Pension funds can now invest in infrastructure, foreign bonds
Monday, 20 December 2010 00:00 Anthony Osae-Brown
A revised investment guidelines for pension funds has been released by the National Pension Commission (PENCOM) which will now allow them invest in infrastructure funds and foreign currency bonds issued by Multilateral Development Finance Organisations (MDFOs) like the World Bank, African Finance Corporation (AFC), African Development Bank (ADB) and the International Monetary Fund (IMF), among others.
The new guidelines were released over the weekend, titled: “Regulation of investments of pension fund assets.”
Analysts see the guidelines as having the potential to change the structure of the Nigerian financial market, catalyse the development of infrastructure and resuscitate the new securities issues market in 2011. It will also mark the ascendancy of institutional investors in the Nigerian capital market through the establishment of key funds to attract the huge pension fund assets under management. Nigerian pension funds are estimated to currently have assets in excess of N2 trillion while the potential market of the pension fund industry could be as much as N18 trillion.
Under the new guidelines, pension assets can also now invest in foreign currency denominated bonds issued by the Federal Government of Nigeria (FGN), or the Central Bank of Nigeria (CBN), or agencies and companies owned by the Federal Government “provided that the securities are fully guaranteed by the CBN or Federal Government.”
Infrastructure bonds issued by corporate entities are also allowable investments; along with bonds, debentures, redeemable and convertible preference shares, and other debt instruments including asset backed securities.
Infrastructure funds and private equity funds registered with the Securities and Exchange Commission (SEC), as well as Global Depositary Receipts (GDRs/Notes) and Eurobonds “issued by listed Nigerian companies for their operations within Nigeria , as certified and approved by SEC”, are also now allowable investments.
For infrastructure projects to attract investments of pension assets, the guidelines provide that the projects must have been awarded to a concessionaire through an open and transparent process; be not less than N5 billion in value; managed by a concessionaire with a good track record; meet the due process requirements of Public Private Partnership (PPP) Policy, “and of the nature of core infrastructure which includes roads, railways, airports, ports, power and gas pipelines and related facilities, and other projects that may be approved by the commission from time to time”.
For Specialist Infrastructure Funds seeking to attract pension fund investments, the guidelines say it must also have 75% of its projects located in Nigeria . Not more than 5% of pension fund assets can be invested in Infrastructure funds, but up to 35% of pension fund assets can be invested in infrastructure bonds, mortgage and asset backed securities and corporate debt securities.
The guidelines tightened the specified minimum quality of the allowable investments now requiring that state government bonds, local government bonds, corporate bonds, supra-national bonds and other allowable securities “shall have a minimum credit rating of “A” by at least two recognised credit rating agencies” before pension fund assets can be invested in them.
However, pension funds can invest not more than 20% of their assets under management in all the allowable debt securities with a minimum credit rating of BBB by at least two recognised credit rating agencies.
Also, the new guidelines stipulate that any bank which money market instrumentspension fund assets are to be invested in, must have a minimum credit rating of BBB “by at least two recognised credit rating companies.” But for discount houses or firms seeking pension fund assets in their issued commercial papers or money market instruments, they should have a minimum credit rating of “A” by a minimum of two credit rating agencies.
For state and local government bonds, the guidelines also state that besides being registered with the SEC and meeting the rating requirement, they must also “legislate sinking funds backed by irrevocable payment orders (ISPOs) or external guarantee by a bank development finance institution or MDFOs acceptable by the commission.”
The guidelines for investment in listed ordinary shares of Nigerian companies has however been loosened. Pension funds can now invest in shares of companies that have paid dividend in a minimum of one year of the last five years; the old guidelines required a minimum of three of the last five years. This will reduce the pressure on listed companies to pay dividends to attract investments from pension funds. The maximum amount of pension fund assets that can be invested in ordinary shares is 10%.
The new guidelines also now restrict investments of pension fund assets in Federal Government of Nigeria bonds or CBN securities to 80%, as against 100% in the previous guidelines.