In December 2023, the National Pension Commission (PenCom) announced that the third edition of pension enhancement under the Contributory Pension Scheme (CPS) has been approved.
The exercise, which is for existing retirees under Programmed Withdrawal(PW) who have accumulated significant growth in their Retirement Savings Accounts (RSAs), is expected to commence in February 2023.
The first pension enhancement was conducted five years ago, precisely, in December, 2017 and it benefited former employees who retired on Programmed Withdrawal(PW) window between July 2007 and December 2014.
The second enhancement, which took place three years after, that is, February, 2020, covered employees who retired on programmed withdrawal between July 2007 and December 2017.
From then henceforth, it becomes an act that is performed every three years, which was why the third enhancement is taking place in February 2023. The exercise is projected to cover about 111,187 retirees, a laudable feat.
It is worthy of note that there are two modes for accessing periodic pension payments under the CPS, namely, Programmed Withdrawal(PW) and Life Annuity(LA).
Programmed withdrawal is a method by which the retiree collects his retirement benefits in monthly or quarterly amounts throughout the length of an estimated lifespan, which is determined using mortality (actuarial) tables. This is a product offered by Pension Fund Administrators (PFAs).
Life Annuity, on the other hand, is a series of monthly or quarterly payments paid to a retiree for life. This is a product offered by Life Assurance companies.
While the pension enhancement is a laudable achievement and an inducement that comes with the new pension scheme known as Contributory Pension Scheme(CPS), there are concerns as to why retirees under the Life Annuit(LA) cannot benefit same to ensure they reap from benefits of the new pension scheme.
Enhanced Pension(EP) 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)
The director, Centre for Pension Rights Advocacy(CPRA), Mr. Ivor Takor, stated that, pension enhancement is one of the laudable initiatives introduced by the National Pension Commission (PenCom) to periodically boost monthly pension of retirees under the programmed withdrawal mode of the CPS.
The enhancement, like the previous two, he stressed, is only for those who are under programme withdrawal and have accumulated significant growth in their RSAs, adding that, retirees who opted for annuity are not affected by the enhancements in the same manner they were not affected during the two previous ones.
Similarly, the chairman/CEO Achor Actuarial Services Limited, Dr Pius Apere, said, the enhancement of pension (EP) for PW retirees only could be seen as cushioning the effect of the non-implementation of Guaranteed Minimum Pension (GMP) but this is not a substitute for GMP.
“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,” he pointed out.
Saying, it has become expedient and imperative for the Life Annuity(LA) regulator, operating under the current Enhanced Pension(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, he added that, 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.
He believes the LA product may not be appealing to many new retirees in the future if no action is taken.
Why Retirees Under Life Annuity Are Not Covered
The reason why pension enhancement affects only retirees who draw pension under programmed withdrawal, Takor said, is because these retirees draw their monthly pension from the balances in their RSAs administered by Pension Fund Administrators(PFAs), who are supervised and regulated by PenCom and the balance in the RSA belong to the retiree.
Those who opted for annuity, on the other hand, he added, used the balance in their RSA to purchase products from Life Assurance companies supervised and regulated by the National Insurance Commission (NAICOM) as their payments are based on the Agreements they signed with these companies.
Stating that pension enhancement is not necessarily synonymous with pension review as provided for in the Constitution, he noted that, the enhancement, being carried out by PenCom, is principally based on pension fund investment performance.
According to Apere, 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.
The inability of the LA insurers, being regulated by NAICOM, to provide enhance pension would result in de-marketing themselves, he said.
“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 Pension Protection Fund(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,” he pointed out.
While 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, he noted that, the provision of regular EP by PenCom for the WP retirees is a step in the right direction pending the implementation of GMP.
The provision of EP for LA retirees which is under the control of NAICOM, he said, would not be achieved without revisiting the current LA product design.