PenCom allows pension contributors to pick investment options

Beginning from July, workers under the Contributory Pension Scheme will be allowed to go to their Pension Fund Administrators to choose how they want the money in their Retirement Savings Accounts to be invested so as to gain higher interest based on the new multi-fund structure.

Following the enactment of the Pension Reform Act, 2014, the National Pension Commission amended the investment regulation in April 2017, largely to incorporate the new provisions in the law as well as align it with market realities.

One of the major amendments was the introduction of the multi-fund structure for Retirement Savings Account funds.

The new multi-fund structure seeks to align a contributor’s risk tolerance or appetite with his investment return expectations based on work life cycle, according to the commission.

The fund was divided into four parts to cater for the different age groups of contributors, including retirees under the CPS.

Fund I (young contributors): PenCom explained that this fund was growth oriented and was aimed at young contributors of 49 years and below.

These 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 commission noted that the assets allocation structure would allow greater investment in variable income or growth securities (ordinary shares, private equity and infrastructure funds, and open/close-ended funds, among others).

Fund II (default fund/middle-aged contributors):  The commission explained that this was the default fund and was similar to the current RSA ‘active’ fund.

At the commencement of the proposed multi-fund structure, all active contributors will be moved to the Fund II. Subsequently, contributors will need to request formally to be moved to Fund I.

Fund III (pre-retiree fund): The commission explained that Fund III was the most conservative fund for ‘active’ contributors and was designed for those close to the retirement age.

It essentially maintains an asset allocation structure similar to the current RSA retiree fund. Unlike the current RSA retiree fund that allows up to five 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 five to 10-year period before retirement.

Fund IV (retiree): According to PenCom, 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 have been reduced from 10 per cent to five 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.                                                                                        

PenCom explained that a major benefit of the introduction of the multi-fund structure was that the contributors’ pension contributions would be invested in an optimal manner to achieve enhanced retirement benefits.

For example, it stated that younger contributors might prefer a pension fund with a higher level of risk and expected returns, so as to increase the expected value of their pension at retirement, while older contributors or those already retired might prefer a low-risk fund so as to minimise the likelihood of a reduction in the value of their pensions.

The commission explained that other potential benefits of the multi-fund structure included that it would provide the contributors with options on how their pension contributions were being managed and invested by licensed Pension Fund Administrators; and would improve efficiency in fund management through better matching of pension assets and liabilities.

According to the commission, contributors should be actively involved in how their pensions are invested by communicating with their PFAs on their choice of investments and further clarification on the funds.

PenCom stated that an active contributor in Fund II, who wished to be moved to Fund I, and an active contributor in Fund III who desired to be assigned to Fund II should make a formal request to the PFA.

The commission, however, explains that an RSA retiree or active contributor, who is 50 years and above, will not be allowed to choose Fund I.

While explaining transfers between fund types within a PFA, it stated, “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.”

While explaining the relevance of the funds, PenCom stated that the multi-fund structure for the RSA funds was to improve upon the existing two-fund structure and comprised four funds, which would provide contributors an opportunity to improve their long-term terminal retirement benefits by properly aligning individual contributors’ funds with their individual risk profile.

It states that the existence of alternative funds makes it necessary to communicate the characteristics of these funds in as simple a way as possible in order to facilitate decision-making.

“It is expected that contributors will make rational decisions based on a thorough understanding of the options available and of individual needs and expectations,” the commission added.


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