate rating of "A".
However, instead of the 0.5 per cent permissible hitherto, not more than 1.0 per cent of Pension Fund Assets managed by a Pension Fund Administrator (PFA) can be invested in Certificates of Deposit and Bankers Acceptances of any one Discount House, and traded on a Money Market Electronic Platform open to the public and approved by the Central Bank of Nigeria (CBN) or Money Market Association of Nigeria.
Pension fund assets managed by a PFA can be invested in Certificates of Deposit and Bankers Acceptances of any one bank issued on its own behalf and traded on a Money Market Electronic Platform open to the public and approved by the CBN or Money Market Association of Nigeria, subject to the limit of 2 per cent for a bank with risk rating of "A"; 3 per cent for a bank with risk rating of "AA"; and 4 per cent for a bank with risk rating of "AAA". It was one per cent across board initially.
Pension fund asset managed by a PFA can be invested in the ordinary shares of any one corporate entity subject to the limit of 1 per cent for a company with risk rating of "BBB"; 1.5 per cent for a company with risk rating of "A"; 2 per cent for a company with risk rating of "AA"; and 3 per cent for a company with risk rating of "AAA".
Unlike before when it was just one per cent, not more than 2.0 per cent of the issued ordinary share capital of any one corporate entity, may be purchased by a PFA.
Meanwhile, a bank in whose instruments any Pension Fund Assets are invested, is required to have a minimum corporate rating of 'A' by, at least, one recognised Risk Rating Company.
If the bank fails to fulfil the requirements requiring it to have a minimum corporate rating of 'A' by, at least, one recognised Risk Rating Company, the PFA is required to divest itself of all deposits or securities issued by that bank, in the following three months.
Pension Fund Assets can be invested in real estate, only through instruments such as Mortgage Backed Securities (MBS) and Real Estate Investment Trusts (REITs).
Such MBS are to satisfy certain requirements. In addition to having a minimum investment grade level rating of 'BBB' by, at least, one recognised Risk Rating Company, the face value of the issue should not be less than N1 billion, while the market value of the mortgages securitising the issued MBS, shall not be lower than the ratio 1.5:1.
Besides, such MBS must be quoted and listed on a registered Securities Exchange and where such MBS is a new issue, shall have a minimum acceptable rating of 'AAA' by, at least, one recognised Risk Rating Company.
With regards to REITs, the company managing the funds is required to have a minimum of three years continuous experience managing assets of third parties, just as the face value of the issue should not be less than N1 billion.
The Prospectus is to specifically state that the securities shall be subject to memorandum listing on a recognised Securities Exchange, while the fund must have made taxable profits for, at least, three years immediately preceding the investment.
The fund must also have paid dividends or issued bonuses for, at least, three years immediately preceding the investment.
Pension Fund Assets can be invested in asset-backed securities, if the issuer and the securities if the face value of the issue is not less than N1 billion and it is quoted and listed on a registered Securities Exchange.
It is necessary to state here that the nation's pension industry is not beng over-regulated. People who have been clamouring for the regulation on investment of pension funds should be further relaxed should note that the need to ensure the safety of pension funds cannot be over-emphasised. The ongoing pension reform in the country was necessitated by the need to avoid pension debacle so that the ugly incidences of the past will not repeat itself.
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