As 75% Lumpsum Withdrawal Bill threaten retirees sustenance in retirement

Retirement is a very critical stage in the life of every individual because it marks a time when one no longer have the capacity to do active work. So the personfalls back on whatever savings he or she has made while working for sustenance and survival at old age.

The challenge therefore of being able to meet up with basic expenses including food, healthcare, social needs and family sustainability underscores why planning for retirement is extremely important.

The level of preparation in terms of the amount of money or resources available at this time determines how comfortable the person will be in retirement, meaning that the more money you have as savings for example in your Retirement Savings Account (RSA) as in the case of Contributory Pension Scheme (CPS), the better for the retiree.

This will determine how much the retiree is able to earn monthly or quarterly as pension payout, either in programme withdrawal or annuity.

Therefore, the current Bill before the National Assembly being sponsored by AliyuWamakofrom Sokoto North Constituency, which seeks to pass a law “For An Act To Further Amend The PRA 2004 To Provide For Definite Percentage A Retiree Can Withdraw From His RSA And For Other Matters Related Thereto” has become a source of concern for those in the know.

The Bill if allowed to stay permits retirees to withdraw a definite rate of 75 percent of the value of their RSA upon retirement, leaving only 25 percent to be spread over their expected years of retirement as periodic pension payments.

The arguments put forward by the sponsor of the Bill include the fact that the current lumpsum payouts are not sufficient and it is the contributors’ savings, so they should have a right to access the bulk of it at retirement. This flawed thinking according to industry watchers,highlights the very justification behind a Contributory Pension Scheme accepted globally which is the ‘Intertemporal Myopia’ (FIAP Pension Notes, 2017).

This means that individuals are unable to anticipate the gamut of needs they will experience in their old age and therefore have a preference for immediate gratification and heightened consumption immediately they attain retirement age. A properly structured pension system such as the CPS, seeks to protect retirees and contributors alike from this lack of foresight, providing them with sufficient, steady, stable income to avoid poverty in old age.

It also prevents or reduces the likelihood of them becoming a burden to the society and government further down the road.

The proposed Bill according to the Pension Fund Operators Association of Nigeria (PenOp) is therefore faulty on so many levels due to the following reasons:

“The proposal is based on a misunderstanding of the concept of pension payment under the Contributory Pension Scheme.”According to them, it is pedestrian to assume that lump sum should be fixed, rather, what should be implemented is a minimum replacement ratio as monthly pensions.”

Accordingly, the retiree should keep an amount that can procure an amount of monthly pensions as replacement of salary over an expected life span. Whatever remains over that amount may be taken as lump sum. The current replacement ratio under the Contributory Pension Scheme is 50 percent of last pay by virtue of the PRA 2014 and regulations issued by the National Pension Commission.

One of the objectives of the CPS is to assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age. The proposed amendment would mean leaving only 25 percent to be spread over the lifespan of the retiree, which may be longer than 20 years, thus giving meagre monthly pensions below the current replacement ratio of a minimum of 50 percent of last pay.

It is therefore doubtful if the 25 percent balance in a retiree’s RSA, after deduction of 75 percent lump sum, would, if spread through the retiree’s expected life span, be adequate to reasonably cater for his livelihood during old age. Accordingly, the proposed amendment would only result in the depletion of the RSA without regard for the retiree’s continued subsistence, thereby impoverishing retirees.

PenOpobserved that the proposed amendment will undermine the objective of pension reform seeking to ensure workers save to cater for their old age. “Retirees will become targets for unscrupulous business opportunities due to their lack of experience in handling or investing such bulk sums, will spend the money quickly and return to dependency and insecurity. Indeed, retirees will be forced to return to active life rather than retirement, thereby reducing their life expectancy.”

The proposed amendment PenOp stated will also negatively impact on the economy by drawing large amounts out of the pool of pension assets.

“A 75% lump sum payment upon retirement is never the case in ALL jurisdictions operating the Contributory Pension Scheme the world over.”

According to the operators, the title of the Bill makes reference to a definite percentage while the explanatory memorandum states the Bill seeks to provide succour to retirees regarding delays and other difficulties they encounter in withdrawing from their RSAs. “There is a mismatch in the objectives of the Bill based on this variance. Section 2(a) of the Bill seeks to amend Section 7 (1) of the PRA 2014 by inserting the words “or retires, disengages or is disengaged from employment as provided under Section 16(2) (a) and (b) of this Act” immediately after the phrase “whichever is later”. “However, this already applies in the PRA 2014 and therefore is unnecessary. Section 2(c) seeks to exclude persons who, before the age of 50 years, disengage or are disengaged from employment and are unable to secure another employment within four months in accordance with the terms and conditions of employment from accessing their RSA.”

“It is noted that such persons are only allowed to withdraw an amount of money not exceeding 25 percent of the total amount in the RSA to aid in any hardship they may be experiencing. The proposed amendment would be unfair on an employee who duly retires under these conditions.”

The operators insist that,  it is clear that this Bill is not well thought out, shows limited understanding of the innate long term benefits of Pensions for retirees and if passed will significantly defeat the purpose of pension reform in Nigeria.

“It will most probably lead to widespread cases of dependent retirees, who, having received the larger part of what they had saved up for retirement in lumpsum, soon dispose it sub-optimally, and are left with little or no fall-back position.”