Transforming the Landscape of Pension Fund Investments

The Nigerian Exchange Limited (NGX) and the National Pension Commission (PenCom) collaborated to introduce the NGX Pension Broad Index (NGXPENBRD), aimed at transforming the equities investment landscape for pension funds. Launched on June 15, 2023, the new index addresses the limitations of existing benchmarks, providing a more inclusive and representative measure of the investment universe of pension funds

Evolving from Constraints

Traditionally, pension funds relied on the NGX All Share Index (ASI) and NGX Pension Index (PI) for assessing the performance of their equity portfolios. However, both indices had their limitations. The ASI encompassed all stocks listed on the Nigerian Stock Exchange, including those ineligible for pension fund investments. On the other hand, the PI comprised only 40 stocks, leading to a narrow representation dominated by high-value stocks. Recognising these constraints, PenCom and NGX sought to develop a more comprehensive benchmark.

NGX Pension Broad Index

The NGXPENBRD addresses the shortcomings of the ASI and PI by expanding the universe of eligible stocks and incorporating stringent criteria in line with the Regulation on Investment of Pension Fund Assets.

In order to qualify for inclusion in the NGX Pension Broad Index, companies are required to satisfy specific eligibility criteria. This includes demonstrating a consistent track record of taxable profits over a minimum of three out of the last five years prior to the investment consideration. Moreover, companies seeking inclusion must exhibit a history of either distributing dividends or issuing bonuses in at least one of the preceding five years.

Furthermore, adherence to the NGX’s free float rules is essential. To meet this criterion, companies must maintain a Free Float Factor of no less than 5%. This ensures that a significant portion of their shares is actively traded in the market, aligning with the Exchange’s commitment to maintaining a robust and representative index. It also aids the pension funds liquidity requirement through easy entry and exit of investments.

Pension Index Key Features

Expanded Composition is a major feature of the new index the NGX Pension Broad Index. It now includes 84 stocks, up from the 40 in the previous NGX Pension Index. This expansion resulted from a meticulous selection process, ensuring adherence to profitability and dividend payment criteria set by the regulatory framework.

Regular Rebalancing is a significant feature of theNGX Pension Broad Index. To maintain integrity, the index undergoes semi-annual rebalancing, adjusting sector weights to reflect market dynamics accurately. In addition, the NGX Pension Broad Index has introduced diversification. The broader universe of the NGX Pension Broad Index provides a more diversified representation, catering to Pension Fund Administrators (PFAs) with investments beyond the confines of the NGX Pension Index.

Performance, Regulatory Approval

Since its launch, the NGX Pension Broad Index has demonstrated robust performance. Comprising high-quality stocks across key sectors such as Banking, Insurance, Oil & Gas, Consumer Goods, and Industrial Goods, the index aligns seamlessly with the provisions of the PenCom Regulation on the Investment of Pension Fund Assets.

PenCom has officially endorsed the NGX Pension Broad Index as the benchmark for Nigeria’s pension industry equity investment portfolios. This stamp of approval solidifies the index’s credibility as a reliable yardstick for evaluating equity performance within the pension industry.

Investment Decisions, Ensuring Stability

The NGX Pension Broad Index is expected to play a pivotal role in guiding investment decisions for PFAs, offering a comprehensive view of the market. Its well-diversified composition and adherence to regulatory criteria contribute to enhancing the overall stability of Nigeria’s pension industry.

In conclusion, the introduction of the NGX Pension Broad Index marks a significant leap forward in the evolution of benchmarks for pension fund investments, ensuring a more inclusive, representative, and stable investment landscape for the pension industry.