‘Why retiree fund must be invested cautiously’

Pension Fund Administrators (PFAs) must be cautious in investing retiree fund by separating such fund from active workers’ fund to minimize risks.

An investment guideline of the National Pension Commission (PenCom) indicates that investing the funds together would mean that reduction in the value of equities due to market dynamics would cause retirees to lose part of their RSA balances between the date of retirement and date of receipt of lump sum/first pension.

PenCom notes that although an appreciation in value of retirees’ fund is desirable, the most important concern of the retiree is security of their funds.

The guideline stated that since the general age of retirement is 60 years and above, the retirees’ risk appetite is not as high as that of active contributors.

In order to reduce risks, the Retiree Fund shall be wholly invested in fixed income securities such as government securities, corporate debt instrument and money market instrument.

PenCom insists that PFA can invest as much as 100 per cent of retiree fund in government securities, 60 per cent in money market instrument and 40 per cent in corporate debt instrument.

Even the fees charged on retiree fund is regulated, given the sensitive nature of the fund, even as it is based on net asset value rather than return on investment

PenCom approved a maximum of 0.75 per cent per annum of daily Net Asset Value (NAV) of the Fund to be charged as asset based fees.

The PFA is expected to take 0.50 per cent while Pension Fund Custodian is to take 0.15 per cent and PenCom is to take 0.10 per cent per annum.