With age on your side, you can increase your pension earnings

Younger people have the opportunity to increase their pension earnings by increasing their risk appetite in high-yielding investment instruments.

By getting across to your Pension Fund Administrator (PFA), you can actually request that your funds be channelled towards high-risk instruments that offer higher investment returns.

This provides an opportunity for enhancement of the pension savings, according to regulations on the Multi-Fund Structure provided under the Contributory Pension Scheme (CPS).

The Multi-Fund Structure is a significant enhancement to the CPS, offering greater flexibility and choices to cater for the different risk appetites of contributors, according to Agudah Oguche, chief executive officer, Pension Fund Operators Association of Nigeria (PenOp).

He said the Multi-Fund Structure ensures that pension funds are invested in a way that is more closely aligned with the individual needs of contributors at different stages of their lives.

Fund I is the most aggressive fund meant for contributors who are below 50 years old and voluntarily choose to be in this fund. It allows for a higher allocation to riskier asset classes like equities and this takes one percent of the Asset Under Management (AUM).

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Fund II is the default fund for contributors who are below 50 years old and have not made any specific choice. It has a balanced approach to risk, with a moderate allocation to equities and other high-risk assets. This takes 8.52 percent of the AUM.

Fund III is the default fund for contributors who are 50 years old and above. It is more conservative, with a lower allocation to risky assets like equities and a higher allocation to fixed-income securities. This takes 26.4 percent of the AUM.

Fund IV is specifically for retirees, focusing on capital preservation and steady income, with the lowest exposure to high-risk assets. It primarily invests in fixed-income securities. This takes 7.2 percent of the AUM.

Fund VI is for contributors who are still in active service and prefer to invest their pension contributions in non-interest-bearing assets. It is designed for those below 50 years old. This takes 0.29 percent of the AUM.

Fund VI (Retiree) is a sub-fund for retirees who wish to continue investing their retirement savings in non-interest financial products. It is tailored to those 50 years old and above or already retired. This takes 0.04 percent of the AUM.

The Multi- Fund structure was introduced through the enactment of the Pension Reform Act (2014), and the amendment of the Regulation on Investment of Pension Fund Assets in 2018 by the National Pension Commission (PenCom). It was meant to give some flexibility to RSA holders on how they want their pension assets to be managed and take into consideration their risk appetite.

The Multi-Fund structure aims to align the age and risk profile (tolerance level) of RSA holders.

Accordingly, the multi-fund structure comprises Fund I, Fund II, Fund III, Fund IV (Retiree Fund), Fund V (Micro Pension Fund), and Fund VI (Active and Retiree) – the Sharia Compliant Funds. Funds I, II, III, IV, V, and VI differ among themselves according to their overall exposure to variable income, conventional, and sharia-compliant instruments.

It should be noted that RSA holders are by default assigned to Fund II at the point of entering the scheme. They are moved to Fund III from Fund II and Fund I once they attain fifty (50) years of age, and subsequently to Fund IV when they retire from active service.

However, modalities have been put in place for RSA holders who desire to move from Fund II to Fund I or from Fund III to Fund II. RSA holders in either Fund I, II, and III who want their pension contributions invested in Sharia-compliant instruments can elect to move to Fund VI Active, while those in Fund IV can opt for Fund VI Retiree. All the movements can be effected in line with the criteria stipulated by the PenCom guidelines.

Unlike the old single-fund structure, the multi-fund structure gives more control to the RSA holders over how their pension funds are invested.