The National Pension Commission (PenCom) has strengthened controls around the transfer of assets between pension funds, requiring Pension Fund Administrators (PFAs) to obtain prior regulatory approval before executing such transactions.
The commission, in a circular dated July 11, 2024 and addressed to all licensed pension fund operators, said the guidelines were introduced after it observed instances where pension assets were being transferred between funds without prior impact analysis to establish whether the transactions were fair, transparent and compliant with applicable regulations.
Under the framework, PFAs are required to carry out comprehensive due diligence before transferring an asset to another pension fund, including determining whether the asset is consistent with the receiving fund’s risk appetite, investment strategy and capacity to hold the investment.
PenCom also requires PFAs to provide a clear justification for the transfer, demonstrating that the transaction is in the best interest of the receiving fund and consistent with their fiduciary and regulatory responsibilities.
The originating fund must also have a documented reason for disposing of the asset, with the justification reviewed by relevant control departments within the PFA.
For non-discretionary funds and schemes, PFAs must obtain explicit approval from the sponsor of the receiving fund before proceeding with an asset transfer.
The commission said PFAs must subsequently obtain a “no objection” from PenCom before any transfer is executed.
A key provision of the framework concerns the movement of illiquid assets between pension funds. Where such assets are involved, the receiving fund must be provided with a liquidity premium to compensate for the reduced liquidity and potential risks associated with holding the investment.
According to PenCom, the premium is to be determined with consideration for the issue size and remaining term to maturity of the instrument.
The commission has also placed additional responsibility on the boards of PFAs, requiring them to establish internal policies governing asset transfers and ensure that proposed transactions comply with existing laws, regulations and the PFA’s own investment policies.
The boards are specifically required to establish that an asset crossing is not being undertaken for the purpose of returns management, but is instead consistent with the fiduciary responsibilities and strategic objectives of the pension fund.
They are also expected to deliberate on proposed transfers and consider their potential impact before approving submissions from executive management.
The framework extends to Pension Fund Custodians (PFCs), which have been directed to ensure that only asset transfers that have received PenCom’s prior “no objection” are executed.
Custodians are also required to report suspicious transactions that could indicate “churning” or excessive trading designed to circumvent regulations or generate commissions at the expense of pension fund interests.
In addition, PFCs are required to submit monthly reports to PenCom detailing asset transfers carried out during the period.
PenCom said it would review requests from PFAs and issue a “no objection” or otherwise within two working days of receiving the request.
The commission said the guidelines form part of its responsibility to continuously monitor pension fund operations and ensure compliance with statutory and fiduciary requirements.
The framework applies to asset transfers between pension funds, excluding interfund transfers relating to Retirement Savings Account (RSA) funds.
PenCom said the circular would be reviewed from time to time as necessary.
