Dr. Pius Apere (PhD/FCII)
(Actuarial Scientist and Chartered Insurer)
Achor Actuarial Services Limited
There had been a delay in the implementation of the guaranteed minimum pension (GMP) leading to retirees’ inability to have sustainable standard of living in retirement. This could be considered as 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” using the surpluses generated from the return on investment in their Retirement Savings Account (RSA). PENCOM’s framework on Enhanced Pension (EP) and the Addendum dated 3rd October 2018 state that “PFAs shall continue paying current pensions to PW retirees that have insufficient growth [in their RSAs] to be considered for enhancement [and also those] that have fully exhausted their RSAs from the provisions made for Pension Protection Levy pending implementation of Minimum Guaranteed Pension (MGP)”, in pursuant to sections 82 (2) and 3(c).
PENCOM had approved the first and second tranches of enhancement of Pension for 2,916 and 52,186 PW retirees which amounted to monthly enhanced pension of N13.16 million and N1.71 billion with effect from December 2017 and 2018 respectively, as revealed in PENCOM’s Annual Reports. The third tranche of enhancement of Pension has been approved to take effect from February 2023.
The approval of regular enhancement of Pension for PW retirees only has left Life Annuity (LA) retirees in a state of limbo. This is because the regulation of LA product and insurers has not resulted in enhancement of pension for LA retirees probably due to the current LA product design being approved for the Nigerian Pension Industry. The implications of the foregoing are highlighted below.
- Guaranteed Minimum Pension (GMP) Vs Enhanced Pension (EP)
The enhancement of pension (EP) for PW retirees only could be seen as cushioning the effect of the non-implementation of GMP but this is not a substitute for GMP for the following reasons:
- In practice, the concept of GMP is a form of underpin applicable in the design of a defined contribution scheme, such as CPS, which has a main benefit that is defined contribution in nature, with a promise that the benefit will be at least a defined benefit (DB) amount (i.e. the GMP), usually a percentage of final salary at retirement date.
- The GMP acts as a safety net (akin to an income support) usually to protect the retirees against the risks of low investment returns, with the aim to reduce the risk of volatility in standard of living in retirement for all retirees and not only for PW retirees. Whilst EP is based on appreciable increase in investment returns in RSAs.
- EP and GMP would have different basis and methods of computations. For instance, PENCOM had engaged the services of Actuaries since 2018 to work on “a preparatory process to concluding the requisite framework and guidelines for the implementation of the GMP” as revealed in PENCOM’s Annual Reports to date. For EP, there is little or no actuarial techniques involved in the calculations.
- Regulation of Pension Products in De-accumulation Phase
Basically, there are two types of pension products being used in the de-accumulation phase in CPS to provide retirement benefits for the RSA holders at retirement (as stated in section 7(1) of PRA 2014), namely Programmed Withdrawal (PW) and Life Annuity (LA) products. The PW and LA products are being offered and administered separately by PFAs and Life Insurance Companies (Life Annuity Insurers) respectively. On the other hand, the PFAs and Life Annuity (LA) Insurers are regulated by PENCOM and NAICOM respectively. However, the regulations on LA product are jointly issued by the two regulatory bodies, as specified in section 7(1) (c) of PRA 2014.
Briefly, LA product provides “a guaranteed periodic income (pension) to a retiree throughout his/her life after retirement with a minimum guaranteed period of ten years. If the retiree dies within the first ten years of retirement, the monthly annuity will be paid to his beneficiaries for the remaining years up to ten years at a present value”. On the other hand, PW retiree receives a regular income from his/her RSA (with the balance being invested continuously) over an expected lifespan until the RSA balance runs out. Thus, there is a risk that, if a fixed income is taken, the PW retiree’s RSA balance could potentially reduce to zero before the retiree dies and be dependent on the Government.
The Retiree Pack (A Guide for Retirees under CPS), jointed signed by both regulators on 1st September 2020, stated that “PW retirees may benefit from periodic pension enhancement resulting from returns on investment of the pension funds in their RSAs. [Whilst] the periodic pension enhancement [for LA retirees] may be applicable depending on the type of [LA product] purchased” which is dependent on the LA product design approved by NAICOM. Furthermore, section 4.3 of Revised Regulation on Retiree Life Annuity states that “a retiree shall be at liberty to have increasing annuity features as an option subject to the [LA product] being approved by NAICOM”. Thus, the approval of EP for PW and LA retires is strictly under the control of the different regulators.
