PenCom issues guidelines on asset crossing between pension funds

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The National Pension Commission (PenCom) has issued guidelines governing the transfer or “crossing” of assets between pension funds, requiring Pension Fund Operators (PFOs) to obtain prior regulatory approval before executing such transactions.

The directive was contained in a circular dated July 11, 2024, with reference number PenCom/INSP/Surv/2024/1382, addressed to all licensed Pension Fund Operators.

PenCom said it had observed practices involving the crossing of pension assets between funds by some Licensed Pension Fund Operators without prior impact analysis to ensure fairness, transparency and compliance with existing laws.

The Commission said the guidance was developed pursuant to Section 90(1) of the Pension Reform Act 2014 and applies to all asset transfers between funds, except interfund transfers pertaining to Retirement Savings Account (RSA) funds.

Under the general principles, PenCom stated that assets involved in a crossing arrangement must meet the eligibility criteria for pension fund investments as prescribed by applicable laws and regulations.

It added that where an illiquid asset is involved in a transfer, a reasonable compensation in the form of a liquidity premium must be provided to the receiving fund.

According to the Commission, the liquidity premium is intended to offset the reduced liquidity and potential risks associated with holding illiquid assets while ensuring equitable treatment and compliance with fiduciary standards.

The circular placed several responsibilities on Pension Fund Administrators (PFAs). PFAs are required to conduct comprehensive due diligence to ensure that assets proposed for transfer align with the risk appetite and holding capacity of the receiving fund.

They must also present a compelling justification for the transfer to enable the Commission to make an informed decision, demonstrating that the transaction serves the best interest of the receiving fund and complies with fiduciary and regulatory obligations.

PFAs are further required to justify the divestment of assets from the originating fund, supported by evidence of review by relevant control departments.

Where non-discretionary funds or schemes are involved, the PFA must obtain explicit approval from the sponsor of the receiving fund.

The circular also requires PFAs to seek and obtain a “no objection” from PenCom before executing any asset transfer.

Boards of PFA directors are required to formulate an asset-transfer “crossing” policy consistent with applicable laws, regulations and the PFA’s internal policies. They must also assess management submissions, ensure transactions are not intended for returns management and deliberate on the potential impact of proposed transfers.

Pension Fund Custodians, meanwhile, are required to ensure that only crossings with prior PenCom “no objection” are executed. They must report suspicious transactions that may indicate “churning” or excessive trading and submit comprehensive monthly reports of all asset crossings to the Commission.

PenCom stated that it would review requests and issue a “no objection” decision or otherwise within two working days of receiving the request.

The Commission added that it would continue to monitor compliance with the circular and other statutory requirements governing pension fund operations.