Expert charts ways for micro pension plan development

Dr. Apere


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Chuks Udo Okonta

Following the observations made by the National Pension Commission (PenCom) from inspections conducted on Pension Fund Administration’s (PFAs) branches in Ondo and Ekiti Sates, where issues such as inadequate staffing; poor record keeping; lack of staff training; inadequate information communication technology facilities and poor service delivery were revealed, an actuarial expert and the Managing Director/Chief Executive Officer, Achor Actuarial Services Limited, Dr. Pius Apere, has proffered ways the Micro Pension Plan (MPP) can be achieved.

PenCom in its second quarter 2019 reports, stated that it conducted inspection of PFA branches in Ondo and Ekiti Sates, adding that a total of 13 PFAs were inspected in each of the States and that the inspections were to determine the extent of compliance by the PFAs with the circular on minimum requirements for branches and service centers as well as the quality of services rendered to stakeholders in the States.

PenCom noted that it also sought to ensure that staff of the PFAs were conversant with the provisions of the States Contributory Pension Laws and relevant regulations and guidelines it issued, stressing that at the end of the branch inspections of the PFAs, the issues that were observed include Inadequate Staffing; Poor record keeping; Lack of staff training; Inadequate ICT facilities and Poor service delivery.

For Apere, who believes the micro pension plan must be taken to the grassroots, posited that technology enables people to access financial services including pension products and it is a driver behind realizing financial inclusiveness. Thus, potentially high front-end capital investments in information technology (IT) infrastructure as well as manpower by PFAs are required in establishing efficient micro-pension administration and delivery platforms to mobilize micro-pension contributors at the grassroots. “In fact, the timing of implementation and robustness of IT infrastructure by PFAs as specified by PenCom to meet the expected increase in micro-pension contributors in the short term may be a concern,” he said.

He urged PenCom to carry out adequate supervision and periodic reviews to monitor and ensure an efficient and effective implementation of the MPP, adding that there is a lot of work to do by the regulator and PFAs in order to bring confidence into the pension system and that a network of branch operations by PFAs with high standard of service delivery will help to bring confidence in the system.

He noted that there is high tendency for micro-pension contributors to operate RSA as a bank savings account because of the over flexibility of the contingent withdrawal option provided in the Guidelines. “For instance, the Micro-pension Contributor may withdraw the total balance of the contingent portion of his/her RSA including all accrued investment income thereto, making the first withdrawal 3 months after the initial contribution and subsequent withdrawals once in a week from the balance of the contingent portion of the RSA. In view of the above, the contingent withdrawal option would create administrative hassle for the PFAs because the amount of records keeping required would actually lead to incurring high administrative costs and processing time.

“The above administrative hassle could be avoided or reduced if at the point of registration micro-pension contributors are asked to complete a weekly or monthly income and expenditure planner which would indicate and/or guide how much they can conveniently safe in a week or month. The forgoing is also in line with section 6.3(d) of the micro-pension guidelines (“The amount of contribution shall be dependent on the Micro-pension Contributor’s pension aspiration and financial capacity”),” he posited.

On risks associated with the MMP, he said Section 6.5.3 (ix) of micro-pension guidelines relating to Guaranteed Minimum Pension (i.e. Micro-pension Contributors are entitled to Guaranteed Minimum Pension) has not only created a unique selling propositions for the PFAs (as explained above) but also a high expectation for all micro-pension contributors to benefit from GMP at retirement if their RSA balances are too low to afford a decent living in retirement.

This expectation, he said is high in the minds of all micro-pension contributors when joining the micro-pension plan despite section 6.5.3 (x) of micro-pension guidelines stating that (“Where the total amount contributed is below the amount required to qualify for Minimum Pension Guarantee, the Micro-pension retiree shall be paid enbloc in accordance with the Regulation for the Administration of Retirement and Terminal Benefits”).

“Furthermore, with the contingent withdrawal option, it is more likely for micro-pension contributors to have lower RSA balances at retirement than the mandatory contributors. Thus, the micro-pension retirees will be aggrieved when they are disqualified from GMP at retirement and their expectations are not met leading to a reputational risk for the entire pension industry. This is because the micro-pension contributors would expect same eligibility criteria for GMP (as stated section 84(1) of PRA 2014) to be used for both micro-pension contributors and mandatory contributors,” he added.

He maintained that as far as the micro-pension contributors are eligible to guaranteed minimum pension (GMP), it is not likely that the pension protection fund established to finance the GMP as stated in section 82 of PRA 2014 will be sufficient to cover the liability. This, he said is mainly because of the number of micro-pension retirees that would qualify for GMP benefit will be higher than expected due to the unique selling proposition (USP) discussed above, leading a strain on the PPF.

On investment of micro-pension fund/assets, Apere noted that considering the facts, as stated in sections 6.3 (c) and 6.5.2 (iii) of the micro-pension guidelines, that “every contribution shall be split into two comprising 40 per cent for contingent withdrawal and 60 per cent for retirement benefits” and the total balance of the contingent portion of micro-pension contributor’s RSA including all accrued investment income can be withdrawn on a regular basis (once a week), the investment of the contingent withdrawal portion is likely to be only in cash and/or money market instruments while the retirement benefits withdrawal option will follow the Fund V – (micro-pension fund) in the multi-fund structure.

He stressed that investment guidelines (Fund V – micro-pension fund in the multi-fund structure) for micro-pension contributors do not consider their risks profile (in terms of age and duration) until they have the opportunity to be converted to mandatory contribution status, whereby “At conversion, the PFA shall move the Micro-pension Contributor’s RSA balance to the appropriate fund under the Multi-fund Structure”. The above, he noted would discourage a young and financially literacy employee working in the informal sector to join the micro-pension plan if has alternative ways of meeting his retirement needs.

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