How return on investment can impact your retirement savings

Ever wondered the difference return on investment (ROI) can make to your total retirement savings when you retire?

Let’s assume Mr. A and Mr. B started remitting N11, 000 into their retirement savings accounts (RSAs) in different pension fund administrators (PFAs) at the same time. If Mr. A is using PFA-A with 20 per cent constant return on investment (ROI) per year and Mr. B is using PFA-B with 10 per cent constant ROI per year, in 35 years, Mr. A will retire with N693.92 million while Mr. B will retire with N42.11 million.

The above calculation using an online pension calculator explains the big impact of return on investment on retirement savings which many new entrants to the contributory pension scheme (CPS) in Nigeria seem unaware.

Analysis shows that Mr. A contributed N11,000 for 420 months which make up 35 years and accumulated N4.62 million but by consistently returning 20 per cent as return on investment on the savings as they trickled in over 420 months, PFA-A made a profit of N689.3 million from the savings.

This explains why new contributors to the CPS should first consider a Pension Fund Administrator’s historical record of returns on investment before opening a Retirement Savings Account (RSA) with it.

Data sourced from the National Pension Commission (PenCom) show that in 2016, 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 year ended 31 December, 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 the year 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 checked the websites of PFAs in Nigeria to determine their returns on investment, taking note of both the annual and three year average of the returns.

However, findings show that some PFAs do not disclose the information on their websites.

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

Note that not all PFAs posted their annual or three-year rolling average returns on investment on their websites as they the unit prices of both the RSA and Retiree Funds.

To up the returns on investment, PenCom has introduced a multi-fund structure that allows contributors to choose between high and low risk investments.

From the first quarter of this year, PenCom mandated PFAs to create four funds from the initial two, allowing contributors more choice, especially younger contributors who have more taste for higher risk and higher return on investment.

While Fund I will be for younger generation that can take risks in investment for higher returns, the Fund IV will be for retirees and will be invested with caution and possibly low return on investment.