Pre-Trade vs Post-Trade Allocation Limits in Pension Fund Investing: Rethinking the 5% per issuer rule under Ghana’s pension investment framework

Delali Herman AGBO, CEO EcoCapital Investment Management Ltd

The growth of pension assets in Ghana has significantly transformed the country’s capital markets completely. With pension funds now among the largest institutional investors in the economy, regulatory guidelines issued by the National Pensions Regulatory Authority (NPRA) play a critical role in shaping how capital is allocated across the entire market.

One of the most debated provisions within the NPRA investment framework is the 5% per issuer limit applied to pension fund portfolios. While the intention of this rule is to ensure diversification and protect contributors’ funds, its application as both a pre-trade and post-trade limit has created unintended distortions in the market, particularly toward the end of each quarter when fund managers rush to rebalance portfolios to remain compliant.

This article examines the difference between pre-trade and post-trade limits, explains why the post-trade application of the 5% rule creates challenges, and proposes policy recommendations aligned with international best practices.

Understanding Pre-Trade and Post-Trade Limits

Pre-Trade Limits

A pre-trade limit restricts the size of an investment before a transaction is executed. For example, if a pension fund manages GHS 1 billion, a 5% pre-trade limit means the fund manager cannot purchase more than GHS 50 million worth of securities from a single issuer during the transaction. The purpose of pre-trade limits is to ensure adequate portfolio diversification, reduction of concentration risk and compliance with regulatory investment policies. Globally, pre-trade limits are widely used, and are considered a prudent risk management tool.

Post-Trade Limits

A post-trade limit requires that after market price changes, the value of a holding must not exceed the prescribed regulatory threshold. This means that even if the investment grows because the asset performs well, the fund manager may be required to sell part of the position to remain compliant. For example, let’s say a Pension Fund Portfolio Value is GHS 1 billion and 5% per issuer limit is GHS 50 million. If a fund purchased shares worth GHS 50 million, and the share price appreciates significantly, (which is a great news, right?) the value of the investment may rise to GHS 80 million.

Under a strict post-trade limit rule, the manager would be forced to sell GHS 30 million worth of the asset, even though the asset is performing well and may continue to perform well. This is one of the most difficult decisions an active fund manager would have to make to be in compliant – this is just like selling your best players all because they are playing too well.

Why This Has Become an Issue in Ghana

In practice, the post-trade application of the 5% limit has created structural inefficiencies, particularly in the market dynamics of the Ghana Stock Exchange. Toward the end of each quarter, pension fund managers frequently rush to sell strong performing assets simply to remain compliant with the regulatory limit. This has created three major problems worth discussing.

• Forced Selling of High-Quality Assets

Pension funds often hold shares of fundamentally strong companies such as MTN, GOIL, Total and so on… If the share prices of these companies rise significantly, the value of pension fund holdings may exceed the 5% limit, which is the expectation but it will rather force managers to reduce positions of a performing asset. This creates a paradox: the better the asset performs, the more pressure there is to sell it off, such forced selling penalizes success and limits portfolio growth.

• Artificial Market Volatility

Because many pension funds face similar compliance deadlines, large volumes of shares are sold simultaneously at quarter-end. This results in temporary price distortions, liquidity shocks and short-term market volatility. Instead of allowing prices to reflect long-term fundamentals, the market becomes influenced by regulatory rebalancing pressure.

• Limiting Long-Term Wealth Creation

Pension funds are long-term investors. Their objective is to maximize sustainable returns for contributors. However, forcing funds to reduce exposure to their best performing assets undermines this objective. If global investors such as sovereign wealth funds or pension funds in developed markets were forced to sell assets whenever they appreciated beyond a fixed allocation limit, many of the world’s most successful investments would never have compounded over time.

International Practice: How Other Markets Handle This

Globally, pension regulations emphasize pre-trade diversification rules rather than rigid post-trade enforcement. In many jurisdictions:

• Post-trade breaches caused by market appreciation are allowed temporarily
• Managers are given reasonable timeframes to rebalance
• Some regulators allow higher thresholds once appreciation occurs

For example:

• In several OECD pension frameworks, concentration limits are enforced at the time of purchase, not strictly after price appreciation.
• Portfolio breaches due to market movement are typically corrected gradually, not immediately.

This approach recognizes that market performance should not penalize investors but should rather be celebrated.

Illustrative Example

Let’s consider a pension fund that invested in MTN Ghana shares when the price was GHS 1.50. Suppose the fund invested GHS 50 million, representing the 5% limit. If the share price later rises to GHS 3.50, the investment would be worth GHS 116 million. Under strict post-trade enforcement, the fund would have to sell more than half of its holdings simply to comply with the rule. Yet this outcome would mean that selling a high-performing asset, which is now trading at GHS 6.27, will mean that the manager is reducing long-term returns and potentially weakening market confidence.

Policy Recommendations to the NPRA

To ensure the pension system supports both prudential regulation and market growth, several adjustments could be considered.

1. Maintain the 5% Limit as a Pre-Trade Rule

The 5% per issuer limit is appropriate as a pre-trade restriction. This ensures that fund managers do not excessively concentrate investments in a single issuer at the time of purchase.

2. Introduce Flexibility for Post-Trade Breaches

If an investment exceeds the 5% threshold due to market appreciation, the fund should not be forced to sell immediately. Instead the guideline should permit the position to remain and require rebalancing within a reasonable period.

3. Introduce a Post-Trade Tolerance Band

A tolerance band could be introduced. Example, Pre-trade limit: 5% and Post-trade tolerance: up to 30%. If the asset grows beyond 5% due to market performance, the fund may hold it until it reaches the tolerance threshold before rebalancing.

4. Allow Natural Portfolio Rebalancing

Instead of forced selling, regulators could allow managers to rebalance portfolios through new investments in other assets, gradual reallocation over time and cash inflows from contributions. This avoids unnecessary market disruption by force selling good investment assets.

Supporting the Growth of Ghana’s Capital Markets

The pension industry has become one of the most important drivers of liquidity and stability on the Ghana Stock Exchange. Regulations should therefore aim to balance risk management, market development and long-term investment growth. While diversification rules are necessary, their design should not inadvertently penalize successful investments or distort market behavior.

The 5% per issuer rule remains an important safeguard for diversification within pension fund portfolios. However, its strict application as a post-trade limit can unintentionally constrain portfolio growth and create unnecessary market volatility. A regulatory approach that emphasizes pre-trade discipline while allowing flexibility for post-trade market appreciation would better align Ghana’s pension investment framework with international standards.

Such reforms would allow pension funds to capture the full benefits of successful investments, support the growth of the Ghanaian capital market, and ultimately deliver stronger retirement outcomes for millions of contributors. The time may therefore be right for the National Pensions Regulatory Authority to review the implementation of the 5% issuer limit and adopt a framework that balances prudential oversight with long-term investment growth.

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