Pension: X-raying imperatives of Multi-fund Structure
The introduction of multi-fund structure by the National Pension Commission (PenCom) recently was to further strengthen the objective of the Contributory Pension Scheme (CPS) by ensuring the safety and fair returns on investment of pensioners’ fund through a structured investment portfolios. The take off date of the new initiative was July 1, 2018.
The Multi-Fund structure is a framework that aims to match retires age and risk profile to one of four distinct funds – i.e three (3) Retirement Saving Account (RSA) Fund types for active contributors and one (1) Retiree Fund for retired contributors.
Prior to its introduction, there were two funds – if you retire, you will be under Retiree Fund, if you are still active and working, and 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.
Pension is invested in variable income instruments. They are investments that generate income or returns that cannot be pre-determined from the date the investments were made. In addition, the prices of such instruments fluctuate daily. Instruments in this category include Ordinary Shares, Collective Investment Schemes (“CIS”) such as Mutual Funds, Real Estate Investment Trust; Infrastructure Funds and Private Equity Funds.
Such investments have potentials to generate high returns over the long term but could be risky owing to uncertainty and fluctuations in market prices and returns.
Below are some frequently asked questions about multi-fund structure
Does my age really count?
In investing money, everyone has a limit to the amount of risk that they can take and the amount of uncertainty they can handle. This is known as risk tolerance. Typically, younger people tend to have more capacity for risk because they still have time to recover from loses (if any). Once a person is nearing retirement, it is advisable that they limit the amount of risks they take and reduce exposure to uncertainty as they would start drawing down on their pensions within a short period.
Consequently, the allowable exposures to variable income instruments have been designed such that Fund I has the highest allowable limit, followed by Fund II, III and IV respectively. This reduces the risk and uncertainty of contributors in line with their ages.
What is default mechanism?
On the day of commencement, a default mechanism shall apply. According to the default mechanism, all active contributors that are 49 years and below would be placed in Fund II while active contributors that are 50 years and above would be placed in Fund III. Subsequently, an active contributor can make a request to his PFA to move between Funds subject to certain restrictions. An active contributor of 49 years and below can opt for Fund I, while an active contributor in Fund III may elect to be assigned to Fund II. However an active contributor in Fund III is not allowed to opt for Fund I while an active contributor in Fund II is not allowed to opt for Fund III. Fund III is strictly for active contributors above 50 years. To be assigned to any fund based on the preceding, an RSA holder must make a formal request to his/her PFA.
What if I am no longer satisfied with my fund type?
An active contributor may switch from one Fund type to another Fund type within a PFA, once in 12 months without paying any fees (subject to a formal application).
Any additional requests for switches among Funds within a 12-month period by the active Contributor shall attract a fee, of an amount not less than a minimum value, to be determined by PenCom from time to time.
When will the 12 months period start counting?
PenCom will provide details on the 12 months period in the operational framework that would guide the transition to the Multi-Fund structure.
What do I really stand to gain from Multi-funds structure?
Of course, there are. The new structure allows RSA holders more control over how their pension funds are invested based on their risk tolerance. For instance, an RSA holder in Fund III owing to the default classification based on age, may have more tolerance for risks and uncertainty and could opt to be assigned to Fund II.
How soon can I choose a fund type?
PenCom is yet to provide the operational framework to guide the transition to the Multi-Fund structure. Once the framework is released, there will be proper guidance regarding when contributors can be assigned based on the default age classification. Contributors will subsequently have the option to be assigned to a Fund of their choice depending on their risk tolerance.
Who take the ultimate switch responsibility between the contributor and the PFA?
Whilst the contributor has the right to switch between funds depending on his or her preference, the PFA will be responsible for effecting the switch upon receipt of a formal request from the contributor. The PFA is also in a position to provide financial advice to contributors to assist in assessing risk and making an informed decision
Will my pension balance be affected when my PFA moves into multi-funds structure?
