opinionBy Nse Anthony-Uko
Saving for retirement is considered a daunting task, particularly for the young, who feel they still have several decades before that inevitable period comes. The introduction of new funds by PenCom, especially one that targets the younger generation would however, give the youths reason to save. Writes Nse Anthony Uko.
When you are young, retirement seems a long way off in the future, and the benefits of saving for retirement may not have even occurred to you. You don't even want to think about retirement because it is synonymous with growing old. And nobody ever imagines that they will look like their grandparents some day. Long term savings is not on your mind because you need the money to buy the things you want right now.
The issue of saving for retirement is even more compounded when you look at the returns it provides. Due to the largely conservative fund structure of the Retirement Savings Account (RSA) Fund, the returns on pension assets have been rather dismal.
However, this scenario is about to change as the National Pension Commission (PenCom) has reviewed the investment regulation to allow the introduction of different types of funds capable of providing better yields.
Following the review of the regulation, the commission is introducing four funds to replace the Retirement Savings Account (RSA) Fund into which every contributor currently invests.
Different Fund Types
The proposed amendment to the contributory pension scheme is anchored on a new multi-fund structure. Under the proposed multi-fund structure, PFA's would have to maintain four separate funds instead of one fund. Each fund will be invested differently.
Each fund primarily targets a different age group - Fund 1 (otherwise tagged 'Aggressive') targets 45- year olds and under, Fund 2 (tagged 'Conservative') targets 45-year olds and above but less than 50 years, while Fund 3 targets contributors from 50 and above. PFAs also need to offer a 4th-Sharia compliant fund - Fund 4 -for those who want their pensions invested in Sharia compliant instruments.
PenCom Director General, Mr. Muhammad Ahmad recently said the new Funds will give contributors more choices depending on their ages.
The big idea being that in general each age group has a different risk profile and their pensions should be invested in a way that reflects their risk profile. Younger people can take more risk with their pensions and older people nearing retirement need more secure and less risky assets.
By separating and pooling pension contributions into their risk profiles, PenCom is able to and have indeed given each group different investment guidelines to suit their risk profile. For example, up to 50 per cent of Fund 1 (aimed at 45-year olds and under) can be invested in more variable instruments including capital markets.
Under the proposed amendments, up to 10 per cent of Fund 1 can be invested in private equity. Up to five per cent of Fund 2 (aimed at 45s and above) can be invested in private equity, while none of Fund 3 (aimed at over 45s) can be invested in private equity and up to five per cent of Fund 4 (Sharia compliant fund) can be invested in private equity.
Similarly, up to 50 per cent of Fund 1 can be invested in the capital markets, up to 30 per cent of Fund 2 can be invested in capital markets, up to 10 per cent of Fund 3 can be invested in the capital markets and up to 25 per cent of Fund 4 can be invested in the capital market.
The decision to widen the fund classes available to contributors was borne from the need to improve the earnings on pension fund contributions, however analysts believe that besides improving returns the four-fund window offers more benefits not just to the individual contributors but to the economy in general, as it would allow more funds to be channelled from the pension assets into key areas of the economy like infrastructure which stands to benefit from long term funds such as can be provided by the pension assets.
Explaining how the new multi-fund structure would work, Managing Director, Legacy Pensions Managers Limited, Misbahu Yola said, it would cut the investment in government securities and then increase investment in equities and other long term asset classes like infrastructure, real estate and private equity.
Though pension funds has generated an appreciable pool of long term investable funds, with total pension assets put at N2.86 trillion as at August 2012, the bulk of it (61 per cent) is currently invested in Federal Government Securities (FGN Bonds), thus draining much of the funds that would have been channelled to developmental projects in the economy.
"The whole essence of the multi-fund structure is to match asset with liability. To take the contribution of those who are young and put them in the longer term investment that is the variable income. When you are young you can afford higher 'risk' if I may put it that way. When you are older you will take less risk. So the Fund 1 will have more variable income than Fund 2, and Fund 2 will have more variable income than Fund 3. If people are young now you can put their money into longer term investments.
Variable Income Instruments
Barbara James, Chief Executive Officer, Henshaw Capital Partners, a private equity firm said the icing on the cake, for the capital markets, private equity, infrastructure and real estate instruments, which PenCom refer to as 'variable income instruments' is that each group not only has a maximum limit that can be invested in 'variable income instruments' but they also have a minimum limit - yes minimum. Fund 1 must invest at least 10 per cent in the capital markets, private equity, and infrastructure and real estate instruments.
A further recommendation to assign minimum investment levels for each of the variable income instruments e.g. a minimum of two per cent of Fund 1 should be invested in private equity.
These minimum investment requirements, she envisaged should jump-start pensions investment in private equity.
