PenCom to Senate: Ignore proposed Bill seeking 75% withdrawal from RSA as lump sum

Being the memorandum submitted by the National Pension Commission (PenCom) to Senate Committee on Establishment and Public Service at the Public Hearing on the Bill for an Act to amend the Pension Reform Act 2014, to provide for definite percentage a retiree can withdraw from his Retirement Savings Account(RSA) and for other matters related, held 29 November 2017 by Aisha Dahir – Umar, acting DG of the Commission:  Excerpt:

Section 2 (b) of the Bill:

This provision seeks to amend Section 7(1) of the PRA 2014 by inserting the words “of up to 75 percent” immediately after the words “a lump sum”. The import of the proposed amendment, is to allow the retirees of all categoriesto withdraw up to 75 percent of the balance in their RSAs as lump sum, irrespective of whether or not the balance would be sufficient to procure a programmed fund withdrawals or annuity for life.

It is our considered opinion that the proposal for payment of 75 percent of RSA balance as lump sum to a retiree is faulty due to the following reasons:

The proposal is based on a misunderstanding of the concept of pension payment under the Contributory Pension Scheme. It is trite that lump sum should not 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 pension 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 provisions of the PRA 2014 and Regulations issued by the Commission.

It is noted that one of the objectives of the Contributory Pension Scheme 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% to be spread over lifespan of retiree, which may be longer than 20years, thus giving a meagre monthly pensions below the current replacement ratio of a minimum of 50 percent of last pay.It is 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. This proposal is never the case in ALL jurisdictions operating the Contributory Pension Scheme the world over.

The payment of a 75 percent lump sum would result in the monthly pension reducing by an average of 60 percent when compared to the pension currentlybeing paid to retirees under the PRA 2014. Under the CPS, the size of the monthly pension is determined by the balance in the RSA after lump sum withdrawal. For example, if a retiree has N10 million in his RSA, taking 75 percent lump sum will leave a balance ofN2.5 million in the RSA which would be the base on which his monthly pension will be calculated. Accordingly, the proposed amendment would only result in the depletion of the RSA without regard for the retiree’s continued subsistence, thereby impoverishing retirees. The proposed amendment would, therefore, necessarily defeat the above objective of a pension Scheme.

Another implication of this proposal is that in the near future, there will be huge cries for Government to provide more funds for pension payment to augment the meagre amount to be taken as monthly pension as a result of the proposed Bill. This is demonstrated by the outcome of a simulation exercise undertaken by the Commission on the application of this proposal on some live data. For instance, a retiree with RSA Balance of N14, 008,353.65 and monthly salary of N114, 036.56, took under the present dispensation, a lumpsum of N7,004,176.83 and monthly pensions of N58,099.33. If the proposed 75 percent is applied, he would take N10,506,265.24 as lumpsum and N29,041.38 as monthly pensions. This would automatically make him a proponent of the clamour for exemption or enhancement of pensions in whatever way. Furthermore, such person would seek to be accommodated under the Minimum Pension Guarantee (MPG), thereby exerting more pressure on the funding requirements for the take-off of the MPG. It is important to note that the MPG is yet to take off largely due to lack of funding from the Federal Government.

Section 2 (c) of the Bill:

The proposed amendment in Section 2(c) of the Bill seeks to exclude “persons who retire before the age of 50 years in accordance with the terms and conditions of employment” from accessing the RSA in line with Section 7(1) of the PRA 2014. The amendment seeks to equate and treat this group of retirees as similar toemployees who disengage or are disengaged from employment before the age of 50 years and are unable to secure another employment within four months. It should be noted that the latter group of employees are only allowed to withdraw an amount of money not exceeding 25 percent of the total amount in the RSA.The Bill seeks to treat this group as similar to the employees who have retired in a normal way in accordance with the terms and conditions of their employment. We are, therefore, of the considered opinion that this proposed amendment would be unfair and should not be accepted.

General observations and comments on the Bill

Distinguished Members of the Senate Committee, the Commission believesthat the absence of other social security benefits in Nigeria is partly responsible for the clamour by the retirees to access substantial amounts as lump sum from their RSA balance. Therefore, there is an imperative need for Nigeria to institute a Zero Pillar Pensions in the form of social security benefit,which isrecognised and provided for under Section 16(2)(d) of the Constitution of the Federal Republic of Nigeria 1999 (as amended). If implemented, it will go a long way to alleviate the sufferings of all Nigerians irrespective of whether or not they had a formal employment. It will also augment earnings from occupational pensions.

It is noted that the proponents of the 75 percent lump sum advance the argument that Pension Fund Administrators (PFAs) either do not make any income or make insufficient income on investment of pension assets that does not outperform inflation. Examples were given on how retirees could invest better in fixed income securities should they have access to their funds. We believe that this simplistic analogycan hardly stand technical financial scrutiny. However, it is important to note that Retiree Pension Fund is also being invested in mostly fixed income securities such as Treasury Bills and other Federal Government securities.

It is worthy of note that pension funds are invested in line with Regulations issued by the Commission and theydo earnfair income, which is credited to the benefit of the individual RSA holder in line with the provision of Section 83(1) of the PRA, 2014. The Commission, in its regulatory oversight, ensures strict compliance with the section and the amount of income earned from investment, which is credited to the RSA holder, is clearly stated on the RSA Statement.

Rather than canvass for payment of 75 percent lump sum, we believe that the remedy lies in the implementation of the provision of Section 4(4)(a) of the PRA, 2014 dealing with payment of additional benefitsupon retirement. It provides that “notwithstanding any of the provisions of this Act, an employer may elect agree on payment of additional benefits to the employee upon retirement”. This would enhance the amount that employees may receive as lump sum upon their retirement.

Distinguished Senators, experience has shown that about 99% of the retirees who collected huge lump sums from their RSAs squandered the money quickly after retirement and left with meagre amounts as pensions. This category of pensioners are currently bitterly complaining against their low pensions and advancing this situation as justification to calls for exemption from the CPS.We therefore believe that it is not in the overall interest of the retiree to saddle him with the responsibility of managing 75 percent of his total benefits after retirement, when he should have been resting and enjoying the fruits of his long years of labour.

Indeed, the Commission has just concluded an exercise to increase the monthly pensions of all retirees on Programmed Withdrawal due to the income earned on investing their pension assets. The outcome of this exercise showed that 30% of the retirees would not benefit from the increase due to insignificant income earned on the small balances in their respective RSAs.

The payment of enhanced pension would apply only to those retirees that left reasonable balances in their RSA, which has earned income over time. The payment will commence in December, 2017. This indicates that, indeed, the return on investment of pension fund is being utilized for the benefit of RSA holders.

Conclusion

The Commission respectfully submits that the proposed Bill appears to undermine the essence of pensions as enshrined in the Constitution of the Federal Republic of Nigeria 1999 (as amended), as it would deny the retirees an adequate periodic income in retirement.

Consequently, the Commission urges the Distinguished Senate Committee to disregard the Bill and, instead, seek for the implementation of the provision of Section 4(4)(a) of the PRA 2014 on the payment of additional benefits by the employer as well as the institution of the Zero Pillar pension in Nigeria.