Multi-fund structure: Pension contributors to decide how funds are invested

Starting from today, all Pension Fund Administrators (PFAs) in Nigeria will transit from double fund structure to multi-fund structure, allowing contributors to have a say in the investment portfolios their funds are committed.

Notice issued by the National Pension Commission (PenCom) to PFAs indicates that all pension managers must on July 1, 2018 start the implementation of the multifund structure, which is expected to increase the returns on investment of pension funds as well as protect the funds of retirees from investment risks.

The Founder and Chief Executive Officer of Learning Impact NG , Omagbitse Barrow, said the Multifund structure requires RSA holders to select the investment portfolio that they will like their pension funds invested in based on their age and risk appetite.

Barrow said the new initiative offers contributors more options on how their pension contributions are invested.

PenCom is projecting higher returns on pension fund investments as the Contributory Pension Scheme (CPS) transits from double fund structure to multi-fund structure.

An explanatory note obtained from PenCom on the new policy states, “The new MultiFund Structure seeks to align a contributor’s risk tolerance or appetite with his/her investment return expectations, based on work life cycle.”

The new fund structure has four funds unlike what the two-fund structure which is in operation now.

Due to the nature of retirement funds, PenCom mandated PFAs to operate two funds: the Retiree Fund, which are not invested in risky instruments and active Retirement Savings Account Fund, which PFAs are a bit venturesome when it comes to investments.

However, perceived low returns on investment seem to have necessitated the creation of more funds, bring the total to four.

“A major benefit of the introduction of the Multi-Fund Structure is that the contributors’ pension contributions are invested in an optimal manner to achieve enhanced retirement benefits. For example, younger contributors may prefer a pension fund with a higher level of risk and expected return, so as to increase the expected value of their pension at retirement, while older contributors or already retired, may prefer a low risk fund, so as to minimize the likelihood of a reduction in the value of their pension,” PenCom stated.

Fund types and the default mechanism for the allocation of contributors are Fund I for young contributors based on choice, Fund II for young and middle-aged contributors (ages 49 years and below), Fund III for pre-retirees (ages 50 years and above) and Fund IV for retirees.

PenCom said a contributor in Fund II wishing to be assigned to Fund I shall make a formal request to the PFA, contributor in Fund III wishing to be assigned to Fund II shall also make a formal request to the PFA while a retiree or active contributor 50 years and above shall not be allowed to choose Fund I.

However, an active Contributor may switch from one Fund type to another Fund type within a PFA once in 12 months, without paying any fees. Any additional switches between Funds within a PFA would attract a fee, which would be determined by PenCom.

A Pension Expert, Sani Mustapha, explained that the MultiFund structure implementation is a step towards strengthening the investment framework that is bound to reward the active RSA holders.

Mustapha, who was a regional manager of a leading PFA but now works in Pension Transitional Arrangement Directorate, said it is a positive development as contributors can now have a say in the investment of their funds as done in some parts of the world.

He said in the United States, contributors are the ones who determine the investment portfolios where their funds are invested but in Nigeria, PFAs take the decision on behalf of the contributors, largely due to low financial literacy among the contributors.

He said the implementation of the multi-fund structure is a way of allowing the contributors to now decide where their funds will be invested with restrictions that still allow PFAs to protect the funds of retirees and workers about to retire from risky investments.

To protect the funds further, PenCom has outlined some investment securities: Not more than 10 per cent of the total value of the RSA Funds shall be invested in securities issued by a corporate entity (equity, money market and debt) and not more than 4.5 per cent of any one Fund shall be invested in the ordinary shares of a quoted company.

In addition, not more than 10 per cent of the total value of the RSA Funds shall be invested in the issued share capital of a quoted company and not more than 45 per cent of pension assets managed by a PFA shall be invested in a sector of the Nigerian economy.

The introduction of the multi-fund structure may not be unconnected with the desire of PenCom to increase the returns on investment of pension funds by PFAs.

Data from PenCom show the weighted average return on investment on the RSA ‘Active’ Fund, net of asset based fees and taxes, was 11.59 per cent as at the end of 2016.

It should be noted that this nominal return on investment was 2.94 per cent higher than 8.65 per cent recorded in 2015.

However, PenCom acknowledged in its 2016 report that the return on investment for 2016 represented a negative real return of -4.04 per cent based on the average inflation rate of 15.63 per cent in 2016.

This also implies that retirement savings in PFAs lost 4.04 per cent value as profits made from the funds could not match the depreciating effect of inflation in 2016.

Note that one of the key functions of the PFAs is to “invest and manage pension fund assets; payment of retirement benefits and accounting for all transactions relating to the pension funds under their management.”

Daily Trust on Sunday had previously reported returns of investment of some PFAs in 2016 and 2017 and some of the PFAs posted low returns.

The 4th quarter edition of AIICO Pension Managers Limited quarterly newsletter for 2017 indicated 17.29 per cent as return on investment on RSA Fund but Daily Trust could not trace the details on the Company’s website and so could not get the Retiree fund ROI.

APT Pension Fund Managers Limited disclosed on its website that the PFA made 22.20 per cent ROI on RSA Fund and 21.43 per cent on Retiree Fund.

“We are happy to inform our valued customers that Apt Pension has been exceptional in Return on Investment (ROI). For substantial part of 2016 Apt has been on 1st or 2nd Position in the industry in terms of ROI. Apt Pension maintained the performance into 2017 at 1st Position for the entire year,” the PFA stated on its website.

CrusaderSterling Pensions Limited disclosed 9.70 per cent as its ROI but it was not specifically stated whether it was for retiree fund or RSA fund.

Premium Pension Limited revealed 12.28 per cent as its return on investment for 2017, while its three-year rolling average for 2016 stood at 9.98 per cent for RSA Fund and 11.14 per cent for Retiree Fund.

Legacy Pension Managers Limited posted 9.45 as its three-year rolling average ROI for RSA Fund and 11.79 for Retiree Fund while the PFA made 9.76 per cent ROI on RSA fund in 2016 and 11.06 per cent for Retiree Fund.

OAK Pensions Limited disclosed 13.47 per cent as its ROI rate but it did not specifically state the separate rates for RSA Fund and the Retiree Fund on its website.

Daily Trust on Sunday also found that Pal Pensions Limited posted 10.34 per cent ROI for 2016 in its fourth quarter newsletter for the year.

It is hoped that the implementation of the multi-fund structure from today will manifest in higher returns on investment of pension fund in future.