PENCOM’s New Guidelines: Ambition, Risks and The Fine Print

PENCOM’s new leadership is not wasting any time. They have hit the ground running, releasing circulars and guidelines almost every week.

It feels like a regulator on a mission compared to the sleepy tempo that often characterises Nigerian regulatory bodies; this burst of activity stands out.

The work rate is impressive and, frankly, refreshing.

It is also worth noting how long it has been since the last big update. The corporate governance guidelines were last revised in 2021. The investment guidelines date even further back to 2019. A refresh was badly needed, and PENCOM deserves credit for bringing the sector up to date.

These documents are not mere housekeeping. They signal a new seriousness about shaping how pension funds are run and invested.

One of the most welcome developments in the new guidelines is the formalisation of rules around securities lending and repurchase agreements. This is long overdue.

By providing a clear framework for these transactions, PENCOM allows PFAs to optimise returns on their portfolios while maintaining robust risk controls. It is a practical step that reflects an understanding of modern portfolio management techniques.

The changes in Fund II, which holds the majority of industry assets, are bold. The maximum allocation to FGN securities has been reduced from seventy per cent to fifty per cent. On the surface, this looks sensible.

PFAs have been over-reliant on government debt for years, and diversification is long overdue. Smaller PFAs can pivot easily. Larger operators, however, face a real challenge. Shifting twenty per cent of portfolios away from FGN securities is not trivial. Markets cannot always absorb that kind of volume quickly.

Where will the money go? Allocations to private equity have been expanded. Generalist PE funds can now take up to ten per cent, up from five. Infrastructure PE has jumped from five per cent to twenty.

A new category allows up to five per cent in the agricultural value chain. Combined, private markets now account for roughly thirty per cent of the portfolio. Public equities, by contrast, have a limit of just twenty-five per cent.

The missing opportunity for Public Equities 

This allocation is striking. Nowhere else in the world, even among institutions that pioneered private equity, do we see public equities take a backseat to private markets. The Yale Endowment and other leading global endowments initially pushed aggressively into private equity, but have gradually rebalanced toward public markets.

Public equities remain the backbone of liquid portfolios, providing both transparency and flexibility. There is a real opportunity to increase the allocation to public equities, yet the current rules tilt strongly toward private markets.

It is clear that interest groups for private equity, infrastructure, and agriculture lobbied effectively or had their interests considered. By contrast, public equities, and by extension, the Regulator of the public market, do not appear to have had as strong a voice at the table.

The rationale for PE, infrastructure, and agriculture is understandable. Infrastructure offers long-term cash flows suited to pension horizons. Private equity has the potential to generate superior risk-adjusted returns.

Agricultural investment, if well managed, can support jobs, productivity, and food security. The potential is real, and there is a case for allocating capital to these sectors.

But the risks cannot be ignored. Private equity returns in Nigeria have been inconsistent. Infrastructure projects face delays, cost overruns, and regulatory bottlenecks. Agriculture is notoriously unpredictable, with weather, policy shifts, and operational challenges. Pension funds are defined-contribution and open-ended.

Contributors expect liquidity when they need it. Locking up too much in illiquid private markets could create a mismatch between long-term investments and short-term withdrawal needs.

On corporate governance, the guidelines also introduce notable changes. Principal Owners may now remain on boards as Non-Executive Directors beyond the normal tenure limit, provided they meet certain oversight conditions.

The intent is continuity with accountability, but it does weaken a key governance principle. Tenure limits are designed to refresh boards and prevent entrenchment. Influence does not require a title, and a Principal Owner’s voice carries weight even if they sit quietly at the end of the table.

Succession planning is another area for attention. Pension operators are systemically important institutions managing trillions of naira. Yet the guidelines require only two months’ notice for a CEO exit. That may suffice for smaller organisations, but large, systemically important operators need longer runways. The CBN has extended notice periods for bank CEOs to six months, a practice PENCOM could emulate.

Proportionality is also key. Applying the same rules to the largest and smallest operators creates inefficiencies. A Stanbic Pensions and a small operator like Radix do not carry the same systemic weight. Regulation should reflect that. Tiered regulation, as done by the CBN for banks, could be a model. Asset allocation, governance requirements, and compliance timelines should consider the size and systemic importance of each operator.

The intentions behind these reforms are commendable. Diversification from government debt is necessary. Strengthening governance is important. Expanding the investment universe is bold. Securities lending and repos are a practical step that will improve returns.

But policy is not just about intention. Execution matters. Pension funds hold other people’s life savings. Prudence, proportionality, and liquidity management are essential.

PENCOM’s energy and urgency are welcome. They are clearly determined to move the industry forward.

The challenge is to ensure ambition is balanced with nuance. Infrastructure, private equity, and agriculture could transform the industry if approached carefully, but public equities should not be neglected.

By refining the balance and recognising market realities, the regulator can deliver reforms that are ambitious, yet sustainable, protecting both returns and confidence.