James maintained that it is these, 'variable income instruments' as opposed to government securities and money market instruments that most penetrate the real economy visibly. They translate to housing, roads, ports, refineries, power plants, successful entrepreneurs backed by private equity, schools, healthcare centres etc.
Pensions and Private Equity
Private equity is unique among the 'variable income instruments'. A recent IMF global survey of pension asset allocations showed that between 2006 and 2010, private equity received the largest increase in global pension asset allocations of all the asset classes.
Pensions and Infrastructure
Above all, it is the physical and social infrastructure that pension fund assets can finance, that will speak volumes for the multi-fund pensions' investment guidelines. Today we have a pension industry which has about N2.8 trillion (about $80 million) pension assets, over 5.3 million Nigerians have registered, over 180,000 private sector employers have also joined the scheme.
James conceded that at the moment, it is hard to see or touch exactly what this N2.86 trillion pension pool has been spent on.
"Pensions assets are clearly huge and growing but do they translate to tangible, recognisable physical contributors to society at large?
When young adults can see world class roads, hospitals, schools, shopping malls etc. and link them back to pensions, we will have succeeded in making a connection. That connection registers pensions in their minds as a 'real' asset and I believe subconsciously, will encourage more Nigerians to participate in the contributory pension scheme."
Returns on Investments
Over the long run it is expected that the multi-fund structure of investing pension assets would translate to improved returns for contributors.
However, Mr. Yola believes the level of returns depends largely on the current age of the contributor. Risk and returns are related.
If you pursue higher returns there are likely to be higher risk. So if you are young, your money can be put in riskier investments and there is a long time for you to recover if something went wrong. But if you are not so young you don't want risky investment you want something safer.
"Supposing you are currently 25, or below 30 and you are in Fund 1, which is more aggressive, which has a higher combination of variable income, there is more risk but there is the chance for higher returns.
By the time you are 45 or thereabout you will automatically move to Fund 2 which is a less risky fund class because you are getting closer to retirement. And by the time you get to 50, all the profit and principal would be moved into the fixed income asset class. But presumably you would have made a lot more profit in the variable income and because you are young there would always be the time to recoup whatever losses you could have made over the years"
Nevertheless, he maintained that the main issue is to ensure safety of the funds first and not necessarily returns. According to him, the priorities are focused first on safety of funds, secondly liquidity, and third returns on investment Safety in that you don't want to be chasing high returns and then you lose the principal contribution. So the primary aim would be the safety of the principal.
Secondly, as I said earlier it is about matching assets with liabilities. If someone is retiring very soon you want to put his money into some investment that you can easily bring back, and this is usually the fixed income, whether money market or treasury bills, something that you easily get out of.
But if somebody is very young, you know that he won't retire in the next 20 to 25 years, you can put his money in long term projects. You can even use their money for national infrastructure and in long term investment.
Power to the Youth
Probably the most important retirement planning step is to start saving early and often. According to James of Henshaw Capital, herein lies the power of our youth - under the proposed new pension guidelines, pension contributions from 45-year olds and under, provide the largest pool, 10 to 70 per cent of their pension assets, for investing in the 'variable income instruments' such as real estate, infrastructure and private equity.
Conversely, herein also lies the danger of not generating employment for our youth - we lose out on their pension contributions that would have been invested, at least 10 per cent of it, and up to 70 per cent of it, in real estate, infrastructure, capital markets and private equity. It is a simple mathematical construct if you understand the Nigerian demographic. Simply put, employed youth equals more infrastructures, unemployed youth equals less infrastructures.
This is not the first time that PenCom is amending the investment guidelines. In December 2010, PenCom amended the rules for investing pension assets. A key feature of the 2010 amendments was the expansion of the broad types of assets pensions could be invested in from five to nine types of assets.
In addition to Government Securities, Corporate Bonds, Money Market Instruments, Ordinary Shares and Open/Closed-end Funds (including real estate), PenCom added four more asset classes - Infrastructure Bonds, Supra-national Bonds, Infrastructure Funds and Private Equity.
The pension sector has made tremendous achievement in the last five years since the commencement of the Contributory Pension Scheme. According to the DG PenCom, There are currently about 54,558 retirees from the public and private sectors under the Contributory Pension Scheme (CPS) that have collected over N151.52 billion as lump sum and are collecting about N1.77 billion as monthly pension".
Despite these achievements, it is not without challenges that the Commission's Head, Research and Corporate Strategy, Dr. Farouk Aminu Aminu maintained the industry still lack adequate knowledge on the workings of the Contributory Pension Scheme (CPS).
Other challenges he mentioned were delays in remittance of contributions occasioned by non-submission of nominal rolls by MDAs, low level of monthly pension, poor service delivery by PFAs among others.
Aminu also said that government consistently supports PenCom without any interference in its operations.