Contributory Pension Scheme: The multi-fund structure explained

Oluleye Ademola Head, Investment, Veritas Glanvills Pensions Limited.

WHAT IS THE MULTI-FUND STRUCTURE?
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.

WHAT ARE THE VARIOUS FUND TYPES UNDER THE MULTI-FUND STRUCTURE?

FUND I
This fund is accessible to contributors aged forty-nine (49) years and below. The fund is particularly suitable for contributors with a longer duration of work life. Existing RSA holders 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, IV, and VI Retiree cannot switch to Fund I due to their age (at this point, they are close to retirement or retired) and risk profile.
The fund can invest up to 75% of its assets in variable income instruments which can earn returns above the inflation rate in the long term.

FUND II
This is the default fund for those that are forty-nine (49) years and below as at their last birthdays. Contributors are onboarded by default into this fund type unless they elect otherwise.
Contributors may elect to move to other funds or are moved automatically upon the attainment of fifty (50) years of age. Contributors can elect to move to Fund I, depending on their risk appetite or Fund VI Active based on the ground of ethical investment. Contributors that are above fifty (50) years can also elect to be in Fund II. However, contributors in Fund IV and VI Retiree cannot switch to Fund II due to their risk profile.
The Fund can invest up to 55% of its assets in variable income instruments.
Note that Funds I and II invest pension assets in the same classes of instrument, the difference is just the percentage of maximum exposure to those asset classes.

FUND III
This is a pre-retirement fund with a significantly reduced risk exposure to variable income instruments. This fund is for active contributors who are above fifty (50) years. However, contributors in the fund can elect to move to Fund II but are not allowed to move to Fund I. The major difference between Fund II and Fund III is the lower exposure to variable-income securities. Currently, there are some variable income securities like Infrastructure Funds, and Private Equity Funds that Fund III assets cannot be invested in. The fund can invest up to 20% of its assets in variable income instruments. It is a conservative fund.

FUND IV
This fund is strictly for RSA retirees only. The fund is for those that have applied for retirement and chosen the Programmed Withdrawal option. The main objective of the retiree fund is to ensure that the fund does not diminish or lose value. PENCOM’s regulation provides that maximum exposure of 10% of portfolio value can be invested in variable income instruments. A minimum of 90% of the fund is invested in fixed-income instruments. It is purely a conservative fund.

FUND V
This fund is for Self-employed persons. Contributions are flexible and may be paid daily, weekly, monthly, or as may be convenient. The regulation allows for a maximum of 40% to be withdrawn for contingent purposes while 60% shall be for retirement savings. While contributors in other Funds cannot move to this Fund. Contributors in Fund V are however allowed to move to Funds I, II, III, and VI Active where he/she secures employment in the formal sector with an organization that has three (3) or more employees through a formal request for conversion. The fund’s investments in variable income instruments cannot exceed 5% of its total value.

FUND VI (ACTIVE & RETIREE)
This is referred to as the non-interest fund. This fund is for contributors who desire that their pension contributions be invested in instruments that are both ethical (Shariah Compliant) and non- interest bearing.

Fund VI is of two (2) types: (i) Active Non- Interest Fund (Active Fund VI) – This is for existing or new active contributors. Existing contributors in Funds I, II, and III can elect to move their contributions to Fund VI. (ii) Retiree Non-Interest Fund (Retiree Fund VI) – For Retirees in Fund IV who want their contributions to be managed as an ethical fund.

The pension fund assets are to be invested in instruments that are free from speculation and uncertainty that might lead to destruction or loss, otherwise known as *Gharar under the Islamic commercial jurisprudence.
A maximum of 55% of portfolio value is allowed to be invested in compliant variable income instruments such as Sharia-compliant Ordinary Shares, Infrastructure Funds, Private Equity Funds, and Open/Close Hybrid Funds.

It should be noted also that RSA holders in Fund VI seeking to move back to any of the Active RSA Funds or Fund IV shall do so in line with the provisions of the RSA Multi- Fund Implementation Guidelines.

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 twelve (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.

In conclusion, the multi-fund structure is aimed to achieve ideal returns for contributors at retirement by aligning their pension savings with their individual risk profiles.

For more information on multi-fund structure or how to switch to your preferred fund, you can contact VG Pensions via email, [email protected], or call 01- 280 3550.

Veritas Glanvills Pensions (VG Pensions) Limited, is a licensed Pension Fund Administrator managing Retirement Savings Accounts (RSA) of individuals and pension assets of institutions in the public and private sectors of the country.

VG Pensions currently manages the Retirement Savings Accounts of employees of over 5000 institutions and retirement funds of over 3000 retirees across the country. VG Pensions also manages legacy pension assets and gratuity schemes of several institutions including the Nigerian National Petroleum Corporation (NNPC), FAAN Legacy Fund, Jigawa State & LGs Contributory Pension Fund, Niger State Fund, Unity Bank Legacy Fund, and Ekiti State Legacy Funds.