PenCom: Providing More Investment Options Through Non-Interest Fund

In October last year, the National Pension Commission announced the introduction of a Non-Interest Fund through the issuance of an Operational Framework for the Fund.

The commencement of the Fund is in furtherance of the implementation of the Multi-Fund Investment Structure, which seeks to empower pension contributors and retirees to choose a particular fund in which their pension savings are invested.

The non-interest fund offers a viable alternative to the conventional interest-based financial instruments for pension funds investment. The non-interest fund, better known as fund VI, complies with the provisions of Islamic commercial jurisprudence and any other established non-interest principles.

In ensuring the effective implementation of the framework, PenCom further directed Pension Fund Administrators to create and maintain the non-interest fund (Fund VI) for interested Retirement Savings Account holders.

It said that the non-interest fund would be separated into two funds for Active RSA holders and retirees, respectively.

Operational Framework:
By the Operational Framework regulating the Fund VI, contributions made to the fund cannot be invested in the production or trading of alcohol, pornography, weaponry, gambling/betting, speculation, interest earning ventures and other similar undertakings that are contrary to Sharia principles. Furthermore, the scope of the prohibited schemes for the Fund VI is to be determined from time to time by the Financial Regulation Advisory Council of Experts (FRACE), an advisory body on Islamic Banking and Finance established by the Central Bank of Nigeria (CBN) to advice on matters relating to Islamic commercial jurisprudence.

The Operational Framework provides that the Fund VI is to be managed in two separate accounts by Pension Fund Administrators (PFAs): for active Retirement Savings Accounts contributors, and retirees. Both active contributors and retirees will be able to move their contributions to the Active Fund VI or Retiree Fund VI, respectively.

PFAs are also prohibited from investing contributions to the Fund in speculative instruments. The Operational Framework sets the maximum limits for the various allowable classes of assets that the Fund can be invested in, and further provides the modalities for Retirement Savings Account holders to migrate to the Fund VI, amongst other provisions. The Fund VI is in line with the multi fund investment structure introduced by PENCOM in 2018 which gives more freedom to retirees and contributors to invest their funds according to their risk enthusiasm.

Why Non-Interest Fund Is Important:

At the commencement of the Contributory Pension Scheme, all active contributors’ funds were being invested solely in the RSA ‘Active’ Fund. The Multi-Fund Investment Structure was thus conceived by PenCom to align the age and risk profiles of contributors. As a result, pension contributors and retirees are allowed to make specific choices regarding the investment of their pension funds. Introduced in July 2018, the Multi-Fund Investment Structure resulted in the separation of the RSA Fund into 6 Fund types (Funds l to Vl).

The Multi-Fund Structure is consistent with the principle of allowing individuals to make their own choices under the Contributory Pension Scheme (CPS). Some of these fundamental choices include the option of selecting a Pension Fund Administrator (PFA) for the purpose of opening a Retirement Savings Account; the choice of a fund under the RSA Multi-Fund Structure; and the transfer of an RSA from one PFA to another among others.

The National Pension Commission (PenCom) has introduced a Non-Interest Fund (Fund VI) and also issued an Operational Framework for the Fund. This is in furtherance of the implementation of the Multi-Fund Investment Structure, which seeks to empower pension contributors and retirees to choose a particular fund in which their pension savings are invested.

Section 7.3 of the Regulation on Investment of Pension Fund Assets issued by PenCom, established the Non-Interest Fund (Fund VI) among the Fund types to be managed by licensed PFAs. It is a Fund which complies with the provisions of Islamic Commercial Jurisprudence and any other established non-interest principles, as approved by the Financial Regulation Advisory Council of Experts (FRACE) or any other body constituted by the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission.

In order to boost confidence amongst pension contributors and retirees, the FRACE, has certified that the Operational Framework issued by the Commission complies with non-interest finance principles.

Some of the objectives of the Operational Framework issued by PenCom include to promote financial inclusion within the Nigerian Financial System; to establish standards and procedure for the management of Fund VI by licensed PFAs; to promote Islamic Finance thus bridging the access to finance gap in Nigeria; and assist in expanding the coverage of the CPS by attracting employees who are interested in non-interest funds.

Instruments To Be Invested With Non-Interest Fund:

Sequel to the issuance of the Operational Framework by PenCom, all PFAs were required to create and maintain the Non-Interest Fund for interested RSA holders. The Fund would be separated into two funds, for Active RSA Holders and Retirees, respectively.

The permissible instruments for the Investment of Fund VI assets include: Corporate/ Supranational Sukuks; Government Sukuk (including Islamic Treasury Bills and Euro Sukuk) issued by the Federal Government of Nigeria, CBN or FGN Agencies and Infrastructure Sukuk backed by FGN/CBN guarantee. Other instruments are compliant Money Market instruments, ordinary shares, private equity Funds and real Estate funds.

How To Transfer Pension Savings To Non-Interest Fund:

The Non-Interest Fund is optional to pension contributors and retirees. Consequently, RSA holders in Funds I, II, III and retires in Fund IV are eligible to transfer their RSA contributions to the Non-Interest Fund (Fund VI) by making a formal request to their PFA in line with the provisions of the RSA Multi-fund Implementation Guidelines and Section 7.6 of the Investment Regulation dealing with Transfers between Fund Types within a PFA.

This implies that eligible RSA holders are required to visit their respective PFAs to request for the transfer of their pension funds from their existing fund to the Non-Interest Fund by completing and signing a Consent Form to be issued by the PFA. The personal presence of the RSA holder is required due to the need for authentication.

Consequently, regardless of how the Consent Form is made available, the process cannot be concluded until the RSA holder visits the PFA and appends his/her signature to the form. Thereafter, the PFA will move the funds from the existing fund to the Non-Interest Fund and advise the RSA holder accordingly.

The Non-interest Fund has been received with great enthusiasm by pension contributors and retirees. While the Fund’s assets stood at N7.79bn in September 2021 at commencement, the Fund grew to N17.75bn by the end of January 2022, translating to a growth of N9.95bn over the period.

As enlightenment efforts are intensified by the Commission and Pension Fund Administrators, it is expected that the growth of the Non-interest Fund will be sustained.