The Enhanced Pension as a Means of Cushioning the effect of Non Implementation of Guaranteed Minimum Pension under PRA 2014
Presented by Dr Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
Nigerian Pensioners have two basic expectations under the Defined Contributory Scheme (CPS), namely “to have sustainable standard of living in retirement and their benefits paid as at when due”.
The above expectations cannot be fully met for all pensioners without the implementation of the guaranteed minimum pension (GMP) as stated in section 84(1) of Pension Reform Act (PRA) 2014. This is true particularly for those retirees with small Retirement Savings Account (RSA) balances because they have not accumulated enough as at the date of retirement to have a decent standard of living in retirement.
The delay in the implementation of GMP (by PENCOM for more than 10 years after the CPS was established in 2004) have resulted in growing sense of disenchantment among current pensioners with relatively small RSA balances at retirement. This is because of the small monthly pension they have been receiving over the years relative to the huge gains (from investment returns and/or dividends) the Pension Fund Administrators (PFAs) are currently making. The GMP (if implemented) would have eliminated the disenchantment among the current pensioners.
The recent implementation of Enhanced Pension (EP) programme by PENCOM effective from December 2017 is aimed at providing sustainable standard of living in retirement for the Programmed Withdrawal (PW) pensioners and therefore it could be seen as cushioning the effect of the non-implementation of GMP for these PW pensioners.
This paper highlights the rationale and implications for introducing the Enhanced Pension (EP) programme for only the Programmed Withdrawal (PW) pensioners.
The Rationale for Enhanced Pension (EP) Programme
The guaranteed minimum pension (GMP) is usually to protect the RSA holders against some of the risks of low investment returns and the erosion of pensioners’ incomes by inflation during a period of economic down turn leading to having a low standard of living in retirement. Thus, it could be seen as a redistribution of resources to act as a safety net for pensioners.
The delay in the implementation of GMP could be considered to be the main reason for PENCOM’s attention being drawn to the “clamouring for periodic enhancement of the pension for retirees on Programmed Withdrawal (PW) under the CPS”. The grumbling may arise mainly due to the contributors and/or new retirees demanding for huge initial lump sum payment, leaving them with reduced RSA balances for investment which in turn has reduced the monthly income to live on in retirement.
The PENCOM’s framework on Enhanced Pension (EP) provides that “only retirees on Programmed Withdrawal (PW) under the CPS with appreciable growth in their RSAs are entitled to receive enhanced pensions”. Furthermore, the framework also stated that: (a) “PFAs shall continue paying current pensions to retirees that have insufficient growth to be considered for enhancement”. (b) “PFAs shall continue paying pensions to retirees that have fully exhausted their RSAs from their statutory reserve pending implementation of Minimum Pension Guarantee (MPG)”.
The implementation of EP is a welcome development but the fact that it is applicable to only Programmed Withdrawal (PW) pensioners has great concerns and far-reaching implications to other stakeholders.
The Funding of Enhanced Pension (EP) Programme
Indeed, the funding of Enhanced Pension (EP) is the responsibility of the PFAs, as stated in PENCOM’s framework on EP that “PFA shall use the surplus [generated from Return on interest (ROI)]” and/or “statutory reserve Fund” to enhance the pensions of eligible retirees.
Section 81 of PRA 2014 required that “every PFA shall maintain a Statutory Reserve Fund as contingency fund to meet any claim for which the PFA may be liable as determined by the Commission. The Statutory Reserve Fund shall be credited annually with 12.5 percent of the net profit after tax or such other percentage of the net profit as the Commission may, from time to time, stipulate”.
The Implications for Enhanced Pension (EP) Programme
Pension Products – Basically there are two main pension products being used at the de-accumulation phase to provide retirement benefits for the RSA holders in the CPS (as stated in section 7(1) of PRA 2014), namely Life Annuity (LA) and Programmed Withdrawal (PW) products. Briefly, life annuity provides a regular income for life with a minimum guaranteed period of 10 years. Where the retiree dies within the guaranteed period the income for the unexpired period is paid in lump sum to the estate of the retiree or named beneficiary. On the other hand, the retiree under Programmed Withdrawal (PW) receives a regular income from his/her RSA (with the balance being invested continuously) over an expected lifespan until the RSA balance runs out.
