A Chartered Insurer and former Managing Director of Linkage Assurance Plc, Dr. Pius Apere, has kicked against the multi-fund investment structure introduced last year by the National Pension Commission (PENCOM), stressing that the Pension Fund Administrators (PFAs) have not created enough awareness on the initiative.
Apere, who stated this at a forum in Lagos, also warned that contributors may make inappropriate investment decisions due to the lack of knowledge of the plan.
Fund administrators, he added, can reduce the risk by providing access to education, advice and/or communication to ensure that contributors understand what is being offered and the potential consequences of the choices that they make.
However, he stressed that doing this would be at a cost to PFAs.
Apere also said projections of the future pension benefits would be more complex because of many overlaps between some fund types, “thus, the range of investment options (Fund Types) provided will impact on cost of administration of Pension Fund Administrators.”
He further noted that for a defined contribution scheme that offers an underpin (a guaranteed minimum pension), there is a risk that members of the Contributory Pension Scheme will choose a more risky investment strategy than they otherwise might have, “since they know they have a minimum benefit promise or members will choose a very safe investment strategy with relatively low expected returns.”
He further noted that a pragmatic approach for allocation of investment returns within a given fund type amongst contributors may be adopted to take into account of each individual contributor’s asset under management (AUM) and/or duration profile (in years) within the fund type.
Apere concluded that the implementation of the Multi-Fund Structure for Contributory Pension Scheme under PRA 2014, was expected to maximise the investment returns for Retirement Savings Account (RSA) holders prior to retirement and that this would in turn likely to increase their pension benefits at retirement.
He emphasised in the need for involvement of Actuarial knowledge and ideas in the pension fund investment, adding that it was traditionally thought that members in defined contribution (DC) schemes bear all the investment risks and rewards and receive benefits (based on whatever contributions and investment returns are produced at retirement), which are adjusted automatically.
According to him, contrary to this, a Defined Contributory scheme such as the Contributory Pension Scheme (CPS) operating in Nigeria that forces compulsory contribution according to section 4(1) of PRA 2014) and entails significant tax concessions (section 10 of PRA 2014) should not, under reasonable circumstances, be left to require members to bear all risks over many decades of membership.
This according to him necessitated the introduction of guaranteed minimum pension (GMP) as an underpin (section 84(1) of PRA 2014) .
Describing the development as quite appropriate with the aim to reduce the risk of volatility of standard of living in retirement facing the pensioners, Apere said conceptually, the determination of the GMP and the appropriate investment strategies requires an actuarial methodology.
He suggested that in view of the above, PENCOM should also be aware that offering even a minimal defined benefit (DB) underpin can result in the CPS needing to meet DC regulation as well as DC regulation.
He noted that prior to the introduction of the multi-fund structure in July 2018, the PFAs operated low risk investment strategies, without taking into account the scheme members’ duration (age) / risk profiles and their freedom of choice of investment funds.