Insurance companies and Pension Fund Administrators are engaged in an unhealthy competition to the detriment of retirees in their quest for a larger share of the growing pension funds, NIKE POPOOLA reports
Crave for pension money
The desire for a larger share of the growing pension funds is making the insurance companies and Pension Fund Administrators to lure retirees into entrusting their life savings with them through any means.
The Pension Reform Act, which commenced 11 years ago, introduced a Contributory Pension Scheme mandating the PFAs and the insurance companies to administer the pensions of workers in retirement.
As of October this year, the total assets under the CPS had risen to N5.14tn. When they retire, workers are allowed to go for Programmed Withdrawal, which is sold by the PFAs, or opt for annuity provided by the insurance companies. The two pension managers offer different services to pensioners.
Presently, the awareness about the operations of the CPS is still low. It has been discovered that the pension funds’ managers hardly explain to the retirees the terms of their retirement contracts.
Despite the benefits consumers are expected to derive from the competition between the service providers, some pensioners are getting irritated by the actions of some of these managers. They complain about lack of transparency in the operators’ contract dealings with them.
The retirees feel that they are at the receiving end of the unhealthy competition between the PFAs and the insurers.
A retiree, Mr. Taiwo Adeniyi, says he has not been given the full details of the contract he signed with his PFA. “I have been getting my pensions regularly from my PFA and they say they are investing my money and will continue to pay me as long as I still have money with them. But I don’t know the duration of the payment.”
Another retiree, Mrs. Alice Emeka, says she has been told that if she takes annuity, the insurance company will continue to pay her for life. However, she is ignorant about the guaranteed period.
“They said they will be paying me higher pensions as long as I am alive but did not explain what will happen if I die after 10 years of collecting my pensions,” she says.
Mr. Akanni Adekunle says that he applies for annuity because of a higher bargain with an insurance company but his PFA refuses to process his pension, insisting that he should take the programme withdrawal.
Under the CPS, all workers will have to choose between the PFAs and the insurance companies. The choice the retirees make will determine their financial comfort in retirement.
Insurers versus PFAs
The PFAs and the insurers are neither friends nor enemies in the pension business, they are strictly competitors. Their rivalry heightened when the insurance companies started selling annuity to retirees. Though contribution into the CPS by workers started in 2004, the first set of retirees emerged in 2007. The workers save ahead for the future by remitting part of their salaries while in active service into their Retirement Savings Accounts through the PFAs. These funds are kept by the Pension Fund Custodians.
The PFAs keep records of the contributions and process the retirement of workers. Retirees had access to only programme withdrawal until 2010 when the insurance companies started selling annuity. The annuity guideline was introduced by the regulator of the CPS, the National Pension Commission (PenCom), in conjunction with the National Insurance Commission (NAICOM).
The introduction of annuity sold by insurance companies, no doubt, broke the monopoly of the PFAs and commenced the intense competition between the two players. Workers are thus open to taking either the annuity as a retirement option or the PW.
However, the PFAs have an upper hand in the competition. This is because the PFAs keep the RSAs of workers while in active service and know those who are to retire.
At retirement, the PFAs will process the benefits of the retirees, and therefore are able to woo them to take the PW and discourage them from annuity.
Insurers, however, engage the PFAs in a price war by offering retirees higher monthly pensions because they are aware that the PFAs are not allowed to pay their pensioners any rate different from the stipulated PW payment template.
To compete with the PFAs, insurance companies engage the services of aggressive marketers and train them to woo retirees to annuity.
The marketers are thus trained and motivated to bring fresh retirees to the annuity market and snatch the PW retirees from the PFAs.
These ‘retiree grabbers’ are intimidating the PFA’s interest, thus making the PFAs to increase their dislike for insurance firms.
Insurers are not happy with the PFAs either because they feel the PFAs deliberately prevent retirees from taking annuity.
The Director-General, Nigerian Insurers Association, Mr. Sunday Thomas, says the allegation that the PFAs discourage the retirees from taking annuity is true but has no documentary evidence.
“We know that when somebody retires, the first point of contact is to go to his PFA and what happens most of the time is that the PFA will naturally advise the retiree to go for the PW because most of the retirees don’t have any knowledge about annuity. It is not something that is written somewhere that they prevent them formally but it is always there. And I have seen instances where somebody will go to the PFA and the first thing the fellow is told is to go for the PW,” he says.
The pension law, according to him, states that the retiree should be given the two options but the PFAs do not enlighten retirees on annuity.
He notes that some of the PFAs don’t even understand life annuity so they cannot explain what they don’t understand.
Responding to the allegations against the PFAs, the Chairman, Pension Fund Operators Association of Nigeria, Mr. Eguarehide Longe, says it is not right to conclude that all PFAs deliberately prevent retirees from taking annuity.
