How Pension Funds are Invested Under Multi-fund Structure (2)

In the article from the previous week (How Pension Funds are invested under Multifund Structure: Part 1- Focus on Fund I and II), we discussed the Multifund Structure introduced by the National Pension Commission (PenCom). The focus was on the general concept of the Multifund Structure and the salient benefits inherent in RSA Funds I and II.

We highlighted that the Multifund Structure was introduced to govern the investment of pension fund assets of Retirement Savings Accounts (RSAs) funds. To this end, Fund I, II, III, IV, V and VI were introduced to align contributors risk appetite with their investment vision, at each phase of their life cycle. The main objectives of the Multifund Structure is to achieve ideal returns for contributors by aligning their pension savings with their individual risk profiles, provide investment portfolio choices to contributors and enhance the safety of pension assets through adequate portfolio diversification.

In continuation of the article, we shall continue the discuss on the Multifund Structure focusing on Fund III and IV which are the also known as the pre-retiree and retiree funds respectively.

Fund III

This Fund is for contributors who are at least 50 years or older as at their last birthday and are still in active employment. It is a pre-retirement fund with a significantly reduced risk exposure to produce fair income. In the Fund III portfolio, the contributor’s exposure to variable income instruments drops to 20 percent when compared to Fund I and II with exposures of 75 and 55 percent respectively.  Variable instruments is defined as the sum of a PFAs investments in ordinary shares, mutual funds, private equity funds and infrastructure funds.

Contributors in Fund III cannot move to Fund 1 due to its high risk nature, considering the age of the Contributor. However, an RSA holder in Fund III can move to Fund II by written application to his/her Pension Fund Administrator (PFA) requesting for the move.

Fund IV

This fund applies to contributors who have attained the age of 60 years and above. The contributor is generally considered to have attained the retirement age and is automatically moved to Fund IV, (the retiree fund) from Fund III (The pre-retirement fund).

The main objective of the retiree fund is to ensure that the fund does not diminish or lose value between the point of retirement and the point of collection of a lumpsum and commencement of pension. The funds are exposed to little or no risks to generate fair income. To this end, the retiree fund is largely invested in fixed income securities such as Government Securities, Money Market instruments, Corporate Debt Instruments all in line with the Regulation on investment of Pension Fund Assets issued by PenCom.

At this juncture, it is important to note that the Fund IV or the retiree fund is for retirees who have chosen to access their retirement benefits through the programmed withdrawal mode offered by the PFAs. While, retirees that have chosen Retiree Life Annuity will have their funds transferred to a Life Insurance Company of their choice.

Conclusion

The Multi-Fund Structure has been beneficial to contributors’ as pension contributions are invested in the best manner to achieve better retirement benefits. For example, younger contributors may prefer a pension fund with higher returns, so as to increase the expected value of their pension at retirement, while older contributors or retirees, prefer a low risk fund, so as to minimize the likelihood of a reduction in the value of their pension.

In order for contributors to make informed choices, the Pension Reform Act, 2014, Section 55 (d) mandates the PFAs to provide regular information on the pension fund’s investment strategy, rate of returns and other performance indicators. Therefore, contributors can obtain information on the performance of each fund from the websites of the PFAs.