Less than 10% of the country’s population contribute to a retirement benefits scheme. Majority of the people who contribute have to contribute since it is mandatory. It is mandatory to contribute to NSSF if you are employed. Most places of work have occupational schemes whereby it is mandatory for the employees to contribute a certain percentage of their salaries to the schemes. There are very few people who voluntary contribute to a pension scheme. Fewer people know the whole process of contributing to a pension and how safe the contributions are. We have previously talked about why everyone needs a retirement benefits plan explaining the reasons why you need to prepare yourself for the future. Your pension should be part of your financial plan so that you can calculate how much money you need to save in order to be able to have almost same standards as when you were employed or an entrepreneur. Some of the advantages of Pension Plans are listed here.
Before the Retirement Benefits Authority Act (RBA Act) came into effect in 1997, the country’s pension industry was largely unregulated. Consequently, the industry faced a number of problems such as:
• Mismanagement of funds;
• Inadequacy of funding of the schemes;
• Arbitrary investment of funds; and
• Poor record keeping
The RBA Act has been instrumental in regulating the industry and this has resulted in the contributions being properly invested for the sake of the members. Every member of a scheme needs to know a few things about the scheme. Those who are not covered and are looking to get a pension plan should also consider these things so as to make an informed decision. Most of these things are included in the Scheme’s Trust Deed and Rules which is normally a boring 30+ page document which most people never get to read. Below are the most important things you need to know about a scheme:
Is it a Defined Benefit or Defined Contribution Scheme?
A Defined Benefit (DB) scheme is one in which the benefits are known. It could be something like 4 times the annual salary at retirement. A Defined Contribution (DC) scheme is one in which the contributions are known eg 10% of the salary. The benefits therefore depend on the contributions and the interest the contributions have earned. About 99% of the schemes in the country are DC.
Is it a Pension Scheme or a Provident Fund?
A provident fund is a scheme in which one is given a lump sum of his benefits upon retirement. The alternative is to have the benefits converted to an annuity where the retiree or beneficiary is entitled to a certain amount of money per month. Most provident funds are still referred to as pension schemes. Some schemes are hybrid in that a portion of the benefits (mostly a third) is given as a lump sum while the rest is used to buy an annuity.
This is normally the founder of the scheme. The term is common in most occupational schemes where the employer is the sponsor of the scheme. By law, the scheme’s assets are separate from those of the sponsor. Most times and especially with regards to occupational schemes, the employer will also match the contributions of the members of the scheme i.e if the members contribute 10% of their salaries, the employer will also contribute a certain percentage.
These are the people tasked with the running of the scheme. They are mainly elected by the members of the scheme and serve for certain duration. Some schemes allow the sponsors to nominate one or two trustees to serve in the board of trustees. Other schemes have corporate trustees. The board of trustees should meet at least once every quarter. The board also appoints the other service providers such as administrators, fund managers, custodians and independent asset consultants.
The administrator is in charge of the administrative duties of the scheme. Most schemes have outsourced this job to professional administrators registered by the RBA while the large schemes have internal administrators.
Every scheme is required to appoint a fund manager registered by the RBA. The Fund Manager invests the funds of the scheme on behalf of the scheme.
These are normally banks registered by RBA that hold financial assets of the scheme and effect transactions. While the Fund Manager invests on behalf of the scheme, they hold no money or assets. As a result, if they have to buy an asset, they have to let the custodian know so that the custodian can do the transactions. This is mainly to enhance accountability.
Independent Asset Consultants
The independent asset consultants should be actuaries or Certified Financial Analysts. Their job is to study the risk and age profile of the scheme in a view to adequately advise the trustees and fund managers on the best way to invest the scheme funds. The consultants will prepare a document known as an Investment Policy Statement (IPS) which the fund managers will use as a guide in deciding where to invest. Every scheme should have an IPS which should be changed at least once every three years.
As you can see, the whole process of investing the contributions from members is meticulous to ensure that there is transparency and to guard against loss of money. The Fund Manager has to be guided by the IPS developed by the asset consultant when investing the funds. The recommendations made by the asset consultant should not exceed the RBA limits. For example, a scheme can only invest upto 70% of it’s funds in equities or upto 30% in property. All these rules are made to safeguard the members’ contributions.
A pension plan is very important when it comes to saving for retirement. The best thing is that the industry is well regulated, and as a result, your money is safe.