Reforming Retirement Planning: Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree)

Reforming Retirement Planning: Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree)



The landscape of retirement planning in Nigeria has undergone a significant transformation, thanks to the National Pension Commission (PenCom). In a move aimed at diversifying investment options and accommodating ethical and Shari’ah-compliant preferences, PenCom a while back had approved the introduction of Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree).


Pension planning has always been a crucial aspect of financial security for individuals, and with these new funds, it is more inclusive and customisable. In this article, we will explain what Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) entail, why PenCom introduced them, and how they improve the face of retirement planning in Nigeria.


Understanding Non-Interest Funds

Islamic finance has gained prominence worldwide, and Nigeria is no exception to this trend. In the context of retirement planning, non-interest funds are a key component of Islamic finance. These funds adhere to Shari’ah principles, ensuring that investments are made in a manner consistent with Islamic ethics.


At their core, non-interest funds avoid interest-based transactions and investments in industries deemed unethical, such as gambling, alcohol, or pork. Instead, they focus on sectors that align with Islamic values, such as real estate, agriculture, and ethical finance.

One of the fundamental principles behind non-interest funds is the prohibition of "riba," which refers to the concept of charging or paying interest. This prohibition ensures that investments generate returns through ethical and sustainable means, fostering financial inclusivity and fairness.


Non-interest funds are an attractive option for individuals who seek to align their retirement savings with their ethical and religious beliefs. By embracing these funds, investors can achieve their financial goals while upholding their principles.


PenCom's Motivation for Introducing Non-Interest Funds

The introduction of Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) by PenCom reflected a forward-thinking approach to pension planning. Several key motivations would have driven this decision:

1.  Diversification: PenCom recognized the importance of diversification in investment portfolios. By introducing non-interest funds, individuals now have a wider range of investment options to choose from, reducing risk and enhancing their ability to achieve financial security in retirement.

2. Ethical and Shari’ah-Compliant Investing: Nigeria has a sizable Muslim population, and many individuals prefer investment options that align with their religious beliefs. Non-interest funds cater to this demand by providing Shari’ah-compliant investment opportunities, ensuring that financial planning remains consistent with personal values.

3.   Inclusivity: PenCom's decision to introduce these funds aimed to promote financial inclusivity. It recognized that different people have varying risk appetites and ethical considerations. By offering non-interest funds alongside traditional pension options, PenCom ensured that everyone can find a suitable avenue for securing their retirement.

4. Competitive Edge: Nigeria is a dynamic and competitive economy. The introduction of innovative pension funds like Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) positioned Nigeria's pension system as progressive and responsive to the evolving needs of its citizens.


Fund VI - Non-Interest (Active) Explained

Fund VI - Non-Interest (Active) is designed to cater to individuals who are still in the active phase of their careers and contributing to their pension accounts. Here's a closer look:

·  Eligibility and Contributions: the fund is for those that choose to have their contributions invested in Non-interest Money and Capital Market Products.

·   Investment Opportunities: This fund offers a unique range of investment opportunities that comply with Shari’ah principles. Investments may include real estate, Islamic bonds (Sukuk), ethical equities, and other ethical financial instruments.

·  Benefits for Active Contributors: For individuals in the prime of their careers, Fund VI - Non-Interest (Active) offers several benefits. It provides an avenue for sustainable and ethical wealth accumulation, helping contributors build a solid financial foundation for retirement. Additionally, the diversified investment portfolio reduces risk and enhances the potential for long-term returns.

·     Risk Management: Like any investment, Fund VI - Non-Interest (Active) comes with inherent risks. However, PenCom has put in place robust risk management strategies to protect contributors' interests. This includes prudent investment selection, and regular monitoring. The fund only allows a 55% exposure to Variable Income Instruments*.


Fund VI - Non-Interest (Retiree)

As individuals go into retirement, their financial priorities and risk tolerance change. Fund VI - Non-Interest (Retiree) is designed to address these shifting needs:

·  Eligibility and Transition: Fund VI (Retiree) is for those that choose to have their contributions invested in Non-interest Money and Capital Market Products. To join and or transition, individuals must have reached retirement age or being in the immediate pre-retirement phase. This fund serves as a transitionary vehicle for those shifting from the active contributor phase to retirement.

·   Investment Strategies: Fund VI - Non-Interest (Retiree) adopts a more conservative investment approach compared to the active fund. It focuses on low-risk, income-generating assets, such as real estate and fixed-income securities. This approach aims to provide retirees with a stable source of income during their post-employment years. The fund is only allowed a 10% exposure to Variable Income Instruments*.

·   Benefits for Retirees: Retirees stand to benefit from Fund VI - Non-Interest (Retiree). This fund structured to offer a reliable income stream, ensuring that retirees can maintain their lifestyle and meet their financial obligations during retirement. Moreover, it minimizes exposure to volatile markets, reducing the risk of depleting retirement savings prematurely.

