Since the coming on board of the Multi-fund Structure not many Retirement Savings Account (RSA) holders are aware they could actually take advantage of the investment guideline to increase their pension purse. Paddy Ezeala, a communication and development specialist based in Enugu in this article review the scheme and how RSA holders can strategically boost their pension earnings.
The Contributory Pension Scheme (CPS) has largely been successful. But proper understanding of the workings and the immense opportunities inherent in the system would enhance the maximisation of its potentials, especially by Retirement Savings Accounts (RSA) holders. One of the major differences between the old Defined Benefit Scheme (DBS) and the current CPS, apart from the deregulation of pension administration with its concomitant private sector participation, is the opportunity to grow accumulated funds. Pension funds are becoming increasingly relevant to economic development.
There is need for proper enlightenment and sensitisation of the general public on the opportunities available to the RSA holder to direct his or her Pension Fund Administrator (PFA) in line with available investment options. For proper understanding, since July last year, The National Pension Commission (PenCom) created options in the CPS with regard to how pension funds are invested. Previously, from inception of the industry in 2004, contributions of workers, those in active employment, are lumped together by the PFA in a single Investment Fund and invested in various instruments in line with the guidelines laid down by the regulatory body, PenCom. The choice of the actual portfolio composition is made by the PFA without any input by the account holder.
As it is today, the story is different. In what is called Multi-funds Structure, three separate investment funds, i.e. Fund I, Fund II and Fund III are available to active contributors, while retirees are in Fund IV.
What is Multi-fund Structure? “The Multi-Fund structure is a framework that aims to align the age and risk profile of RSA holders by dividing the RSA Fund into four distinct Funds. The current RSA Fund will be sub-divided into three separate Funds, while the RSA Retirees Fund would be the 4th Fund.” It is the risk features of the different funds that differentiate them. In investment, investors are free to choose portfolios that align with their risk appetite and further informed by a cocktail of reasons including stock of investments, age, level of income and needs. For instance, young people have a higher disposition to risks with regard to pension funds investment. This is because the invested funds would naturally have longer gestation period and would in the long-term most likely earn higher returns on their investment. Some would keep contributing for up to 35 years. But someone already in his 50s and close to retirement would not be able to take high risks. In Nigeria, age and level of income should be the major determinants of choices to make.
Following the regulations, the maximum exposure to variable investments is 75 percent for Fund I, 55 percent for Fund II, 20 percent for Fund III and 10 percent for Fund IV while the minimum exposures are 20 percent for Fund I, 10 percent for Fund II, 5 percent for Fund III and 0 percent for Fund IV. This implies that Fund I is amenable to aggressive and high risk investment while Fund IV naturally deserves a more careful and conservative approach with regard to investment.
Fund I is available to RSA holders on request who are above 50 years old even when contributors who are above 50 years old by this regulation are placed in Fund III. Those 49 and below are in Fund II while retirees are in Fund IV. There is an opportunity to migrate from one Fund to another subject to other regulations and/or restrictions.
“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.”
The Multi-fund Structure unpacks tremendous advantages. 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. But to ensure that RSA holders maximise the gains of the scheme, there should be proper understanding of how it works. This is why pension operators and the regulatory body must continue and even expand and intensify public enlightenment programmes on its workings and benefits. It should be noted that the age of the RSA holder and the amount of investible funds to a large extent should determine or inform penchant towards risk or otherwise.
