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  • Damilola Agubata

How to Invest Your Pension Fund and What You Need to Know


As a pension contributor, knowing everything about how your pension fund contributions are invested is important.


And if you have not started contributing towards your retirement, you still need to familiarize yourself with the principles of pension fund investment and how your pension contributions can generate high yields.


In this article, you will learn everything about how your pension contributions are invested under the Contributory Pension Scheme (CPS).


Who Invests Your Pension Fund Contributions?


First, you must know that the Pension Fund Administrator under which your Retirement Savings Account (RSA) is registered is responsible for investing your pension contributions according to the guidelines stipulated by PenCom.


This means that if you opened a Retirement Savings Account with Oak Pensions Limited, then Oak Pensions is responsible for managing and investing your pension fund contributions.


How are Your Pension Fund Contributions Invested?


To ensure that all RSA holders are properly captured, PenCom introduced the Multi-Fund Structure to help RSA holders with different ages and risk profiles (tolerance levels) have their pension funds invested in a manner that best suits their needs.


The Multi-Fund Structure


The Multi-Fund Structure encompasses the following:


  • Fund I

  • Fund II

  • Fund III

  • Fund IV

  • Fund V

  • Fund VI


Fund I: This Fund's primary objective is to produce superior investment returns. Your retirement savings could be invested in variable income instruments at a rate ranging from 20% to 75%. Your pension would consist primarily of stocks, with a fixed income allocation of between 20% and 80%. Fund I is for active contributors that are 49 years and below. You can decide to switch to Fund II or Fund III (once you reach the age of 50).


Fund II: This Fund is diversified so that it can protect its investors' principal while still seeking reasonable returns over the long term. Retirement savings can be invested in variable income instruments at a percentage between 10% and 55%. This is the default fund for those who are younger than 49 and actively contributing. If you are an active contributor and 49 or younger, you can request to be moved to Fund I instead.


Fund III: This is a safe investment vehicle whose main goal is to preserve investor money. Your retirement savings would be invested in variable income instruments at a rate between 5% and 20%. This is the default fund for pension contributors who are aged 50 and above. If you are an active contributor to this Fund and would like to switch to Fund II, you can do so by submitting a request.


Fund IV: This Fund is for those who prefer extreme caution. Pension funds may be invested in variable income instruments at a maximum of 10%. The Fund is reserved exclusively for those who have reached retirement age. Those who have invested in this Fund are restricted from switching to any other Funds.


Fund V: Contributors in the informal economy, such as those who are self-employed, are the intended beneficiaries of this fund. Any time of the day, week, month, or quarter can be used to make a Contribution. While the other 60% will be saved for retirement, you can take out a maximum of 40% for emergency expenses. If contributors in this fund find work in the formal economy, they will be able to transfer their contributions to Funds I, II, and III.


Fund VI: Those who wish to invest their retirement savings in ethical, non-interest-bearing instruments can do so through this fund. In accordance with Shariah principles, the fund's assets are not put to work in the following areas: the manufacture or sale of alcoholic beverages; the operation of casinos or other betting establishments; or the establishment of interest-bearing financial instruments. More than half of the portfolio will be invested in sources of income that comply with Sharia law.


READ MORE: Six Things to Consider about the Non-Interest Fund


What are the Available Investment Windows for Pension Contributors?

They include shares/stocks, bonds, money market instruments and alternative investments.


Shares/Stocks

Shares are largely a tradeable piece of a company's value, which can rise or fall depending on a variety of market factors. There are numerous variables that influence share prices.


These may include the global economy, sector performance, the capital structure of the specific company whose shares are being traded, regulatory frameworks, natural hazards, the feelings of venture capitalists, and others. Historically, however, stocks have historically generated higher returns than cash and bonds over long periods of time, although this cannot be guaranteed.


Pension assets in Nigeria must be invested in ordinary shares of public limited companies that are either currently quoted on a securities exchange registered with the Securities and Exchange Commission (SEC) or that are proposing to be listed and publicly quoted through an initial public offering, as per regulations issued by PenCom.


Bonds

A bond is a type of fixed-income security that represents a loan from an investor to a debt issuer (typically a corporation, government, or government-sponsored enterprise). Essentially, a bond represents an I.O.U. between a lender and a borrower that specifies the terms of a loan and the manner in which it will be repaid.


Companies, municipalities, states, and even sovereign governments all use bonds to fund day-to-day operations and large-scale projects. Bondholders receive interest payments throughout the bond's tenor and the bond's face value upon maturity.


In the event of company liquidation, bondholders are given priority over stockholders and paid their fixed interest before dividends (if any) are distributed to stockholders. Bonds and Issuers can be given credit ratings by reputable rating agencies.


Investment-grade bonds are the highest quality bonds available and are typically issued by sovereign governments or extremely stable corporations.


Money Market Instruments

Money market instruments are fixed-income investments with short maturities that represent loans from investors to borrowers (typically corporations or governments). In most cases, the tenor is for a period of one year.


Treasuries, commercial papers, and bank deposits are all examples of money market instruments. They carry less risk than bonds or stocks, so their returns reflect that fact.


Alternative Instruments

For the purposes of this definition, any financial asset that is not a stock, bond, or currency is considered an alternative investment. Alternative investments include things like private equity and venture capital, hedge funds, managed futures, commodities, art, and derivatives. As an alternative asset class, real estate is gaining popularity among investors.


As a result of their complexity, lack of regulation, and high level of risk, alternative investments are typically held by institutional investors or high-net-worth individuals. Many institutional investors, such as pension funds and other asset managers, only devote a small percentage of their total assets to alternative investments.


Your pension fund can yield greater returns for you when you start saving towards your retirement with Oak Pensions Limited as your Pension Fund Administrator. To open a Retirement Savings Account and start your pension fund investments, call the Marketing Manager on 09087448661 or send an email to info@oakpensions.com.




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