The National Pension Commission, PenCom, is getting ready to start implementing the Retirement Savings Account, RSA, Multi Fund structure from July 1st, 2018. The proposal is built on the objective of achieving a proper alignment between the assets and liabilities of pension funds as well as making pension fund investments in line with the risk appetite and profile of pension contributors. According to available regulatory documents, the multi fund structure shall comprise Fund 1, Fund 2, Fund 3 and Fund 4, which will differ between each other according to their overall exposure to variable income instruments.
While Fund 1 is allowed a maximum exposure of 75% of portfolio value to variable income instruments, Fund 2 can only be exposed to such instruments to the maximum of 55% while Fund 3 and Fund 4 will be allowed a maximum exposure of 20% and 10% respectively. In like manner, there are stipulations for minimum exposure as well. These are 20% for Fund 1, 10% for Fund 2 and 5% and 0% for Funds 3 and 4
The determination of what fund you belong to shall almost exclusively be based on your age. Membership of Fund 1 is strictly by choice made by the pension contributor while membership of Fund 2 is for contributors that are 49 years or younger, those that are 50 years or older belong to Fund 3 while Fund 4 is for RSA retirees only.
Contributors in Fund 2 can migrate to Fund 1 if they so wish so far as they make a formal request while those in Fund 3 can also migrate to Fund 2 upon formal request. However, no member of Fund 4 above the age of 50 is allowed to migrate to Fund 1 but you can only make a switch from one fund to the other once in 12 months free of charge, any switch request that is more frequent than 12 months intervals attracts a yet to be determined fee.
The multi structure is a good development in that it will free pension fund managers to invest in variable income securities like equities, ETFs and mutual funds which will in turn increase market activities and add to the vibrancy of the market. It will also help pension contributors in meeting their retirement savings target. Every pension fund manager has devoted some pages on their website to frequently answered question on multi fund structure but there still seem to be some unanswered questions in the multi fund structural system. The system assumes that contributors’ risk appetite or profile is determined solely by their age. That assumption may not be totally correct. Risk appetite can be affected by ones’ current financial and family circumstances. A first-born child aged 29 who has 8 siblings still in school and whose parents are retired may have a risk appetite for Fund 4 while a 55-year-old retiree who has some money in a fixed deposit account in a bank somewhere and who also has life insurance policy, may have the risk appetite for Fund 1.
The question then is, how will the proposed fund structure accommodate a 29-year-old contributor whose family and financial circumstance puts him as a risk averse investor that fits into Fund 4 category? And how will the proposed fund structure accommodate a 55-year-old contributor whose family and financial circumstance puts him as a risk loving investor that fits into Fund 1 category?
It looks like one can only switch from Fund 2 to 1 or 3 to 2 and not the other way around, like from 2 to 3, or 1 to 3. What if, for example, a contributor in Fund 1 thinks that the equity market is doing very poorly and wants to move to Fund 3 instead, for a temporary period of time after which such a contributor would move back to Fund 1.
Split between funds
It does not look like the regulation provides for a split between funds. Investors sometimes like to have some safe landing by hedging their risk in one way or another. What if a contributor wants to get the best of both worlds by being partly in Fund 1 for higher return and partly in Fund 3 or 4 for safety. How would those who want to divide their contributions between 2 or more funds be accommodated?
As it stands, investments in Fund 1 and probably Fund 2 will require active management by the fund manager as they are likely to involve more rebalancing while investments in Funds 3 and 4 may not require so much active management. Given the nature of invests in Fund 1 compared to Fund 4 and the requirement for rebalancing to stay within regulatory demands, there is the likelihood that Fund 1 will gain more than 4 over time, of course, depending on the stock market. How then will a fund 4 contributor with minimal gain be charged the same fee, of N100 or the like, as one in Fund 1 who demands active management and generates more gains?
Valuation and Reporting
The multi structure system may introduce some fund accounting or valuation issues. How will RSAs valuations be reported on a daily or monthly basis. Will the prices of the Funds differ one from the other? For example, let’s assume that on July 1, the funds are valued as follows:
Then by the end of the month the funds make the following profits/losses after fees
Fund 1——————– (N10) loss
Fund 2——————-N10 gain
Fund 3——————-N11 gain
Fund 4——————-N12 gain
Will the valuations of the funds be as follows as at July ending?
Or are we going to have a weighted average price for the 4 funds in one RSA fund?
Though we have posed these question to the National Pension Commission, PenCom, we have not received any response but these and other issues need to be addressed and communicated to contributors, so they know what they are getting into.