The Retiree Pack also stated that “LA premium [i.e. available retiree’s RSA balance at retirement after allowing for lump sum (if without a waiver) received from the PFA] is transferred to a Life Annuity Pool/portfolio of the LA Insurer [which is normally ring-fenced] and invested to generate income to the LA pool”. The profits of the LA pool (i.e. surplus being declared after an actuarial valuation of the portfolio) are currently not distributed between the LA Insurers and retirees, but for the benefit of LA Insurer alone, probably due to the LA product design approved by NAICOM.
However, it has become expedient and imperative for the LA regulator, operating under the current EP regime in the Pension Industry, to also consider ways of redesigning the LA product to allow for distribution of profits from the LA pools of a particular LA Insurer. This will help the LA insurers to remain competitive in the pension business over the long term, which is currently being controlled by the PFAs and at the same time, to an extent, cushioning the effect of inflation on LA Retirees’ pensions. In other words, the LA product may not be appealing to many new retirees in the future if no action is taken.
Furthermore, Retiree Pack prescribed the criteria in which PW retiree will be eligible to receive GMP when implemented as follows: “A PW retiree whose RSA balance is exhausted may be eligible for the payment of Guaranteed Minimum Pension (GMP) through the implementation of the Minimum Pension Guarantee (MPG)”. However, the guidelines are not explicit on the criteria in which LA retirees will be eligible for GMP. It is no gainsaying the fact that some LA retirees are living in poverty with their current pensions at subsistence level (even without taking into account the effect of inflation) and their pensions will surely fall below GMP when implemented.
- Implications of Enhanced Pension (EP) for PW Retirees Only
The enhancement of pension for PW retirees only have raised some concerns by stakeholders despite the good intentions of the initiative/regulation.
- Possibility of LA Insurers Losing Business to PFAs
The regular enhancement of Pension for only PW retirees would no doubt cushion the effect of inflation on their pensions over time, thereby creating unique selling proposition (USP) for PFAs that could be used to de-market the LA Insurers. Thus, there would be a natural tendency for more new retirees to choose PW product in the future rather than the LA product with no provision for EP. For instance, out of 45,107 new retirees in 2017, 70% (32, 444 new retirees) chose PW product while 30% (13,663 new retirees) opted for LA product. Similarly, out of 37,063 new retirees in 2021, 75% (27,843 new retirees) chose PW product while 25% (9,220 new retirees) opted for LA product.
- LA Retirees’ Disenchantment for Lack of EP or GMP
The fact that the “[regular income from LA product] is not exhaustible, provided the retiree is still alive” does not mean that GMP will not be applicable to LA retirees and/or their regular pensions have not been eroded significantly by inflation over the time. Therefore, the LA retirees are also clamouring for enhancement of their pensions or implementation of GM, having considered the economic hardship facing Nigeria pensioners. The inability of the LA Insurers, being regulated by NAICOM, to provide enhance pension would result in de-marketing themselves. Thus, if the current trend in the provision of regular EP for only PW continues, the LA retirees’ disenchantment over inadequate pension for decent living would also continue to grow.
- The Risk of PW Retiree’s RSA Balance Running Out Being Eliminated
PENCOM’s directive, as stated in circular dated 3rd October 2018, that “PFAs to continue paying pension to PW retirees that have fully exhausted their RSAs from the provision made for Pension Protection Levy pending the implementation of GMP”, has technically eliminated the risk of their RSAs running out of funds over time which has always been a unique disadvantage of PW (drawdown pension) product relative to LA product. The directive has not only protected PW retirees’ RSAs from being fully exhausted due to risk of low return on investments in their RSA balances but also from when they have deliberately received a high fixed income over time.
- Depletion of Pension Protection Fund (PPF) for Financing GMP
The use of PFA’s Pension Protection Levy for paying enhanced pension to PW retirees with fully exhausted RSAs could create shortage of funds in PPF leading to delay in implementation of the GMP for the benefit of all retirees, particularly if the Federal Government has not fully complied with the payment of its annual subvention into PPF, as required in section 82(2)(a) of PRA 2014.
The current pensioners in Nigeria are in dare need to have a sustainable standard of living in retirement in this period of serious economic hardship facing the country. Therefore, the provision of regular EP by PENCOM for the WP retirees is a step in the right direction pending the implementation of GMP. However, the provision of EP for LA retirees which is under the control of NAICOM would not be achieved without revisiting the current LA product design.