PenCom Cautions PFAs Against Investing in Banks’ AT1 Capital Instruments

The National Pension Commission (PenCom) has issued a strong warning to Pension Fund Administrators (PFAs), directing them to avoid investing workers’ retirement savings in banks’ Additional Tier-1 (AT1) capital instruments. The caution follows heightened concerns over the risk profile of such assets, which have come under global scrutiny after recent financial sector shocks.

According to industry sources, PenCom’s advisory stems from its mandate to safeguard the N20 trillion pension assets under management in Nigeria’s Contributory Pension Scheme (CPS). The regulator emphasised that PFAs must exercise extreme caution in evaluating investment opportunities, particularly those that may expose pension contributions to unnecessary risks.

AT1 capital instruments are hybrid securities designed to absorb losses in times of financial distress. They allow banks to strengthen their capital base in line with regulatory requirements. However, they are considered high-risk because they can be written down or converted into equity if a bank faces solvency issues. In some jurisdictions, AT1 investors have lost substantial funds when banks collapsed, raising doubts about their suitability for conservative funds such as pensions.

A senior PenCom official explained that the directive is aimed at pre-empting potential losses that could affect contributors’ savings. “The priority of the Commission is to ensure the safety and sustainability of pension funds. While banks may issue AT1 instruments as part of their capital structure, PFAs must refrain from deploying pension assets into such instruments due to their speculative and volatile nature,” the official said.

This move is consistent with PenCom’s long-standing cautious investment guidelines, which prioritise capital preservation, fair returns, and liquidity over risky high-yield opportunities. The Commission had earlier set strict limits on the asset classes in which PFAs can invest, including government securities, corporate bonds, equities, money market instruments, and real estate. By expressly warning against AT1 capital, PenCom is reinforcing its protective stance in a banking sector currently undergoing recapitalisation pressures.

Financial analysts note that Nigerian banks are turning increasingly to hybrid capital instruments to meet the Central Bank of Nigeria’s (CBN) capital adequacy requirements. As lenders seek to raise billions of naira in fresh capital to comply with the new CBN directive, PFAs have been seen as potential buyers of AT1 issues given their access to large pools of long-term funds. However, PenCom’s intervention now limits that avenue.

Commenting on the development, investment consultant and pension industry expert, Dr. Adaeze Okafor, said the Commission’s position is prudent. “AT1 capital is not like ordinary bonds. They can be wiped out in extreme situations, and that is not the type of risk you expose pensioners’ life savings to. PenCom is acting responsibly by keeping PFAs away from these instruments, no matter how attractive the yields may look,” she explained.

The caution also resonates with global experiences. In March 2023, the collapse of Credit Suisse in Switzerland led to the complete write-off of about $17 billion worth of AT1 bonds, triggering widespread debate about the safety of such securities. Similar concerns have been raised in other jurisdictions, with regulators tightening rules around the sale and ownership of AT1 instruments.

For Nigeria, the issue is particularly sensitive given the growing reliance of millions of workers on the CPS for retirement security. With over 10 million contributors, PenCom has repeatedly stressed that maintaining public confidence in the scheme is paramount. Any significant loss of pension funds could undermine trust in the system and destabilise the broader financial market.

A PFA manager who requested anonymity acknowledged that AT1 instruments offer higher yields compared to regular bonds but admitted that the risk profile is inconsistent with pension investment objectives. “Our job is not to gamble with contributors’ money. The regulatory framework gives us room to grow the fund steadily, but it also places guardrails to prevent reckless exposure. AT1 capital, in my view, belongs to more sophisticated investors who can absorb shocks, not to pension funds,” he said.

Meanwhile, banks are expected to continue exploring alternative strategies to strengthen their capital base. Analysts predict that lenders may turn more aggressively to rights issues, public offerings, private placements, and subordinated debt to meet recapitalisation targets. Some institutions may also pursue mergers and acquisitions to achieve compliance.

The warning from PenCom is also expected to prompt closer collaboration between financial regulators, particularly the CBN and the Securities and Exchange Commission (SEC), in monitoring fundraising strategies by banks. By ensuring that pension funds are shielded from high-risk exposures, regulators aim to maintain systemic stability while encouraging responsible capital raising by banks.

Stakeholders in the pension sector have praised PenCom for its vigilance. The Nigeria Labour Congress (NLC), which has often raised concerns about the safety of workers’ pensions, welcomed the directive. A labour representative noted that pension funds must never be used to “bail out” banks at the expense of contributors. “Workers contribute to the scheme for retirement security, not for speculative investments. We commend PenCom for standing firm,” he said.

As Nigeria’s financial sector navigates ongoing reforms, the protection of pension assets remains central to economic stability. While banks pursue recapitalisation to strengthen their resilience, PFAs will continue to focus on secure, diversified portfolios that align with PenCom’s conservative investment philosophy.

Ultimately, the Commission’s stance sends a clear message: contributors’ retirement savings are not to be compromised. With growing scrutiny on financial institutions worldwide, PenCom’s decision to shield pension funds from risky AT1 capital underscores its commitment to prudence, accountability, and long-term sustainability of Nigeria’s pension industry.