PenCom Restricts Pension Asset Crossing: PFAs Face Mandatory Prior Approvals and Liquidity Premiums

The National Pension Commission (PenCom) now prohibits Pension Fund Administrators (PFAs) from executing inter-fund asset crossings without prior regulatory clearance and verified commercial justification. Under Circular PenCom/INSP/Survw/2024/1382, the pension regulator mandates that operators prove fiduciary benefit, apply pricing adjustments for illiquid securities, and obtain a formal "no objection" before moving holdings between managed funds.

The directive addresses persistent regulatory observations where administrators transferred assets across internal portfolios without sufficient impact assessments, fair valuation analysis, or transparent governance controls. The framework governs all asset transfers between pension funds, explicitly exempting standard statutory interfund transfers governed under the Multi-Fund Structure for Retirement Savings Accounts (RSA).

Mandatory Fiduciary Tests and Liquidity Surcharges

The circular shifts the evidentiary burden directly to pension fund administrators prior to initiating any portfolio crossing. Administrators must conduct documented due diligence confirming that the receiving fund possesses the appropriate risk tolerance, balance-sheet holding capacity, and statutory mandate for the instrument. Concurrently, the originating fund must register a documented rationale for divestment, validated by internal risk and compliance departments.

Where an asset crossing involves illiquid securities, PenCom requires the PFA to assign an explicit compensatory discount (liquidity premium) to the receiving fund. The administrator must calculate this premium against the issue size and term to maturity of the asset. This pricing adjustment offsets exit restrictions and illiquidity risks, protecting receiving contributors from inheriting impaired or non-tradable instruments at par valuation.

Governance, Return-Smoothing Prohibitions, and Prior Approvals

PFAs cannot execute asset crossings to artificially smooth or manage fund performance metrics (returns management). Boards of directors must establish internal asset-transfer governance policies that align directly with PenCom investment guidelines and board-approved risk tolerances. Directors must assess executive submissions, examine portfolio impacts, and verify alignment with statutory fiduciary standards before greenlighting any crossing request.

For non-discretionary portfolios or ring-fenced employee benefit schemes, the administrator must secure written authorization from the scheme sponsor before initiating a transfer. Once approved internally, the PFA must submit the transaction docket to PenCom for a written "no objection" decision. The Commission commits to issuing an approval or denial within two working days of receipt.

Custodians Deputized as Settlement Gatekeepers

The circular turns Pension Fund Custodians (PFCs) into mandatory regulatory checkpoints. Custodians cannot settle or journal any inter-fund asset transfer that lacks an official PenCom "no objection" letter.

Custodians must report suspicious asset movements, specifically flags denoting artificial volume generation (churning) or maneuvers that extract fee commissions at contributor expense. In addition, custodians must submit monthly asset crossing logs directly to PenCom to allow surveillance officers to track asset migrations across the broader pension sector.

Compliance Implications / What This Means for Your Business

• Who Must Act: Chief Investment Officers, Risk Officers, and General Counsel at licensed PFAs, along with Operations and Settlement Heads at licensed Custodians (PFCs).

• Immediate Operational Changes: PFAs must stop internal crossing settlements that bypass supervisory notification. Investment teams must build formal due diligence files containing documented suitability assessments, control department endorsements, and maturity-based valuation analyses before routing orders to custodians.

• Financial and Pricing Exposure: Investment committees face heightened scrutiny over illiquid asset valuations. Applying an incorrect liquidity premium—or crossing assets to salvage a struggling fund's net asset value (NAV)—constitutes a direct violation of fiduciary duties and triggers administrative sanctions under the Pension Reform Act framework.

• Settlement and Execution Timelines: Operators must factor in a two-working-day regulatory review buffer for transactional planning. Custodians face immediate exposure to regulatory enforcement if their settlement desks clear internal transfers on verbal or internal authorizations without verified PenCom paperwork.

• Open Regulatory Questions: The circular leaves the precise mathematical formula for calculating the mandatory liquidity premium open to institutional pricing models, creating potential variance in valuation audits during upcoming consolidated regulatory examinations. Operators must confirm with PenCom's Surveillance Department whether proprietary pricing models require standalone pre-clearance.

Source: Original reporting via National Pension Commission.