By Dr. Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
Chairman/CEO Achor Actuarial Services Limited
PenCom’s guidelines on equity contribution for residential mortgage issued recently is in line with section 89 (2) of PRA 2014, allowing Retirement Savings Account (RSA) holders utilise 25% of their RSA balance for the payment of equity contribution towards securing a residential mortgage (called Pencom Guidelines in this paper), is a welcome development in the right direction as it would create unique selling proposition (USP) leading to deepening financial inclusion in the Nigerian pension industry. The foregoing would no doubt provide incentives to attract and retain employees (and also employers who have paternalistic desire to contribute beyond the level provided in section 4(1) of PRA 2014 to enable their employees securing a residential mortgage) to enroll in the Contributory Pension Scheme (CPS). Pencom Guidelines also provide access to equity finance for RSA holders in the CPS which in turn provides a sustainable source of long-term finance to the housing and mortgage financing sectors, thereby contributing significantly to Nigeria economic growth and GDP.
On the other hand, Nigerian Pensioners have two basic expectations under CPS, namely “to have sustainable standard of living in retirement and their benefits paid as at when due”. This paper highlights how the payment of equity contribution for residential mortgage by RSA holders from their RSA Balance in CPS would create opportunities and challenges for the RSA holders and Nigerian pensioners in meeting their expectations and welfare.
2. Background information on Types of Mortgage in Nigeria
In Nigeria, mortgages (home loan) are available both through banks and the country’s National Housing Fund (NHF), which is a Federal Government scheme. A mortgage is a legal agreement by which a lender (Mortgagee e.g. a bank or similar organization) lends the borrower (mortgagor) money (capital) to buy a house, etc., and the borrower pays the money back over a particular number of years (e.g. a maximum of 30 years under NHF). The agreement gives the lender the right to repossess the house if the borrower fails to fully repay the home loan, i.e. both capital borrowed and interest (e.g not more than 6% under NHF).
The borrower has different mortgage options to choose from including an interest-only mortgage or a repayment mortgage. Under a repayment mortgage, each monthly repayment consists of part capital and interest owed. For an interest-only mortgage, the borrower repays only the interest owed each month but not any of the capital borrowed. The original capital borrowed is only paid off at the end of the mortgage term, often being financed by other investment products e.g. endowment life assurance policy.
Pencom’s Guidelines define equity contribution as the “amount of capital paid by a RSA holder to a mortgage lender for the purpose of acquiring a mortgage” which is calculated as a percentage of the capital borrowed. However, NHF specifies 10% equity contribution for loan amounts between N6m and N15m and 0% if the loan amount is less than N6m.U
3. Challenges of Meeting RSA holders and Retirees Welfare
The greatest challenge facing retirees under the CPS since its introduction in 2004 is not just to ensure that they receive their benefits as and when due but also their inability to have adequate retirement income to live decent life at old age which is not explicitly defined in PRA 2014.
Section 2 of Pencom Guidelines specifies an authorized limit for the equity contribution as follows:
section 2.1 – “the maximum amount to be applied as equity contribution for residential mortgage shall be 25% of the total RSA balance as at the date of application irrespective of the percentage of equity contribution required by the Mortgage Lender”.
Section 2.2 – “Notwithstanding 2.1 above, where the value of 25% of RSA balance is more than the required equity contribution, the RSA holder can only access an amount equivalent to the equity contribution required by the Mortgage Lender”.
Section 2.3 – “Where the value of 25% of the RSA is lower than the equity contribution required by the Mortgage Lender, the RSA holder shall deposit the difference with the Mortgage Lender before 25% of his/her RSA balance can be applied as equity contribution”.
It is obvious that many RSA holders, particularly micro pension contributors may not have other personal savings else or other investment options in place (e.g. equities, fixed interest securities etc.) which would generate income to meet their short term or long term financial needs prior to retirement. Thus, these RSA holders would not be qualified to access the authorized limit for equity contribution because of their inability to source for external funds to finance the deposit payment specified in section 2.3 of Pencom Guidelines. In the same vein, many other RSA holders who are only able to borrow external funds or have limited personal savings to meet the deposit payment required in section 2.3 of Pencom Guidelines are likely to default in their mortgage repayments, leading to repossession of the property by the mortgage lenders which means a total loss of capital borrowed.
There will be high demand for payment of equity contribution from RSA holders because of the popularity of the residential mortgage arising from their desire to have personal homes. The demand would result in putting severe pressure on PFAs in terms of documentation and transfers of huge sums of money to mortgage lenders, leading to limited funds available for investments towards providing adequate and sustainable retirement incomes for RSA holders. Furthermore, the funds withdrawn from RSA balances for payment of equity contribution would not yield investment returns thereby limiting the growth of RSA and the overall asset under management (AUM) in the pension industry.
Section 3.6 of Pencom Guidelines states that ”where an RSA holder had accessed his/her RSA balance for residential mortgage and 25% due to loss of job, he/she shall access lump sum at retirement in line with section 7(1)(a) of the PRA, 2014 subject to guidelines issued by the Commission”. A critical analysis of this section reveals that most RSA holders are likely to receive about 50% to 75% of their RSA balances in total as lump sum benefits prior to or at retirement, leaving small proportion of the RSA balance for provision of pension. This has indirectly meets the demands from many stakeholders in the pension industry who want an increase in the proportion (from 25% to at least 50%) of RSA balance payable as lump sum to retirees.
4. Opportunities for RSA holders and Retirees
The payment of equity contribution for residential mortgage would provide a financial peace of mind to RSA holders because of the following:
• The necessary funds required to buy a house are readily available.
• Owning a residential property would mean no payment of rent and hence an increase in disposable income to maintain a certain standard of living after retirement.
• They will no longer be paying off the mortgage with RSA balance at retirement.
The residential property is a physical asset that would appreciate in value over time leading to value for money at the point of sales to RSA holder or retiree. This is particularly important for a RSA holder and/or retiree who own a residential home and need long term care immediately or in the future. Such a RSA holder or retiree can make retrospective payments of the cost of long term care by using an equity release which unlocks the value built up in the home as a tax free lump sum. The cost is usually repaid when the RSA holder or retiree moves into long term care home or dies.
Pencom Guidelines would improve the standard of living of RSA holders under the CPS by facilitating their ownership of residential homes during their working life. Furthermore, the property might also be used by a retiree as a collateral to obtain bank loans to set up business ventures in retirement to generate income with the aim to maintaining the same standards of living prior to retirement. This can be measure by Net Replacement Ratio which is the ratio of after-tax income after retirement to after-tax income before retirement.
Pencom Guidelines would also increase the RSA holders’ propensity to make additional voluntary contributions (AVC) to their RSA since RSA holders are allowed to utilize the contingent portion of his/her Voluntary Contribution (VC) for equity contribution.
The utilization of RSA balance for the payment of equity contribution towards securing a residential mortgage by RSA holder has a unique selling proposition leading to deepening financial inclusion in the pension industry. The foregoing would also enable Retirees to have adequate retirement incomes with decent standard of living.