How Pension Funds are Invested Under Multi-fund Structure (1)

An Overview of the Multi-Fund Structure

The Pension Reform Act (PRA) 2014 introduced the Contributory Pension Scheme (CPS) as a mandatory pension arrangement for employees of the public and private sectors. The CPS requires both the employer and employee to contribute towards the payment of the employee’s pension at retirement. It is fully funded through the monthly pension contributions that are remitted into an employee’s Retirement Savings Account (RSA) managed by the Pension Fund Administrator (PFA). The primary objective of the scheme is to ensure that every person that worked in either the Public or Private Sectors in Nigeria including the self-employed persons receives his/her retirement benefits as and when due.

Within the eighteen years of successfully implementing this laudable pension reform, there were a number of laudable innovations introduced by the National Pension Commission to ensure that safety and fair returns on investments of Pension Fund Assets as enshrined in Section 85 (1) of the PRA 2014. Indeed, the Commission had routinely revised and issued Regulations on Investment of Pension Funds to reflect prevailing market and risk management realities. This has seen the aggregate Pension Fund Assets under management rise to ₦14.42 trillion as of 30 September 2022 according to data from PenCom. It is worthy to state that these funds are invested in varied but quality financial instruments, which are stringently monitored through the instrumentality of onsite and offsite oversight supervision by the Commission, all aimed at ensuring the Pension Fund Operators comply with the salient provisions of the investment guidelines. One of the initiatives introduced in the management of the Pension Fund Assets is the Multi-Fund Investment Structure which was introduced in July 2018.

The Concept of Multi-Fund Investment Structure

Following the amendment of the Regulation on Investment of Pension Fund Assets for the Pension Industry by the National Pension Commission, the Multi-Fund structure was introduced to replace the old “single-fund” structure that puts all contributors into one Retirement Savings Account (“RSA”) Fund without consideration for age or risk profile. The Multi-Fund structure is a framework that aims to align the age and risk profile of RSA holders by segregating the RSA Fund into Six (6) funds known as Funds I, II, III, IV, V and VI. The Funds recognizes different demographic (age) profiles and risk appetites of registered contributors. This ingenious initiative aligns contributors’ risk appetite with their investment horizon at each stage of their life cycles. The structure also seeks to provide investment portfolio choices for contributors and enhance the safety of pension assets through adequate portfolio diversification. In this article, our primary focus is to analyse and present the salient benefits inherent in RSA Funds I and II.

General Review of Funds, I and II

Fund I

This category of Fund is accessible to contributors below 50 years and contributors who wish to belong the fund must make an active choice. The fund is specifically suitable for young contributors due to its high exposure (up to 70%) to variable income securities i.e. quoted equities, mutual funds, private equity funds and infrastructure funds.

Contributors who wish to belong to Fund I must make an active choice by notifying their PFA of their intention to move to the Fund. However, contributors in Fund III and retirees are not allowed to switch to Fund 1 because of their age and risk profiles.

Fund II

This is the default fund for young and middle age contributors that are below 50 years of age. However, for contributors above 50 years but less than 60 years, they can opt to remain in Fund II. The major difference between Fund I and Fund II is the lower exposure to variable income securities (up to 50%).

It is imperative to state that transfer between Fund I and Fund II is subject to a maximum of twice in a calendar year. The first transfer in a calendar year shall be at no cost to the contributor, while any subsequent transfer in the same calendar year shall be at a flat rate of N1,000.00.

At this juncture, it is also essential to state that this innovative development of the Multi-Fund Investment Structure by PenCom would benefit the economy as a whole, as pension assets would be channeled into key areas of the economy such as infrastructure and housing, especially with the recent launch of the use of RSA for Residential Mortgage.

In Part II, the highlights of Funds III and IV of the Multi-Fund Investment Structure will be discussed.