The National Pension Commission (PenCom) recently published/released the Amended Regulation on Investment of Pension Fund Assets for the Pension Industry precisely in April 2017. The new investment guideline introduces a multi-fund structure, which would replace the one fund structure that puts all active contributors into one Retirement Savings Account (“RSA”) Fund without consideration for age or risk profile of such contributors.
What is the multi-fund structure?
The Multi-Fund structure is a framework that contains four funds class. The current RSA Fund will be sub-divided into three separate Funds, while the RSA Retirees Fund would be the 4th Fund. RSA holders are assigned to groups based on their age and risk profile.
Are their differences between the 4 Funds?
Yes. The respective funds differ based on their overall exposure to variable income instruments such as equities (that is, Ordinary Shares) and the age profile of the members.
Fund Type Exposure to Variable Investment Instruments Membership
Fund I 20% to 75% of Portfolio Strictly based on request but not accessible to Retiree and active contributors of 50 years and above.
Fund II 10% to 55% of Portfolio Default for active contributors of 49 years and below
Fund III 5% to 20% of Portfolio Default for active contributors of 50 years and above
Fund IV 0% to 10% of Portfolio Strictly for Retirees
What are variable income instruments?
Variable income instruments is defined as the sum of a PFA’s investments in Ordinary Shares and participation units of Open Close-ended and Hybrid Funds; Real Estate Investment Trust; Infrastructure Funds; and Private Equity Funds comprising its current holdings and any future financial commitments to the acquisition of participation units in these Funds. These categories of investments have potentials to generate high returns over the long term but could be risky owing to uncertainty and fluctuations in market prices and returns.
Why should age and risk profile determine how my pension funds should be invested?
There is what is called “Risk Tolerance”. Everyone has a limit to the amount of risk that they can take and the amount of uncertainty they can handle. 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.
Can I decide which Fund Type to be assigned to?
Yes. On the day of commencement, Multi-fund Structure, contributors are allowed to choose the Type of Fund in which they desire to be. However, the following rules shall apply:
i. An active Contributor in Fund II who wishes to be assigned to Fund I shall make a formal request to the PFA.
ii. An active Contributor in Fund III who wishes to be assigned to Fund II shall make a formal request to the PFA.
iii. An RSA Retiree or active Contributor who is 50 years and above shall not be allowed to choose Fund I.
However, a default mechanism shall first apply. According to the default mechanism, all active contributors that are 49 years and below would be placed in Fund II while active contributors that are 50 years and above would be placed in Fund III and Membership of Fund I shall strictly be by formal request by a Contributor.
How often can I move between Fund types?
An active contributor may switch from one Fund type to another Fund type within a PFA, once in 12 months without paying any fees (subject to a formal application). Any additional requests for switches among Funds within a 12 month period by the active Contributor shall attract a fee, of an amount not less than a minimum value, to be determined by PenCom from time to time.
Are there any benefits in this multi-fund structure?
Yes. 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.
Can I request for my choice fund class immediately?
No, PenCom is yet to provide the operational framework to guide the transition to the Multi-Fund structure. Once the framework is released, there will be proper guidance regarding when contributors can be assigned based on the default age classification. Contributors will subsequently have the option to be assigned to a Fund of their choice depending on their risk tolerance.
What are the impacts on my pension balance when my PFA moves into the multi-fund structure?
None. 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.
What is/are the requirement(s) for switching from one fund type to another?
A formal request must be submitted by the contributor to his or her PFA.
Will the RSA and VC funds have separate fund price or the same?
The RSA and VC will have the same fund price because they will be invested in the same fund the contributor selects.
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.
With the new multi-fund structure, can I be given the option to choose which specific variable income instruments my funds can be invested in?
No, the regulation only allows contributors to select a Fund, but the PFAs would continue to have the responsibility of selecting the specific instruments that the Funds would be invested in.