The National Pension Commission (“PenCom”) recently published the Amended Regulation on Investment of Pension Fund Assets for the Pension Industry. The new investment guideline introduces a multi-fund structure, this would replace the existing “single-fund” structure that puts all contributors into one Retirement Savings Account (“RSA”) Fund without consideration for age or risk profile.

 What is the multi-fund structure?

The Multi-Fund structure is a framework that aims to align the age and risk profile of RSA holders by dividing the RSA Fund into three Fund types while retaining the single Retiree fund (four fund types in all 3 active funds and 1 Retiree fund).

What are the different Fund Types?

Fund I – This is an optional fund. Contributors must write formally to opt for this Fund.

Fund II – This is the default fund for contributors aged 49 and below.

Fund III – This is the default fund for contributors aged 50 and above.

Fund IV – This is the Retiree Fund.

What are the features of each Fund Type?

What are variable income instruments?

Variable income instruments are investments that generate income or returns that cannot be pre-determined from the date the investments were made and are not guaranteed. In addition, the prices of such instruments fluctuate daily. Instruments in this category include Ordinary Shares, Collective Investment Schemes (“CIS”) such as Mutual Funds, Real Estate Investment Trust; Infrastructure Funds and Private Equity Funds.

Such investments have the potential to generate high returns over the long term but could be risky owing to uncertainty and fluctuations in market prices and returns.

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 approaching retirement, it is advisable that they limit the amount of risks they take and reduce exposure to uncertainty as they would start drawing from 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.

Why Should I take more risk just because I am young?

The biggest threat to your retirement savings is inflation. Inflation means the general increase in the prices of goods and services and therefore cost of living. Younger people bear the risk that inflation may erode the purchasing power of their savings by the time they retire. While fixed income instruments are less risky and guarantee your invested principal, they do not offer good protection from inflation. Variable income instruments, on the other hand, are not guaranteed but should offer inflation protection in the long term.  Younger people should consider inflation risk when setting their risk tolerance.

Can I decide which Fund Type to be assigned to?

On the day of commencement, a default fund selection will be done for all RSA holders. 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. Contributors who make a formal request can switch among funds within a PFA once in 12 months without a fee. Additional requests to switch among Funds within a year will attract a fee to be determined by PenCom from time to time. Contributors in Fund II can be transferred to Fund I after a formal request. Contributors in Fund III can request to be transferred to Fund II after a formal request. Contributors in Fund III and Fund IV will not be allowed to choose Fund I.

When will the 12-month period start counting, will it be from the date of commencement or from the date of my first switch?

PenCom will provide details on the 12 months’ period in the operational framework that would guide the transition to the Multi-Fund structure.

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.

How soon will this new guideline take effect?

The guideline took effect from July 1, 2018. Contributors are assigned based on the default age classification. Contributors can opt to be assigned to a Fund of their choice depending on their risk tolerance.

Who takes the ultimate switch responsibility between the contributor and the PFA?

Whilst the contributor has the right to switch between funds depending on his or her preference, the PFA will be responsible for effecting the switch upon receipt of a formal request from the contributor.

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.

What is/are the requirement(s) for switching from one fund type to another?

To switch from one fund type to another, a formal request must be submitted by the contributor to his or her PFA.

Do I need to seek an advice from external financial advisor or my PFA before taking a decision to switch?

Whilst you are at liberty to seek advice from external financial advisers, information would be made available on the fund performance and indices to enable you make an informed decision.

If my date of birth is wrongly captured, which Fund Type will my PFA profile me?

You can check and update your records with your PFA before the commencement of the transition.

Can I move back to the preferred fund free of charge after my date of birth correction (especially when my date of birth was wrongly captured by my PFA)?

Yes, you will be able to move free of charge given that a contributor has the option to move for free once within 12 months. However, you can check and update your records with your PFA before the commencement of the transition.

Can I split my additional voluntary contribution in a separate Fund Type while my mandatory goes into another Fund Type?

Every RSA holder is entitled to only one Pin for all types of contributions. Consequently, your voluntary contribution will be in the same Fund as your mandatory contribution.

Will the RSA and AVC funds have separate fund price or the same?

The RSA and AVC will have the same fund price because they will be invested in the same fund the contributor selects.

How will the Fund Prices under the Multi-Fund Structure be determined at the point of crossing over to the new structure and what would happen to the Old Fund Price and units?

PenCom would provide guidance to how the fund price and units would be treated in the operating framework that would guide the transition.

What are the multi-funds options for Approved Existing Schemes?

Approved Existing Schemes are governed by the Board of Trustees who have the right to structure the portfolios in the best interest of the beneficiaries subject to PenCom’s approval. Consequently, the BOTs of contributory AESs can amend their agreements and restructure them along the lines of the Multi-Fund structure if they choose to.

Once an RSA holder makes a withdrawal such as 25% and then becomes unemployed, can he request that his funds be moved to another fund structure since no contributions are entering his RSA?

The regulation does not restrict movements due to withdrawal of 25%. As long as the individual is below 50 years, the option is to switch between Fund I and Fund II.

Is it possible for a client below 50 years to move to fund III?

No, Fund III is strictly for active contributors of 50 years and above.

If I decide to switch from Fund III to Fund II, can I switch back to Fund III?

Yes, but it will be at a cost if you intend to switch back to Fund III within 12 months.

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.

Will the fee for moving between funds be deducted from the RSA or paid as a separate amount in to the bank?

The fee would be deducted from the RSA balance of the contributors.