He says it is not the duty of the PFAs to sell annuity but they can only inform the retirees that the options are there for the retirees to decide. “I know that some other PFAs deliberately tell retirees that they should not buy annuity but I don’t think that is the right thing to do. I don’t know which PFA does that. But the truth is that insurance companies sell only one thing, that is annuity and don’t tell people about the PW. They tell a lot of lies about the PW because the more annuities they sell the more commission they get,” he said. Longe explains that PFAs should be neutral and give retirees full information on PW and annuity and allow them to make their choice.
“The insurance companies have sold annuity that they cannot pay for because the interest rate in the market has collapsed and the liability have gone down and some of them are going to declare losses. It is primarily because of the nature of the agents and their unethical practices who tell retirees lies and get information in unorthodox ways as they are very aggressive because of the commission they will get, but we cannot do that because PFAs don’t earn commission on what they do,” he said.
Also reacting to the allegations on annuities sold by underwriters, the Managing Director, African Alliance Insurance Plc, Mr. Alphonse Okpor, says actuaries determine rates for annuity payment and other life insurance policies all over the world, adding that the actuaries put into consideration the fact that some retirees die early while some live long.
“Underwriters have just started selling annuity to retirees in the CPS and it is not true that insurance companies are making losses because we don’t just determine what we pay to pensioners. We pay depending on actuarial advice, and any rate we pay is backed by the actuary,” he says.
According to him, insurance companies have been paying annuity to other life insurance policyholders before the CPS started, adding that there is no month that they do not pay retirees.
Okpor says insurance companies are offering retirees higher rates on annuity and they can maintain the rates. For now, he says, the PFAs have more PW retirees than those in the annuity group with insurers because the PFAs have the names of those retiring.
“But annuity is growing because more people are becoming more aware, even those who have chosen the PW are changing to annuity because the law allows them to change. Annuity is growing fast now and will soon meet up with the PW the way it is going,” he says.
Insurers’ race with the PFAs
The first sets of retirees under the CPS emerged in 2007 when 47 retirees were registered with PW. Statistics obtained from PenCom showed that the number of retirees on PW increased to 5,077 and 16,400 from 2008 to 2009 respectively.
NAICOM, the regulator of the insurance sector, introduced a recapitalisation exercise for the insurance companies in 2005, which ended in 2007. This did not give the insurance firms the chance to prepare for annuity provision under the CPS until 2009 when PenCom and NAICOM jointly issued annuity guidelines to commence its operations. However, no request was received from any retiree as the awareness was still low.
In 2010, insurance companies began the scheme to snatch retirees from the PFAs. That year, 74 pensioners terminated their contracts with the PFAs and moved to insurance companies and the PFAs had to transfer their pension money called premium to the insurance companies, which was worth N278.41m.
In the third quarter of 2011 and 2012, the total number of PW retirees rose to 35,419 and 54,558, while annuity retirees stood at 152 and 1,408, respectively. The PFAs paid insurance companies N731.53m and N8.74bn premium as benefits for the transferred retirees respectively for the two periods.
At the end of the third quarter of 2013, a total of 73,695 retirees had taken the PW; and the figure rose to 97,808 in the third quarter of 2014.
The figure for the annuity retirees rose to 5,717 and 13,264 while the PFAs paid N28.02bn and N62.291bn premiums respectively to the insurance companies for 2013 and 2014. The RSA retiree funds managed by the PFAs for the PW retirees in the periods rose from N296.95bn to N364.27bn.
The latest figures obtained from PenCom revealed that the total number of retirees on the PW had risen to 118,178 as of July this year while the number of annuity retirees had reached 21,211.
The PFAs have so far transferred a total premium of N104.52bn to the insurance companies while they still manage the RSAs of the PW pensioners amounting to N395.86bn.
Provisions of CPS
Last year, the PRA 2004 was amended and replaced with the PRA 2014. Under the CPS, an employer is expected to open a RSA for his worker with a PFA. Every month, the employer is required to remit 18 per cent of the total emolument into the RSA. The employer deducts eight per cent from the workers’ monthly emolument and augments it with 10 per cent.
These contributions are managed by the PFAs and the Pension Fund Custodians until the workers retire. At retirement, the PFA pays a minimum of 25 per cent of the RSA balance as a lump sum to the retiree while the rest is utilised either for the PW or annuity plan. If the retiree opts for annuity, the balance after getting the lump sum will be transferred to insurance company and will cease to have any relationship with the PFA.
Making informed decision
Analysts have advised workers to be well informed about the benefits and implications of the PW and annuity so that they can make an informed decision on which of them to go for when retiring.
The Director-General, PenCom, Mrs. Chinelo Anohu-Amazu, says the regulation on the administration of retirement terminal benefits states that a PFA shall not impose, coerce nor influence a retiree on the choice or mode of withdrawal.
She explains that the computation of the lump sum and the periodic (monthly/quarterly) pension withdrawals is based on a standard PW template.
