75% lump sum payment will impoverished pensioners – PenOp

Oguche at the public hearing.

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Chuks Udo Okonta

The Pension Fund Operators Association of Nigeria (PenOp) has said a bill currently being moved by some members of the house of representatives to increase the lump sum payable to retirees to at least 75 per cent of their Retirement Savings Account (RSA), would engender poverty as there would not be enough fund left to package their monthly pension benefits.

The Chief Executive Officer, Pension Fund Operators Association of Nigeria (PenOp) Oguche agudah, said this on Tuesday in Abuja during a public hearing on two pension-related Bills by the House Committee on Pension, adding that the
argument that many people are suffering, receiving pittance whethey retire is flawed and faulty, adding that there is the need to realize that the loudest voice is not necessarily the correct voice.

According to him, the agitators might know of one person who had issues with accessing his pensions, however there are millions more who are perfectly happy with the structure of the Contributory Pension Scheme (CPS).

He noted that the people that have issues with the lump sum that they collect at the moment are those who have not been able to accumulate enough funds in their RSAs prior to retirement. “Let’s not forget that the system is relatively new, and most contributions have only happened over the last 15 years or so,” he said.

Oguche maintained that the way the CPS system was designed, is that, if one starts working at say, 25 years and works for 35 years, retiring at 60 years. If the employer and employee have contributed consistently over this period of time, then the funds in that individual’s RSA account would be sufficient to have a decent lump sum with enough funds remaining to earn a decent pension for life.

However, we should not truncate a system, a scheme and structure because of exceptions. What we should do is to address the inconsistencies within the system as opposed to destroying a whole program that benefits majority of pensioners under the scheme and the economy as a whole, he submitted.

According to him, another point is that what the 75 per cent essentially is looking to achieve is a gratuity type payment to retirees, adding that however, it is important to note that the PRA in its current form does not preclude the payment of gratuities by employers.

He maintained as a matter of fact, many Department and Agencies of the Government already pay gratuity to their staff on retirement and that a number of private sector organisations also do the same.

“What we suggest is that employers should be encouraged to pay gratuities at retirement and/or increase their level of monthly contributions in order to boost the balances and subsequent pension payout of their staff,” Oguche posited.

Participants at the hearing.

He remarked that it is also pertinent to note that the Contributory Pension Scheme (CPS) in its current state has in no small way fostered a savings culture in Nigeria, adding that prior to the enactment of the act, Nigeria did not have large pools of domestic savings and that many Nigerians do not have any other form of savings, except through this contributory pension scheme.

He suggested that what we should be doing as a Nation is to encourage more of these savings rather than looking to dismantle the system. This, he said is probably the only form of savings most Nigerian workers are able to put aside for their retirement years.

He maintained that as a matter of fact, there is the need for all stakeholders to encourage more workers to add to their statutory deductions while working, as this would enable them shore up their balances over time.

“What we need to advocate more is the consistency and discipline in the contributions that will even remove the need for any large lump sum payout when retired. A simple example will help illustrate this.
If a worker were to save N20,000 (Twenty thousand Naira) consistently every month for 15 years with an interest rate of 10 per cent per annum compounded for the 15 years, at the end of the period, he would have amassed over N 16,000,000 (Sixteen Million Naira). This is the power of consistency and compounding which the current system provides, and which should be encouraged.

“The other point we would like to make is that pensions are not set out to make you wealthy. If you were wealthy while working, a healthy savings, like a pension, will make you wealthier. Thus, pension will make you comfortable in retirement.
We need to realize that under the CPS, it is what you put in, plus investment returns that you can get out.

“So if we are advocating for a larger lump sum payment of at least 75 per cent as is proposed under this bill, then we need to ask if the 25 per cent remaining is enough to sustain you on a periodic basis for the rest of your time on earth. The answer is a resounding no,” he submitted.

Oguche said the argument many people make is that people need the 75 per cent lump sum to start a business, send their children to school, pay house rent, make some urgent payments amongst other things.

He maintained that however, a reliable data accessed by pension operators demonstrates otherwise.

“First, we are seeing many people who, even though they are eligible for lump sum payments they elect, rather, not to collect it and enable it work for them while receiving payments on monthly basis.

“The second thing is that there are studies to show that when people receive huge sums that they are not used to receiving, they spend it on consumptive rather than productive activities, which can give temporary satisfaction, but does little for the long-term benefit of that individual. In fact, a 2020 report by the Consumer Finance Protection Bureau of the United States of America, found that retirees with regular pension income payments were far more likely to remain financially stable than those who had cashed out the lump sum.

“The report also found out that 73 per cent of those with regular payments could maintain the same spending levels after five years. These are facts backed by data. We have included this report in our submission,” he said.

He said what would happen when large payouts are given to retirees, is that they would not have any other fall back and ultimately, they may become a liability on the society.

PenOp CEO noted that as a nation, we need to forestall this possibility so that we give retirees their dignity in retirement and reduce the possibility of their being a liability to society, adding that while releasing 75 per cent of their balances might seem like a popular idea, it will not serve the pensioners themselves who the bill is trying to protect, or the economy as a whole.

