Persistent weak macros necessitated a paradigm shift - The weak economic environment witnessed in Nigeria since mid-2014, when the global commodities prices nosedived drastically, had challenged the subsisting optimistic investment and business projections thereby impacting negatively on projected investment and portfolio returns.

The economy is highly vulnerable to external shocks as a result of it’s over dependence on the oil sector and inconsistent government policies. The overdependence on crude oil was amplified by the gravity of the  recent economic recession, as GDP growth shrank to its lowest in Q3, 2016 by -2.34%, due to the adverse developments in the international crude oil market.

Appropriately, the National Pension Commission (PenCom) in response to the dynamic and evolving trends in the financial and regulatory environments proactively bid to revamp the investment framework of pension funds’ assets under management. Thus, in February 2015, it circulated the proposed amendment to the regulations on Investment of Pension Fund Assets, 2012 for review by the various stakeholders.

The significant changes made to the Investment guideline was the introduction of the ‘Multi-Fund Structure’ which provides for the different categories RSA funds are divided, while the Retiree fund constitutes only a category in the new structure. 

Multi-Fund Structure: A Framework Aligning Age and Risk Profile
The Multi-Fund structure, a framework which aligns the age and risk profile of RSA holders, proposed a 4-prong assets category due to overall exposure to variable income instruments, age of the contributors, work status, and the risk exposure elements. 

The classifications of the pension fund assets under the newly proposed structure are:

Fund Type	Maximum Exposure to  Variable Investment Instruments	Minimum Exposure to Variable Investment Instruments	Citations	Membership	Active Choices
Fund I	75% of Portfolio value	20% of Portfolio value	Strictly based on request but not accessible to Retiree and active contributors of 50 years and above.	Below 50years
Fund II	55% of Portfolio value	10% of Portfolio value	It is a default fund for active contributors of 49 years and below	Below 50years	Can move to Fund I
Fund III	20% of Portfolio	5% of Portfolio value	It is a default fund for active contributors of 50years and above	50years -65years	Can move to Fund II
Fund IV	10% of Portfolio value	0% of Portfolio value	This is a retiree fund, so it is strictly for Retirees	Above 65years

Source: Regulation on Investment of pension Fund April 2017 and AIICO IR

Multi-fund Structure - Opportunities include but not limited to;

• Diversify investment portfolio by reducing the proportion of FGN securities in the total mix.
• Increase investments in infrastructure funds with comparatively yields as FGN desires to implement projects with long term borrowings.
• Investments in Real Estate Investment Trusts (REITs) with the proposed FGN projects namely - 2,700 housing units construction in the short term, and 20,000 pilot social housing units by 2020.
• Lend to government priority areas like agriculture and solid minerals through the capital market.
• Investment in Green bond as government is showing overwhelming interest in the instrument.
• Buy bonds issued to financing specific-named projects like the building of the Mambilla hydropower plant, Assets slated for concession and the privatization of NIPP generating assets through the stock market.

Conclusively, the release of the amended regulations is a right step in the right direction towards unlocking the investment potentials of pension fund assets in Nigeria. Indeed, the newly-introduced Multi-Fund Structure provides PFAs with wider opportunities to make targeted and well-tailored investments, whilst also reducing the risks associated with undiversified portfolios by spreading it across various asset buckets.
In this vein, it is expected that the inclusion of new asset classes in the list of allowable instruments will widen the investment horizon of PFAs.

When will this new guideline take effect?

PENCOM is yet to provide the operational framework to guide this transition

What has age and risk profile got to do with how my pension funds are invested?

In investing money, everyone has a limit to the amount of risk that they can take and the amount of uncertainty they can handle. This is known as risk tolerance. Typically, younger people tend to have more capacity for risk because they still have time to recover from loses (if any). Once a person is nearing retirement, it is advisable that they limit the amount of risks they take and reduce exposure to uncertainty as they would start drawing down on their pensions within a short period.
Consequently, the allowable exposures to variable income instruments have been designed such that Fund I has the highest allowable limit, followed by Fund II, III and IV respectively. This reduces the risk and uncertainty of contributors in line with their ages.

What impacts does Multi-Fund structure have on my future pension assets at the point of retirement?

The Multi-Fund structure provides more alignment between your retirement goals, risk appetite and age. Consequently, there will be a better chance for your pension assets to meet your expectations when you retire.

Can I decide which Fund type to be assigned to?

On the commencement date, the default mechanism will apply. All active members that are 49 years and below will be placed in Fund II and active contributors above 50 years would be placed in Fund III. However,   subsequently active contributors can apply to switch between funds. An active contributor can switch from Fund II to Fund I while an active contributor in Fund III can switch to Fund II. All retirees and active contributors above 50years cannot switch to Fund I.

Are there any benefits in this multi-fund structure?

The new structure allows RSA holders more control over how their pension funds are invested based on their risk tolerance. For instance, an RSA holder in Fund III owing to the default classification based on age, may have more tolerance for risks and uncertainty and could opt to be assigned to Fund II.

What are the requirements for switching from one fund type to another?

To switch from one fund to another, the contributor must submit a formal request to his PFA

What are the impacts on my pension balance when my PFA moves into the multi-fund structure?

The balance in your RSA will not change due to the movement to the multi-fund structure because the entire balance would be moved to the appropriate fund without charges. However subsequent growths in your balance would depend on contributions such as the mandatory monthly contributions, voluntary contributions as well as returns generated by the PFA on that particular fund.

Will I have access to the financial reports of other funds?

The annual financial reports of the RSA Funds of all PFAs are published once a year in at least 2 national dailies. In addition, the fund prices would be published daily on the websites of the PFAs.