In a significant stride toward enhancing transparency and accountability within the Nigerian pension fund industry, the National Pension Commission (PenCom) last week released a comprehensive circular outlining explicit requirements for performance measurement for Pension Fund Administrators (PFAs) and Closed Pension Fund Administrators (CPFAs).
The circular, a response to evolving industry dynamics, focuses on measuring and reporting the performance of pension fund assets. Below, I explore the nuances of the circular, analysing its implications for the pension fund sector and the broader financial landscape.
Performance Measurement Benchmarks
The focal point of this circular is the establishment of benchmarks against which pension fund asset performance is measured. Each asset class is assigned a specific benchmark, offering a standardised metric for performance evaluation. The benchmarks are:
These benchmarks provide a uniform framework for assessing performance, facilitating transparency and comparability across different asset classes.
This marks a significant shift, introducing a unified measure that enables Retirement Savings Account (RSA) holders to make assessments consistently. The benchmarks not only provide a standard for appraisal but also create a clear and uniform framework for assessing the performance of diverse asset classes within the pension fund industry.
Performance Attribution Analysis
The circular goes beyond benchmarking, emphasising the importance of PFAs and CPFAs conducting attribution analyses.
This analytical process involves a detailed examination of return sources within investment portfolios, offering insights into factors influencing overall fund performance.
By understanding the dynamics of each investment, operators can make informed decisions to optimise portfolio performance.
PenCom also mandates an annual submission of an attribution analysis report to the Commission, adding an extra layer of accountability, and fostering a culture of continuous improvement and strategic decision-making within the industry.
Performance Appraisal
The introduction of benchmarks and performance attribution analysis sets the stage for a robust performance appraisal system.
This system encourages the use of recognised metrics such as Sharpe ratio, Information ratio, Jensen’s alpha, and Treynor ratio.
Widely acknowledged in the financial industry, these metrics provide a comprehensive view of risk-adjusted returns, portfolio manager skills, and the ability to generate excess returns relative to a benchmark. This adoption aligns with global best practices, contributing to a standardised and fair assessment of individual fund performance.
Furthermore, the incorporation of these metrics signifies a departure from a simplistic assessment of returns, encouraging a nuanced understanding of risk and reward dynamics.
By considering risk-adjusted returns and other performance indicators, PFAs and CPFAs are prompted to adopt more sophisticated investment strategies that prioritise not only returns but also the preservation of capital and the efficient allocation of resources.
Reporting Requirements
PenCom has committed to providing a standard reporting template to pension operators, a move that is welcomed for its potential to streamline reporting processes.
This template will not only enhance efficiency but also ensure uniformity and clarity in the information presented by pension operators.
This standardisation is crucial for facilitating efficient data analysis, aiding regulatory oversight, and allowing for meaningful comparisons within the industry.
However, transparency should not be limited to regulatory reporting. This data and information should be made publicly available, serving as a valuable resource for RSA holders and other industry observers. To make it even more effective, PenCom needs to enforce its circular on the minimum information to be displayed on PFAs website, which includes:
- Daily Unit Prices for the RSA and Retiree funds (for the last 7 days);
- Structure of investment portfolio for the RSA and Retiree Funds for the last 7 days; with information published on this later one made more comprehensive.
Conclusion
The circular, with its emphasis on transparency, accountability, and standardised performance evaluation, is poised to reshape the Nigerian pension fund performance reporting landscape.
As PFAs and CPFAs navigate this evolving regulatory environment, adherence to the circular becomes crucial not only for regulatory compliance but also for maintaining the trust and confidence of pension contributors and beneficiaries.
The successful implementation of these requirements should not be seen as merely a compliance exercise; it is a pivotal step toward fortifying the foundation of the pension fund sector and safeguarding the financial future of individuals across the nation.
As the industry adapts to these new standards, stakeholders should view them as opportunities for growth, innovation, and improved risk management.
Embracing this circular positions the Nigerian pension fund industry as a model for transparency, efficiency, and investor protection, contributing significantly to the broader development of the country’s financial markets.
For more information on the performance of pension funds, download the Money Counsellors Annual Report on Pensions (MCARP 2023). The report provides a full analysis of all Pension Fund Administrators (PFA) in one single document and presents a holistic review of the last five years of activities of all PFAs, and the funds managed, including 5-year summary company and fund accounts, ratios, fund performances, fund performance rankings vs. peers, asset allocation, AUM ranking, RSA ranking and much more.
The Report is a must-read for all 10.2m RSA holders and those thinking of signing up to a PFA or switching a PFA.
Michael Oyebola is the founder of moneycounsellors.com. The MoneyCounsellors.com platform is an independent research and information website that offers data and qualitative information about Nigerian Mutual and Pension funds and the publisher of the Money Counsellors Annual Report on Pensions (MCARP). Download MCARP 2023 here.
