By Victor Ahiuma-Young
SINCE the advent of the Contributory Pension Scheme, CPS, following the Pension Reform Act, as amended of 2014, the industry has witnessed positive initiatives aimed at deepening the sector for greater value additions to contributors.
One of these initiatives is the Multi-Fund Structure for Retirement Savings Account, MFSRSA, Funds.
This fund, according to the National PensionCommission, PenCom, seeks to improve upon the existing two-fund structure and comprises four Funds, which provide contributors an opportunity to improve their long-term terminal retirement benefits by properly aligning individual contributor’s funds with their individual risk profile.
The existence of alternative Funds makes it necessary to communicate the characteristics of these Funds in as simple a way as possible, to facilitate decision-making. It is expected that contributors will take rational decisions based on a thorough understanding of the options available and of individual needs and expectations.
Following the enactment of the PRA 2014, PenCom further amended the Investment Regulation in April 2017, largely to incorporate the new provisions in the 2014 Act, as well as align the Regulation with market realities.
One of the major amendments was the introduction of the Multi-Fund Structure for Retirement Savings Account (RSA) Funds.
The new Multi-Fund Structure seeks to align a contributor’s risk tolerance or appetite with his/her investment return expectations, based on work life cycle. Thus, the RSA Fund has been sub-divided into four Funds, to cater for the different age groups of contributors, including retirees under the CPS.
The four Funds to be established and applicable age groupings include:
Fund I (Young Contributors): This Fund is growth-oriented and is aimed at young contributors who are 49 years and below.
This group of contributors have several working years ahead of them and are in a better position to rapidly grow their pension contributions over a long period of time; and can assume a relatively high level of investment risk.
The assets allocation structure therefore allows greater investment in variable income or growth securities (ordinary shares, private equity and infrastructure funds, open/close ended funds etc).
Fund II (Default Fund/Middle-aged Contributors): Fund II is the default Fund and is similar to the current RSA ‘Active Fund. At the commencement of the proposed Multi-fund Structure, all active contributors would be moved to Fund II. Subsequently, contributors would need to request formally to be moved to Fund I.
Fund III (Pre-Retiree Fund): Fund III is the most conservative Fund for ‘active contributors and is designed for those close to retirement age. It essentially maintains an assets allocation structure similar to the current RSA Retiree Fund. However, unlike the current RSA Retiree Fund that allows up to 5 per cent investment in ordinary shares and open/closed-end funds, Fund III allows a maximum of 10 per cent in both asset classes, to enable contributors enjoy some capital appreciation on their pension assets, within the 5 to 10-year period before retirement.
Fund IV (Retiree): Fund IV is essentially a Retiree Fund and maintains the asset allocation structure similar to the current RSA Retiree Fund, with the exception of ordinary shares and open/closed-end funds, which had been reduced from 10 per cent to 5 per cent of total pension fund assets. This is meant to further reduce the exposure of the Fund to market volatility that could adversely affect the value of the pension assets.
A major benefit of the introduction of the Multi-Fund Structure is that the contributors pension contributions are invested in an optimal manner to achieve enhanced retirement benefits. For example, younger contributors may prefer a pension fund with a higher level of risk and expected return, so as to increase the expected value of their pension at retirement, while older contributors or already retired, may prefer a low risk fund, so as to minimize the likelihood of a reduction in the value of their pension. Other potential benefits of the multi-fund structure include: Provide contributors with options on how their pension contributions are managed and invested by Licensed Pension Fund Administrators (PFAs). Improved efficiency in fund management through better matching of pension assets and liabilities.
Limited financial knowledge is one of the major challenges that has been identified as limiting participation of majority of the working population. Often many people would not make any active choice given alternatives due to indifference and/or lack of financial literacy.
The multi-fund structure has therefore been designed with inbuilt default options, which are applicable in the event that the contributor does not make any explicit choice.
The default options are as follows: Fund II for contributors who are 49 years and below. Fund III for contributors who are 50 years and above in active service
An active Contributor in Fund II who wishes to be assigned to Fund I shall make a formal request to the PFA. An active Contributor in Fund III who wishes to be assigned to Fund II shall make a formal request to the PFA. An RSA Retiree or active Contributor who is 50 years and above shall not be allowed to choose Fund I.
Transfers between Fund Types within a PFA
An active Contributor may, subject to a formal application made to the PFA, switch from one Fund Type to another Fund Type within a given PFA, once in 12 months without paying any fees.!Any additional requests for switches among Funds within a PFA by the active Contributor shall attract a fee, of an amount not less than a minimum value, to be determined by the Commission from time to time.