Pension contributors to determine how their contributions are invested

Matthew Otoijagha

With effect from July 2018, contributors to Nigeria’s contributory pension scheme (CPS) will now have options regarding how their contributions are invested and have the prerogative to direct their Pension Fund Administrators (PFAs) to invest their pension contributions in line with these options.

Since 2004, when the CPS was introduced, the pension contributions of active contributors;  those still in service; have been managed by their respective PFAs in a Single Investment Fund, with the PFA choosing the actual portfolio composition and investment instruments in line with the Regulations for Investment of Pension Funds issued by the National Pension Commission (PenCom).

With the new Multi-Fund Structure to be implemented from July 2018, three distinct Investment Funds will be available to active contributors called Fund I, Fund II, and Fund III, while the retirees managed by the PFAs will be placed in Fund IV.

The core difference between the distinct Funds will be the amount of risk inherent in each fund driven by the minimum and maximum amounts of variable income instruments that each Fund can contain based on the Investment Regulations.

Essentially, RSA holders will be allowed to choose from these three funds and decide the amount of risk that they are willing to take in the management of their investment portfolios, in line with the Regulations.

Typically, when it comes to pension fund investments, the global best practice is for portfolios of different risk characteristics to be created and for investors to select the portfolios that align their risk appetites often driven by their age; level of income; liquidity needs, overall stock of investments, the level of diversification of their wealth and of course their past experience with investments that generally affects their risk appetite.

So, for example, the younger people are, the more likely they would have a higher appetite for and ability to take on higher levels of investment risk.

This ensures that younger contributors who have a longer gestation period for their investments up to retirement can exercise their prerogative to be more aggressive about their pension contributions and possibly earn higher returns on their pensions over this longer period.

For example, a 25-year-old who just joins the CPS has in the minimum another 35 years to work and contribute, and so, should have the option to invest more aggressively than a 58-year-old who has just 2 years to retire. In the old arrangement, both the 25-year-old and the 58-year-old, and everyone in between them was placed in a Single Investment Fund that was invested in the exact same without recognizing the different risk appetites of RSA holders based on their age and other considerations.

According to PenCom, ‘’our CPS has now adopted this global best practice after fourteen years of implementation. From inception in 2004, we had anticipated that this day will come’’.

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