Also we need to remember that the balance remaining in the pensions account is being invested and is also growing which has allowed for periodic upward reviews of the monthly pension payments based on investment returns, he said.

He said another pertinent point, was that Nigeria needs to toe the line of international norms and standards, stressing that in other countries with developed systems, lump sum payments are highly regulated and restricted.

“For example, in Chile, the country which Nigeria modelled its pension system after, lump sum payments are largely restricted. When they reformed their pension system in 1981, there was no market for retirement products, but they stuck with the process and framework and are seeing the benefits today. We should follow their lead,” he pointed out.

Continuing, he said:
“The question being put to us today is really a case of logic versus emotion; a case of long-term planning and sustainability versus short term gratification. As a House and as a Nation, we have been saddled with the responsibility of putting in place laws that create precedents and lead to economic growth for the benefit of all.

“The question we are faced with today is, do we want to promote more of individual consumption or widespread economic development? Should we not advocate to utilize our collective savings to develop affordable housing estates complete with amenities so that people don’t need to build their own individual houses and provide amenities themselves? Should we not use our collective savings to improve our healthcare infrastructure and be able to provide affordable and quality healthcare as opposed to fostering more of medical tourism? This is the question ahead of us today. The proposal to increase lump sum payments to 75 per cent whilst it may seem popular and laudable it actually negatively affects both the retiree and the active contributors.”

He maintained that what is required
is to strengthen the regulatory framework around investment in infrastructure by the pension funds, such that there is a better partnership between the private and public sector with regards to infrastructure funding and impact investment. The pension industry is doing a lot of work in this regard, but we need concerted efforts from all parties involved, he said.

Another important point we would like to make is that it seems the pension industry is being targeted unfairly and unjustifiably over and over again. Through ground breaking legislation in 2004 and the efforts of the National Pension Commission and the pension operators, Nigeria’s pension industry has grown considerably such that it has been able to attract individual contributors of more than 9 million Nigerians and build savings of N 13.4 trillion as at December 31st 2021. These are little monthly contributions by many diligent workers over time, monies deducted from their monthly salaries. However, it is pertinent to state that it is not only pensions that are deducted statutorily from workers’ salaries. The National Housing fund receives monthly deductions, the state tax authorities make monthly deductions; some of these deductions are actually more than the pension deductions. We need to sincerely ask- where are the individual statements of account of all these deductions like is done in the pension industry. How much, for instance has been deducted and saved as a result of these deductions. Can any of these deductions be accounted for like they are within the pension scheme? We should not punish transparent, diligent and professional systems, while non-transparent schemes barely face the scrutiny that the pension industry is being made to face. Let us not punish best practice in this country, Oguche said.

According to him, it is also pertinent to draw attention to the fact that in 2004, the same year that the Pension Reform Act was enacted, the Excess Crude Account (ECA) was also established, stressing that the ECA grew to over 22 billion dollars in 2008, but there were agitations that the money needed to be used to solve current problems rather than save for the rainy day. A case was made for this and funds were disbursed to solve current issues Today, the ECA balance that was once 22 billion has about 70 million dollars left at a time the funds would have been most useful. However, we cannot point to one project that these funds were used for. In the same vein $1 Billion dollars out of that money was used to cede Nigeria’s Sovereign Wealth Fund and create the institution of Nigeria’s Sovereign Investment Authority (NSIA).

We can see how positive this decision has been and we can see the institution still running and making further investments from the initial seed funding. We cannot say the same for the other funds that were disbursed outside of the system. Sadly, this is the same line we will be toeing should we go ahead with the bill to increase lump sum payments. We should be guided by history and tread with caution, he said.

He submitted that PenOp opposed to the bill to amend the act to allow for at least 75 per cent of lump sum payment of a retirees RSA account upon retirement, adding that
the reason for the agitation is flawed based on the circumstances of a few people, who have not had the benefit of many years of contribution.

He posited that it is important to state that the scheme is working for millions of Nigerians and we should not construe the loud cry of a few as the verdict of the many.

He said those agitating should not cannibalize a scheme because there are some issues, rather they should look to strengthen the scheme for the benefit of all.

He maintained that the passing of the bill as proposed will actually do more damage to the pensioners, those behind it are trying to protect.

Countless studies and data, he said showed that many who have access to considerably large sums in retirement than they were used to when working only spend it on consumption without any long term personal or economic benefit.

He noted that the argument the proponents of the Bill are making is flawed and based on past and archaic models where they elevated immediate personal consumption as opposed to long term financial stability and National economic growth. Is it not better, for example to have more roads, rail systems and other means of transport than have individuals buy more cars? Is it not better to have retirees and pensioners who are able to provide for themselves to some extent than have indigent pensioners and exacerbate the problem with old age poverty which currently exists? He enquired.

He said all stakeholders should be focused more on using the contributions of many to deliver better outcomes for all in a sustainable manner, that ensures development, while also ensuring retirees have decent payouts at retirement.

He enjoined that we should not encourage the punishment of a transparent, professionally run and well-regulated scheme, stressing that the reason for anyone can even come and ask for an increase in lump sum payment is because we all can see where the funds are going; the retirees receive regular statements and we know the value of contributions, adding that, that
cannot be said about the other statutory deductions from employees’ monthly salaries.

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