How pension multi-fund structure works – Philips

Recently the Zonal Head, South-West Zonal Office, National Pension Commission (PenCom), Mr. Babatunde Philips, was a special guest on the popular Retirement Radio Programme – Retirement Mata – on Naija 102.7 FM. The 30 minutes (5PM to 50.30PM) Pidgin English programme packaged and presented by Chuks Udo Okonta of Inspen Media and is sponsored by PenCom to speak on “How Multi-Funds Structure works.”  Below is the excerpt of the programme as put together by Edet Udoh.

The reason for the programme was to sensitise retirees and the general public on how the recently introduced multi-fund structure works. The Multi-fund structure was introduced by PenCom, an agency saddle with the responsibility of regulating the pension sector in Nigeria to benefit the pensioners. The take off date was July 2, 2018.

What is Multi-fund structure and how does it work?

Before explaining Multi-fund structure, it is important to emphasise the fact that for PenCom, the objective of the Contributory Pension Scheme (CPS) is to ensure safety and fair returns on investment of pension because pension money is employees ‘last card’ and that money, nothing must do it.

Before July this year, there were two funds – if you retire, you will be under Retiree Fund, if you are still active and working, you will be under Active Fund. The Commission discovered that in the life circle of human being, some people will spend 35 years, some 25 years while some will spend 20 years in service.

Based on this, it is wrong to categorise everybody under the same investment portfolio. For instance, it is counter-productive to invest the money of a contributor whose years for retirement remains five years in the same investment with those who still have up to 20 or 25 years to work before retirement. This was what brought about the idea of multi-fund structure.

Now let me explain what Multi-Fund structure is. In Multi-Fund structure, contributors are grouped into four categories and what determines one’s category is the contributor’s age. The funds allow contributors’ savings to be aligned with risk appetite and investment profile. What we mean by risk appetite is that, if you are working, there are some investments under the multi-fund structure called variable income investment and some known as fixed income investment.

For the fixed income return, for example, it’s like putting money in the Treasury Bill or putting money in saving account. If 10 per cent statutorily is what you will get from the bank, depending on the duration of saving, that is what the bank will pay you at the due date. In this case you already know what you will receive as interest. But in variables, it is impossible to pre-determine your interest. For example, if you buy stocks or shares, the dividend that will accrue on those stocks and shares is not known. This is the reason why PenCom categorises the investments into different classes of asset, based on variables and fixed income.

For people that have retired already, they cannot afford to invest their money under long term investment category.

There are four funds under the Multi-Fund Structure. Fund four is for people who have retired already. They are called retirees. Their money is to be categorized under fund four.

Those above 50 years of age, which we called pre-retirees, are under fund three. If you are below 50 years, you belong to fund two.

Fund one is called Aggressive Fund. Under this category of fund, its investment returns are very high and at the same time, the risk is also very high – not the risk of losing your money, but because if you invest your money there, it will take long before you begin to receive returns and the returns could be in multiple of ten or five but you have to wait for a long time for the maturity of the investment. For example, if somebody buys a house today for N5 million and he wants to sell the same house next year, the interest on returns on this investment (that is buying and selling the house) could be N500,000 but in 20 years, the value of that house could be N30 million or N40 million.

This is why PenCom decided that there are some investments that in 15 years, 10 years, and five years time, you will receive a very high return if you put your money there. In the light of this, somebody that just starts work at the age of 25, who still has up to 20 to 25 years before retirement can afford to invest his money in those long term investments with very fantastic returns. But somebody with just five years to retire, cannot afford to do investment of 15 years when his remaining period to retire is five years.  That is what is called miss-match in investment. It was based on avoiding miss-match that brought about the issue of categorization of investment based on age. In this case, the age of the contributors determines his profile. If you are still very young, you can afford to invest in 15 years or 20 years duration.

Fund two is a default fund for anybody below 50 years of age but you can decide to do fund one which is aggressive fund but he has to send a request to his Pension Fund Administrators (PFAs) and sign that he want to do fund one. If you are in fund three, you can move to fund two but if you are in fund four, the retiree’s category, you cannot move to another fund. Investment returns for this category is always very small.

What are the requirements for moving from one category to another and how often can one move?

If you are below 50 years, you will be in fund three and if you are above 50, you will be in fund two. You can choose to do fund one if you are in fund two because it is more aggressive with high returns on investment but you have to make a formal request on this from your PFA.  But if you are in fund three for those people above 50 years but not yet retired, you can request from your employer for a change. Anybody above 50, by default, is in fund three and anybody below 50, is in fund two. You can opt to move down a step – those in fund three can move to fund two. A formal request to this effect must be made to your PFA.

Moving from one fund to another, does it attract any fee?

You can move in the same PFA within a year without paying any fee.  But if you have to move more than once a year, you have to pay for the movement.

How will this policy benefit the contributors?

As I said earlier when I was talking about returns and risk – In risk business, the higher the risk, the higher the return, The point here is that those in fixed income investment, the returns is very very certain but not as fantastic as those in variables investment. What people need to know is that the variable income can swing anywhere. What we are trying to do is that for aggressive fund on the long run, after some years you are bound to gain more. Its amount to cheating if you put everybody in the same class of investment because if you are in the category where your money is invested in bonds, for example bond is safe but the returns is not as sizeable as investing in the real estate trust or infrastructure bond where you can get something more fantastic.

What we do is that because of the gestation period, for people who are young, investing on aggressive fund is, you are bound to make more gain in the long run than those in fixed income investment. That was why I used the analogy of somebody buying a house today for N5 million; if you wait for ten years and somebody that waits for only one year, the person that waited for ten years will, when the house is sold, get more returns on investment than that person that wait for only one year.  If I have 20 years, 25 years or 30 years to be in the scheme, why should I invest my money with somebody that is due for retirement in three years time? It is wrong.