13 February 2013

Nigeria: Contributory Pension, Life Annuities and Retirees' Benefits

The National Pension Commission (PenCom) is worried that eight years after the introduction of contributory pension in the country, life annuity, which is one of the two ways retirees can access their monthly pension, is yet to gain ground; with lack of awareness identified as the problem, writes Nnamdi Duru

The contributory pension scheme, which was introduced by the Federal Government a little over eight years ago, seeks to ensure that every worker receives his retirement benefits as and when due.

In line with the above, the Pension Reform Act, 2004 created three avenues for retirees to receive their pension, namely programmed Withdrawals and Life Annuity or a combination of both.

Section 4 of the law provides that an employee can on retirement make withdrawals from his Retirement Savings Account (RSA) in the form of a programmed monthly or quarterly withdrawal based on his life expectancy or life annuity bought from a life insurance company.

The retiring worker can as well withdraw a lump sum from the balance in his RSA provided that the amount left in the account after the withdrawal is enough to fund a life annuity or programmed withdrawal of not less than 50 per cent of his annual remuneration at the date of retirement.

The Acting Director-General of PenCom, Mrs. Chinelo Anohu-Amazu, however, observed that a major challenge facing annuity business is inadequate sensitisation and public enlightenment on the expectations from all stakeholders.

She said both PenCom and the National Insurance Commission (NAICOM) are collaborating to ensure the success of annuity business, adding that both organisations were assigned different roles in this regard by the pension reform law.

"It is the mandate of NAICOM to regulate the annuity and life insurance markets. PenCom has the responsibility to ensure that the modalities for retirement and terminal benefits administration through life annuity and life insurance policy are followed to guarantee prompt payment," she said.

Life Annuity

Annuity is a contract between the annuitant and a service provider, usually an insurance company for the payment of a series agreed amount of money at given intervals to the annuitant.

In essence, the annuitant has paid consideration for him to receive a given amount over a given period of time at agreed intervals. There are different types of annuity but the one recommended under the Pension Reform Act, 2004, is life annuity, which seeks to guarantee income for retired workers until they die.

Life annuity is one of the modes of withdrawing retirement benefits under pension reform law. It is a regular income received from a life insurance company in consideration for payment of premium or transfer of the accumulated savings standing in the RSA of a worker or part of it at the time of retirement.

How it Works

Where retiree chooses life annuity, a retiree negotiates with the service provider (life insurer) based on his RSA balance projected to the date of retirement and gets an Annuity Provisional Agreement from a life assurance company, which he submits to his PFA.

Within 7 days from the receipt of retiree's application, the PFA seeks approval from PenCom to transfer the agreed premium to the insurer, attaching a copy of the provisional agreement. PenCom is required to forward copies of approval to PFA/PFC and NAICOM and within 7 days of receipt of approval, PFA must instruct PFC to issue a cheque for the premium in favour of the insurance company

Upon receipt of cheque from PFC, the insurer must within 7 days notify the proposed annuitant of such receipt and the latter and his insurer jointly must execute an annuity contract within 21 days from the date of receipt of payment. The insurer then forwards schedule of all policies written to NAICOM not later than 30 days of the execution.

The balance in his RSA, having been transferred to the life assurer, the retirees now gets monthly annuity/pension from the insurance company.

However, annuity payment under contributory pension is guaranteed for a minimum of 10 years in case of death, even as the retiree is free to go for a higher guaranteed period with monthly annuity not less than half of his monthly emoluments at retirement.

Securing Annuity Fund

The Commissioner for Insurance, Mr. Fola Daniel, gave an assurance on the security of life annuity fund saying, "NAICOM takes the issue of annuity very seriously and will do everything within its powers to protect the interest of the retirees."

As a measure of security, service providers are expected to maintain separate books of account in respect of the retiree life annuity funds, which shall be audited annually by a firm of Chartered Accountants.

The operators have to face double certification, as a life assurer and a secondly as a life annuity service provider before he can transact the business, even as the insurer is expected to maintain a solvency margin of 30 per cent on the fund under management.

Also, there are very stringent investment rules to be followed, including that nor more than more than 35 per cent of the fund could be invested in real estate; 20 per cent on quoted stocks; 25 per cent on corporate bonds and 50 per cent on money market instruments.

The regulation, however, allows life annuity providers to invest the whole fund in government securities.

Update on Life Annuity

NAICOM's Assistant Director (Inspectorate), Mr. Sam Onyeka, recalled that PenCom and NAICOM jointly issued the Regulation on Life Annuity pursuant to Section 4 (1) (b) of the Pension Reform Act 2004.

The regulation specified the modalities for the administration of retirement benefits in respect of retirees who have chosen Life Annuity under the Contributory Pension Scheme as contained in the Pension Reform Act 2004

Giving an update on this, PenCom said retirement by life annuity under contributory pension started in 2010 with only 10 life assurance companies licensed to transact retirement annuity business in the country.

Also, 2,343 retirees were on retirement by annuity as at last year while the total life annuity premium paid amounts to the various operators peaked at N12.09 billion and total monthly annuity/pension averages N118.06 million.

Case for Annuity

Making a case for annuity, the insurance commissioner advised retiring workers to embrace the life annuity because it guarantees them pension for at least 10 years or for as long as the retiree lives. He also assured stakeholders that the regulator would ensure maximum protection for the fund.

"With the risk of appearing to be a little partial, I will like to recommend the annuity option to any retiring employee. Not only does this option guarantee a regular payment for life it is also guaranteed for a minimum period of ten years", Daniel said.

Also PenCom last year advised retirees who were not comfortable with the tenure of the programmed withdrawal that they maintain with PFAs to switch over to life annuity.

The commission advised them to use the balance on such accounts to buy life annuity products from insurance companies as a way of ensuring that they get pension for life.

"If you don't want programmed withdrawal, you go for annuity, and even if you chose programmed withdrawal, the law provides that you can switch over to annuity," PenCom advised.

Going Forward

There is an urgent need for the regulatory bodies to work out a good computational module for life annuity, as there is said to be no standard template for this as unlike what obtains for programmed withdrawal.

The present situation where life assurers request for PFA's programmed withdrawal template to underwrite annuity and later mark it up is not good enough. This does not take into account the risk and return on retirees' annuity.

Stakeholders should also consider what becomes of quotations for less than 50 per cent of final salary as provided for in the law

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