“This template makes provision for minimum and maximum withdrawals for the lump sum and periodic draws. The RSA holder can negotiate with the PFA on the minimum and maximum amount to be paid either as lump sum or periodic pension within the minimum and maximum generated by the template,” she says.
Going by the guidelines, those that settle for annuity at retirement cannot reverse to the PW arrangement. However, those that opt for the PW, after collecting their pensions for some months can switch over to annuity by making another application to their PFAs.
The PRA 2014 allows a lump sum payment of not less than 25 per cent of the RSA balance to a retiree, provided that the amount left after that lump sum withdrawal is sufficient to fund the PW over an expected life span or annuity for life. Retirees with balance less than N550,000 are deemed to have insufficient funds and their money will be returned to them.
Before a retiree can submit any document to commence the processing of his retirement benefits, analysts have advised that the retiree should approach his PFA and ask for information on the terms of payment after collecting his lump sum if he takes the PW.
Before signing any agreement, the fellow may take this information to an insurance company to compare what offer he will get if he decides to take annuity. After this, he will be better informed on the decision to make.
Testimonies from retirees have, however, shown that many retirees prefer the PW to the annuity because they do not have any dealings with insurance companies while in active service.
But experts advise that annuity may be suitable for retirees who have history of longevity in their family traits because it will make the insurance company to remain indebted to them for life.
The Director-General, Lagos State Pension Commission, Mrs. Folashade Onanuga, says the PW is a product of the PFAs and is a periodic (monthly or quarterly) pension payment to a retiree from the balance in the RSA for an estimated guaranteed pension period (of lifespan). “While withdrawals are made monthly from the RSA, the balance in the RSA continues to be invested, giving it the potential for growth. The PW computation is based on the template given by PenCom and the higher the lump sum, the lower the monthly pension and vice versa,” she states.
Onanuga says to go for the PW, the retiree will submit all necessary documents required for processing the benefits to the PFA, adding that the PFA must hold an exit discussion with the retiree to agree on the amount to be received as lump sum and monthly pension after which the retiree will sign a copy of the template print out, indicating the agreed lump sum and monthly pension.
“The PFA shall notify PenCom by sending information relating to the retiree and request for its approval of the lump sum and monthly pension. PenCom will within five working days of receiving the notification communicate its approval or rejection to the PFA and shall transfer the retiree’s RSA to the retiree’s database,” she says.
Upon the receipt of PenCom’s approval, she says the PFA and the retiree shall jointly execute the PW agreement, stating the terms and conditions, and the PFA must continue to issue quarterly statements to the retiree.
The LASPEC boss also explains life annuity as a regular income payment (monthly or quarterly) made to a person (annuitant/retiree) for life (life annuity), in return for payment of the purchase money (lump sum) premium.
“Life annuities provided by insurance companies are paid to the pensioner for life. The pension is however guaranteed for 10 years, which means that if the retiree dies after 10 years, his dependants cease to get further benefits,” she says.
According to her, the PFA will provide the current total RSA balance, amount for lump sum and other necessary data for the purpose of generating annuity quote.
She says the retiree will provide the life insurance company chosen with the RSA balance (less amount for lump sum) and collect the quotation or provisional agreement from the company and submit it to the PFA.
Onanuga also says the PFA will (within seven days of receipt of application) seek approval from PenCom to pay a lump sum and release annuity premium.
PenCom will send approval to the PFA and copy the PFC and NAICOM, according to her, adding, “The PFA will pay the lump sum to the retiree and transfer the balance to the life insurance company. The insurance company will issue the policy document to the retiree and payment of monthly pension is made by standing order to the bank account of the retiree.”
The Commissioner for Insurance, NAICOM, Alhaji Mohammed Kari, says the commission has introduced some regulations in the prudential guidelines for insurers to monitor the operation of the annuity under the CPS.
Protecting retiree’s future
It will be recalled that the CPS was introduced in 2004 because the old pension scheme, known as Defined Benefit Scheme failed the retirees after many years of operating it.
The DBS, having accumulated about N2.6tn as liabilities, could no longer pay its retirees. The Federal Government then created the CPS to cater for both public and private workers retiring from June 2007. The workers who retired before June 2007 were left to continue with the DBS. The DBS retirees are still groaning while many of them have died without collecting their entitlements.
Analysts say it is important to check the excesses of the PFAs and insurance companies so as not to trade the retirees’ comfort for the operators’ current thirst for profit.
They also advise PenCom to introduce strict measures to prevent the PFAs from coercing retirees into a particular retirement option and continue to monitor the investment of the pension funds.
The analysts are also advising NAICOM to monitor the rate at which some insurance companies are dolling out funds to retirees to entice them to annuity.
While sound CPS structure may have been laid by the Federal Government to protect workers in their vulnerable old age, the success of the scheme in years ahead largely depends on the competence and commitment of successive regulators of the scheme, analysts have said.