Administration of retirement benefits under Contributory Pension scheme

In order to ensure that every worker under the Contributory Pension Scheme receives his retirement benefits as and when due, section 4(1) of the Pension Reform Act 2004 stipulates that “A holder of a retirement savings account, upon retirement or attaining the age of 50 years, whichever is later, shall utilise the balance standing to the credit of his retirement savings account for the following benefits:

•programmed monthly or quarterly withdrawals calculated on the basis of an expected life span;

•annuity for life purchased from a life insurance company licensed by the National Insurance Commission with monthly or quarterly payments; and
(c) a lump sum from the balance standing to the credit of his retirement savings account: provided that the amount left after that lump sum withdrawal shall be sufficient to procure an annuity or fund programmed withdrawals that will produce an amount not less than 50 per cent of his annual remuneration as at the date of his retirement.

It would therefore be helpful if a potential retiree, even while still in active service understand the options available to him to withdraw his retirement benefits, so that he can be able to make informed decision.

Features of programmed withdrawal:

Programmed withdrawal is a product of the Pension Fund Administrators (PFAs) being regulated by the National Pension Commission (PenCom) and in terms of benefit payment, it pays pension over an expected life span to the retiree and payment can either be monthly or quarterly.

With regard to longevity risk, the RSA balance may be exhausted during life time where the retiree chooses programmed withdrawal, but under annuity for life, the longevity risk is passed to the insurance company who pays pension for life.
If a retiree dies within 10 years of retirement, the RSA balance goes to beneficiaries of the deceased as inheritance.

In similar vein, if retiree dies after 10 years of retirement, the beneficiary under a will or Letter of Administration is paid enbloc the balance in the RSA. A retiree on programmed withdrawal can choose to terminate the programmed withdrawal and enter into an Annuity contract with an Insurance company at any time.

Besides, a retiree on programmed withdrawal with a PFA will be able to move to another PFA in line with the Pension Reform Act when the transfer window is open.

While retiree’s assets under programmed withdrawal are held by Pension Fund Custodian, the returns on investment belongs to the retiree in his RSA.

Features of annuity

Annuity for life is a product of insurance companies being regulated by the National Insurance Commission (NAICOM) and it pays pension for life to the annuitant, and payment can either be monthly or quarterly.

Where the retiree chooses annuity for life, the longevity risk is passed to insurance company who pays pension for life.

If the retiree dies within the guaranteed payment period of 10 years, the surrender value of the remaining amount within the period shall be paid as lump sum to the estate of the retiree or named beneficiary.

However, no inheritance will be passed to beneficiaries if retiree dies after 10 years of retirement.

While a retiree on Annuity with an insurance company cannot change to programmed withdrawal with a PFA, a retiree on Annuity can move to another insurance company after two years.

In view of the fact that Annuity is a product offered by Life Insurance companies, annuity retiree assets are held by the affected insurance company. Again, the returns on investment belong to the pool of insurance funds and not the retiree directly.

Retirees on programmed withdrawal and annuity

The total number of retirees on programmed withdrawal, which stood at 5,124 in 2008 increased significantly to 73,695 as at the end of September, 2013.

The total number of retirees on life annuity retirement plan moved from 74 in 2010 to 2,434 in 2012 and 5,717 as at the end of September, 2013. The total monthly average annuity was N277.20m as at the end of September, 2013, while the total lump sum paid to retirees under this plan was N13.22bn over the same period.

It should be noted that the Regulation for Annuities was jointly developed and issued by PenCom and NAICOM in December 2009, after the consolidation exercise in the insurance industry. This accounted for the late commencement of retirement under this plan and the corresponding lower number of retirees opting for Life Annuity retirement plan as compared to Programmed Withdrawal.

Decision to choose either programmed withdrawal or annuity it will be helpful to point that when a new retiree gets his retirement bond or confirmation letter, he should go to his PFA, where he would be asked to sign an application letter to require for his lump sum and either programmed withdrawal or annuity option.

The retiring employee is advised to read the document clearly and be sure that he is signing his preferred option. If the retiree is not sure, he should ask questions and ask for the right form to fill, either programmed withdrawal or annuity form, before proceeding with his application.

While negotiating on what option to choose, a retiree should ask his PFA to give him a print out of his lump sum, what his regular retirement payments will be and how many years he will be paid, if he decides to take the programmed withdrawal option, before signing any agreement.

Again, it is also advisable that the retiree should also take this print out to an insurance company licensed to underwrite annuity, where he would ask the firm to give him details of how much it will be paying him regularly, until he dies if he decides to take annuity.

Comparison between the offer from the insurance company on annuity and the PFA on programmed withdrawal should help him to decide which option to take before signing any agreement with his PFA.

Conclusion
It must therefore be understood that because the Contributory Pension Scheme seeks to, amongst others things, ensure that every worker receives his retirement benefits as and when due, employees are not to be compelled by anyone or any entity to choose any mode of withdrawing their retirement benefits, whether it is life annuity or programmed withdrawal or both. Every retiring worker has an inalienable right to choose the option that is okay by him.