Recently, the National Pension Commission issued the Operational Framework for Co-Investment by Pension Fund Administrators (the Framework) in a bid to encourage diversification of pension fund assets and improve returns on pension fund investments. The Framework essentially sets the ground rules for co-investment by Pension Fund Administrators in portfolio companies alongside private equity funds in which they are limited partners.

In this newsletter, we have provided an analysis of the main provisions of the Framework and mechanisms built into the Framework to limit the exposure of pension fund assets to investment risks.

Download : A Review Of The Operational Framework For Co-Investment By Pension Fund Administrators

INTRODUCTION

In a bid to encourage diversification of pension fund portfolios and by that, improve returns on pension fund investments, the pension regulator in Nigeria, the National Pension Commission (PENCOM), in the course of the year, issued the Operational Framework for Co[1]Investment by Pension Fund Administrators (the Framework). The Framework essentially sets the ground rules for co-investment by Pension Fund Administrators (PFAs) in portfolio companies alongside private equity funds (PE Funds) in which they are limited partners.

In providing the Framework, PENCOM expressed certain concerns, including the fact that since Nigeria adopted the contributory pension framework, there has been a huge concentration of pension fund assets in Federal Government securities. The regulator noted that this trend could, unfortunately, result in asset price distortions arising from limited investment options in the domestic market. From available statistics, about 70 percent of pension assets are domiciled in federal and state government securities by Pension Fund Administrators (PFAs) who continue to lament the dearth of investible assets.

It is against this backdrop that PENCOM published the Framework to improve the allocation of pension fund assets to the PE asset class, having identified that a co[1]investment arrangement as an investment model will provide flexibility and an array of options to PFAs into which pension funds can be invested. We understand that the Framework is a product of the wider conversation within the pension industry and investment circles on how to unlock pension fund assets to create wealth and foster infrastructure and economic development, in a manner that produces sustainable yield without putting pension fund assets at risk.

This article highlights the main provisions of the Framework – considering the key principles underpinning the co-investment initiative – and mechanisms built into the Framework to limit the exposure of pension fund assets to risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.