The balance in your RSA will not change due to the movement to the multi-fund structure because the entire balance would be moved to the appropriate fund without charges. However subsequent growths in your balance would depend on contributions such as the mandatory monthly contributions, voluntary contributions as well as returns generated by the PFA on that particular fund.
What do I need to have before I can make the switch?
In order to switch from one fund type to another, a formal request must be submitted by the contributor to his or her PFA.
What if my date of birth is wrongly captured, will I be placed in the wrong fund?
You still have the opportunity to check and update your records with your PFA before the commencement of the transition.
Do I need to seek advice from external financial advisor or my PFA before taking a decision to switch?
Whilst you are at liberty to seek advice from external financial advisers, we would make information available on the fund performance and indices to enable you take an informed decision.
Will I be able to move back to the preferred fund free of charge after my date of birth correction (especially when my date of birth was wrongly captured by my PFA)?
Yes, you will be able to move free of charge given that a contributor has the option to move for free once within 12 months. However, you still have the opportunity to check and update your records with your PFA before the commencement of the transition.
Can I split my voluntary contribution in a separate Fund Type while my mandatory goes into another Fund Type?
Every RSA holder is entitled to only one Pin for all types of contributions. Consequently, your voluntary contribution will be in the same Fund as your mandatory contribution
Will the RSA and VC funds have separate fund price or the same?
The RSA and VC will have the same fund price because they will be invested in the same fund the contributor selects.
How will the Fund Prices under the Multi-Fund Structure be determined at the point of crossing over to the new structure and what would happen to the Old Fund Price and units?
PenCom would provide guidance to how the fund price and units would be treated in the operating framework that would guide the transition.
What are the multi-funds options for Approved Existing Schemes?
Approved Existing Schemes are governed by the Board of Trustees who have the right to structure the portfolios in the best interest of the beneficiaries subject to PenCom’s approval. Consequently, the BOTs of contributory AESs can amend their agreements and restructure them along the lines of the Multi-Fund structure.
What impacts does Multi-Fund structure have on my future pension assets at the point of retirement?
The Multi-Fund structure provides more alignment between your retirement goals, risk appetite and age. Consequently, there will be a better chance for your pension assets to meet your expectations when you retire.
If I become unemployed and make a withdrawal such as 25%, can I request that the funds be moved to another fund structure since no contributions are entering my RSA?
The regulation does not restrict movements due to withdrawal of 25%. As long as the individual is below 50 years, the option is to switch between Fund I and Fund II.
Is it possible for a client below 50 years to move to fund III?
No, Fund III is strictly for active contributors of 50 years and above.
If I decide to switch from Fund II to Fund I, can I switch back to Fund II?
Yes, but it will be at a cost if you intend to switch back to Fund I within 12 months.
Will I have access to the financial reports of other funds?
The annual financial reports of the RSA Funds of all PFAs are published once a year in at least 2 national dailies. In addition, the fund prices would be published daily on the websites of the PFAs.
With the new multi-fund structure, can I be given the option to choose which specific variable income instruments my funds can be invested in?
No, the regulation only allows contributors to select a Fund, but the PFAs would continue to have the responsibility of selecting the specific instruments that the Funds would be invested in.
Will the charge for moving between funds be deducted from the RSA or paid as a separate amount in to the bank?
The charge would be deducted from the RSA balance of the contributors.
According to the Zonal Head, South-West Zonal Office, National Pension Commission (PenCom), Mr. Babatunde Philips, speaking recently on a radio programme on FM 102.7 on the Multi-fund structure, said 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.
“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.”
Philips said “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,“ he said.
Explaining further, he said “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,” he said.
According to him, “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, Philips added.
Fund two, he said 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,” he added.
On how the policy will benefit the contributors, Mr. Philips said, “As I said earlier when I was talking about returns and risk – In risk business, the higher the risk, the higher the returns. The point here is that those in fixed income investment, the returns is 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 higher 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, he cautioned.
