The Nigerian Exchange Limited (NGX), in collaboration with the National Pension Commission (PenCom), has introduced the NGX Pension Broad Index (NGXPENBRD) to transform the equities investment landscape for pension funds.
The new index also addresses the limitations of benchmarks, providing a more inclusive and representative measure of the investment of pension funds.
The Director-General, PenCom, Mrs. Aisha Dahir-Umar, said the NGX Pension Broad Index is expected to play a pivotal role in guiding investment decisions for Pension Fund Administrators (PFAs).
She stated that its composition and adherence to regulatory criteria contribute to enhancing the stability of the industry.
Evolving from Constraints
The PenCom boss said pension funds rely on the NGX All Share Index (ASI) and NGX Pension Index (PI) for assessing the performance of their equities.
However, she noted that both indices had their limitations, explaining that the ASI encompassed stocks listed on the Nigerian Stock Exchange, including those ineligible for pension fund investments.
On the other hand, she said 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, she added.
Why we introduced NGX Pension Broad Index
She stated that the NGXPENBRD was introduced to address the shortcomings of the ASI and PI by expanding the eligible stocks and incorporating criteria in line with the regulation.
“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 five per cent. 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,” the DG said.
Key features of the NGX Pension Broad Index
Mrs Dahir-Umar continued: “Expanded Composition is a major feature of the new index the NGX Pension Broad Index. It 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 the NGX 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.”
Promising performance and regulatory approval
Since its launch, Mrs. Dahir-Umar said, the Index has demonstrated robust performance.
Comprising high-quality stocks across key sectors such as banking, insurance, oil and gas, consumer goods, and industrial goods, the index aligns with the PenCom Regulation on the Investment of Pension Fund Assets.
PenCom has endorsed the Index as the benchmark for the industry equity investment portfolios. This approval solidifies the index’s credibility as a reliable yardstick for evaluating equity performance within the industry, she stressed.
Guiding investment decisions and ensuring stability
Mrs. Dahir-Umar also said 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 stability of the industry.
She added that the NGX Pension Broad Index marks a significant leap in the evolution of benchmarks for pension fund investments, ensuring a more inclusive, representative, and stable investment landscape.
SOURCE: THENATION