The Programmed Withdrawal (PW) and Life Annuity (LA) products are being marketed separately by PFAs and Life Insurance Companies (Life Insurers) respectively. On the other hand, the marketers of these products (PFAs and Life Insurers) are regulated separately by PENCOM and NAICOM respectively. However, the guidelines for Life Annuity (LA) product are jointly issued by the two regulatory bodies (as specified in section 7(1) (c) of PRA 2014). The framework on Enhanced Pension (EP) applies to only the Programmed Withdrawal (PW) product and PW pensioners being regulated by PENCOM. It is obvious that the pensioners under Life Annuity product are also clamouring for either guaranteed minimum pension (GMP) or Enhanced Pension (EP), having considered the economic hardship facing Nigeria pensioners.
New Retirees’ Preferred Choice of Pension Benefit Options – The PFAs (being the first point of contact with new retirees) and Life Insurers had been de-marketing each other in the past in order to gain undue business patronage under the CPS. The lack of professional advice (i.e. not based on individual circumstances and/or risk profile) had been given to new retirees to freely choose suitable pension products (i.e. pension benefit options) at retirement. The above has led to more retirees still opting for Programmed Withdrawal (PW) product (142,742 retirees) than Life Annuity (LA) product (34,876 retirees), showing that 80.36% and 19.64% of the retirees were under PW and LA products respectively in December 2016.
The recent implementation of Enhanced Pension (EP) for only Programmed Withdrawal (PW) pensioners would no doubt create a natural tendency for more new retirees to choose Programmed Withdrawal (PW) product rather than the life annuity (LA) product in the future without the PFAs deliberately de-marketing the Life Insurers. Thus, the number of retirees under Programmed Withdrawal (PW) is likely to increase exponentially over time than those retiring as annuitants.
The Statutory Reserve Fund – The Statutory Reserve Fund (SRF) of PFAs (i.e. an annual accumulation of a percentage of net profit after tax of PFAs over the time) used in the funding of Enhanced Pension (EP) do not arise only from the management of RSAs of current Programmed Withdrawal (PW) pensioners over the years but also from the management of RSAs of current and past contributors (who have actually or may eventually become annuitants at retirement). Thus, annuitants whose RSAs have contributed to the Statutory Reserve Fund (SRF) of PFAs in the past should have (a lien in EP) been considered in the implementation of Enhanced Pension (EP). The implementation of Enhanced Pension (EP) using the SRF suggests that a claim has arisen for which a PFA is liable as determined by PENCOM (section 81(1) of PRA 2014).
The above also suggests that the clamouring for Enhanced Pension (EP) that cut the attention of PENCOM would not cease until the guaranteed minimum pension (GMP) is implemented for the benefit of all eligible pensioners (both Programmed Withdrawal and Life Annuity retirees) living in poverty. For the Programmed Withdrawal (PW) Pensioners, the Enhanced Pension (EP) is akin to the guaranteed minimum pension (GMP) as the principle and concept of payment are more or less the same.
The implementation of Enhanced Pension (EP) would put an undue strain on a PFA’s Statutory Reserve Fund and hence on the PFA’s cash-flows. This will be the case when the number of Programmed Withdrawal (PW) pensioners would increase significantly since the PW product is more likely to be the new retirees’ preferred choice than the Life Annuity (LA) product, as explained above. The original aim of maintaining the Statutory Reserve Fund would not be met as the Fund is likely to be depleted to a level below the acceptable threshold already set by PENCOM.
Pension Protection Fund – PFAs has been contributing towards the Pension Protection Fund (as required by section 82 of PRA 2014) to be utilized for any purpose deserving protection as determined by PECOM including the funding of GMP. Thus, the implementation of Enhanced Pension (EP) using Statutory Reserve Fund maintained by PFAs is an extra burden placed on PFAs.
It is clear that Enhanced Pension (EP) is not a substitute of guaranteed minimum pension (GMP) and therefore, there is an urgent need to implement the GMP for the benefit of all eligible pensioners (not only the Programmed Withdrawal (PW) pensioners) in order to have a decent standard of living in retirement, particularly in this period of serious economic hardship facing the country.