·       Risk Management: Protecting retirees' financial well-being is paramount. Fund VI - Non-Interest (Retiree) is designed with risk management as a priority. Conservative investment choices and prudent asset allocation are central to safeguarding the financial security of retirees.


*Variable Income Instruments typically refer to financial securities or investments that do not guarantee a fixed return but rather provide returns that fluctuate based on various factors, such as market conditions, economic performance, and the performance of the underlying assets. They include such instruments as:

·      Equities (Stocks)

·      Real Estate Investment Trusts (REITs)

·      Mutual Funds

·      Exchange-Traded Funds (ETFs)

·      Venture Capital and Private Equity Investments

·      Commodities


Shari’ah-Compliant Investment Strategies

Both Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) are to adhere to Shari’ah-compliant investment strategies. These strategies include:

·  Ethical Screening: Investments are rigorously screened to ensure they comply with Islamic principles. Industries such as alcohol, gambling, and tobacco are excluded.

·  Profit-and-Loss Sharing: Shari’ah-compliant investments often involve profit-and-loss sharing arrangements. This means that investors share in both the gains and losses of the underlying assets.

·   Asset-Backed Investments: Many Islamic investments are backed by tangible assets, such as real estate or commodities. This provides a degree of security and transparency for investors.

·  Avoidance of Interest (Riba): One of the fundamental principles of Islamic finance is the prohibition of interest (riba). Shari’ah-compliant funds do not engage in interest-based transactions.


Benefits of Non-Interest Funds

The introduction of Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) brings several noteworthy benefits:

1.   Ethical and Religious Alignment: These funds allow individuals to align their retirement savings with their ethical and religious beliefs. For many, this alignment is essential for peace of mind and financial satisfaction.

2.   Long-Term Sustainability: Shari’ah-compliant investments often focus on sustainable, income-generating assets. This can lead to long-term financial sustainability, providing retirees with a consistent source of income.

3.   Inclusivity: Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) cater to a broader range of investor preferences. This inclusivity ensures that all citizens, regardless of their financial goals or ethical considerations, can participate in the pension system.


How to Get Started with Fund VI

If you're interested in participating in Fund VI - Non-Interest (Active) or Fund VI - Non-Interest (Retiree), here are the steps to get started:

1.   Ensure Suitability: The funds are for those that choose to have their contributions invested in Non-interest Money and Capital Market Products and believe either of the funds better align with their current financial situation and goals.

2.   Contact a Pension Fund Administrator (PFA): Reach out to a licensed Pension Fund Administrator that offers the selected fund (you can find a list of Fund VI - Non-Interest (Active) here and Fund VI - Non-Interest (Retiree) here. They will guide you through the application process and/or fund switching process.

3.   Monitor Your Investment: Keep track of your investments and review your Retirement Savings Account (RSA) periodically. Consider consulting with financial advisers for personalized advice.


Remember that your choice of fund should align with your long-term financial goals and risk tolerance. Take the time to research and understand the fund's investment strategy before making a decision.


Challenges and Risks

While Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) offer compelling benefits, it's essential to be aware of potential challenges and risks:

1. Market Volatility: All investments carry some degree of risk, and non-interest funds are no exception. Economic fluctuations and market volatility can impact the performance of these funds.

2.  Liquidity Constraints: Shari’ah-compliant investments often involve longer-term commitments, which can limit liquidity.

3.  Limited Investment Universe: Shari’ah-compliant investments may have a narrower universe of eligible assets compared to conventional investments. This limitation can impact diversification.

4. Education and Awareness: Many individuals may not be familiar with non-interest funds or Islamic finance principles. Education and awareness-building efforts are essential to ensure that potential investors make informed decisions.


It's important to approach investment decisions with a clear understanding of the associated risks and seek professional advice when necessary.


In conclusion, the introduction of Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) by the PenCom marked a significant milestone in Nigeria's retirement planning landscape. The funds offer individuals the opportunity to align their pension savings with their ethical and religious beliefs while diversifying their investment portfolios.


Fund VI - Non-Interest (Active) caters to those in the active phase of their careers, providing ethical and sustainable wealth accumulation. On the other hand, Fund VI - Non-Interest (Retiree) ensures investments in the fund offers retirees a stable source of income with reduced exposure to market volatility.


With PenCom's commitment to inclusivity, these innovative funds empower Nigerians to take charge of their financial future while staying true to their principles. As the pension landscape evolves, Fund VI - Non-Interest (Active) and Fund VI - Non-Interest (Retiree) stand as beacons of choice, ethics, and financial sustainability in retirement planning in Nigeria.


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