By Ifeanyi Ugwuadu
The aim of monthly or yearly pension payouts is to mitigate or cushion the likelihood of old age poverty. It is, for this reason, that withdrawal from pension savings after retirement is framed in such a way that the retiree gets so little each time. Whether through an annuity or programmed benefit withdrawal, each piece of the savings flies off without the possibility of another coming in. And the retirees die predictably quicker, unprepared and with little to start off a new phase after years of paid employment. But more worrisome is the fact that death in active service accounted for nearly 88% of the payouts by RSAs since inception. This high percentage of deaths should have triggered a review of the benefit structure in favour of named next-of-kin of the employee. Nigeria presents a unique scenario of the Contributory Pension Scheme owing to various factors peculiar to the country –– ranging from job insecurity, poor remuneration, and inadequate education of the retiree on pension matters. In addition, family and extended family responsibilities weigh heavily on each worker such that there is usually not enough time to plan an exit from paid employment.
Pensions are also business for the administrators who build their profit out of the long-term management of retirement accounts. Pensions are also a huge source of investable funds and domestic borrowing for the government. So, for Nigeria’s pensions market, there are the Retirement Savings Account (RSA) holders, and then you have government regulators (National Pensions Commissions and National Insurance Commission), Pension Fund Administrators (PFAs) and Pension Fund Custodians (PFCs). Insurers and commercial banks make up the remaining parties of interest.
Depending on what the retiree wishes to do with his savings, the other parties of interest congregate to take out of it. However, the question should be, whose benefits are being parcelled out among these stakeholders? With the free fall of the Naira, who is the loser? It must be stated that the retiree savings has been woefully eroded with unimaginable consequences to the entire system and particularly, those retiring since inception. It is impossible now to predict the worst-case scenario.
So we have the entire pension scheme set up and supervised by the government. It is managed and run by private sector entities. The private firms are thoughtful enough to hedge their earnings from the employees’ savings but run out of ideas on how to hedge or guarantee the savings in times of hyperinflation such as we have today. Profit considerations and the need to maximize investments are the main drivers of rules to hold on, for as long as possible, the savings. The earnings for the savers are very low but not so for the pension asset managers.
You’re Alive only when you are working!
The average lifespan of a retiree in Nigeria is 3 years! Death in active service accounted for 87.68% of this figure totalling 39,678 while death in retirement totalling 5,563 or 12.32 per cent makes up the balance. Adjusting the death benefits records of the 22 PFAs against duplication and other errors, about 45,241 death benefits were paid by PFAs to the Next-of-Kin of deceased RSA holders from the inception of the Contributory Pensions Scheme (CPS) to 31 May 2020.
Real Case
A 64-year-old retiree who prefers to tell his story anonymously narrated his situation thus; “My PFA said the balance in my Retirement Savings Account (RSA) as at the time I was programmed in 2018 was N10.21 million and that I can only take about N2.5 million as a lump sum. The rest will be paid to me as a monthly pension. I was diagnosed with heart problems last year, requiring about N3.5 million for surgery abroad to save my life. I returned to my PFA to ask for the balance in my RSA to enable me to pay for treatment abroad and I was told that I cannot take more than my monthly pension, it is what the law provided. But what if I die now? I asked, and they told me the balance in my RSA will be paid en bloc to my Next-of-Kin.”
He further queried; “Who should be the priority of PenCom and my PFA, myself that worked and saved the money, or my children who are meant to inherit my estate when I die? We contributed to the RSA so that we can take care of our needs in retirement. Unfortunately, now that my life is hanging on a balance, they are telling me that I cannot take my own money to save my life. They deceived us into saving for comfort in retirement and now that we have retired they are devising ways to hold onto our money until we die. This is deceitful!” he lamented.
| ANALYSIS OF DEATH IN RETIREMENT FROM INCEPTION – MAY 2020 | |||
| S/NO | DETAILS | TOTAL | % OF TOTAL |
| 1 | Total Death in Retirement | 5,563 | 100 |
| 2 | Death Under 1 Year | 2,805 | 50.42 |
| 3 | Death under 2 Years | 600 | 10.79 |
| 4 | Death under 3 Years | 482 | 8.66 |
| 5 | Death under 4 Years | 418 | 7.51 |
| 6 | Death Under 5 Years | 352 | 6.33 |
| 7 | Death Under 6 Years | 285 | 5.12 |
| 8 | Death Under 7 Years | 219 | 3.94 |
| 9 | Death Under 8 Years | 168 | 3.02 |
| 10 | Death Under 9 Years | 126 | 2.26 |
| 11 | Death Under 10 Years | 69 | 1.24 |
| 12 | Death Under 11 Years | 30 | 0.54 |
| 13 | Death Under 12 Years | 8 | 0.14 |
| 14 | Death Under 13 Years | 1 | 0.02 |
| Total | 5,563 | 100.00 | |
From the above statistics, clearly, half the number of retirees die within one year after retirement while 70 per cent of them die within 3 years of retirement and the remaining die within the 10-year guaranteed period.
These are Nigeria’s pension statistics and confirm that a different approach to dealing with the socio-economic problems should never be benchmarked with world standard methods. This scenario is the background for a groundswell of agitation by pension savers to maximize their exit from the scheme. It is totally insensitive not to pay attention to the glaring statistics that show that many working-class Nigerians do not live up to retirement and when they do eventually retire, most die three years only post-retirement. How does the system justify a 25% lump sum payment while 75% is spread over 15 to 22 years in view of the survival rate of three years? The reverse should be the case. Some retirees are so impoverished that the majority would want to cash out and have indeed approached their PFAs for the same. The time is now to propose an amendment to this regulation and the Pension Reform Act. Pencom should pay heed to the angst against the existing ratio and act quickly. A cashout regulation may also be part of the deal for retirement savings account holders within the scheme.
Job security and structure of Nigeria’s labour market
Aside majority of employees in the public sector, job security in the private sector is almost surreal. Figures from the National Statistics Bureau puts current unemployment, underemployment and youth unemployment at 33.3%, 22.8% and 42.5% respectively. These rates are staggering in their effect on the economy and for an uncoordinated labour market, this situation gives total control to employers. The services sector pays comparably better than the public sector and the real sector. In effect, for any existing job, no matter how paltry the salary, more than 10,000 people are willing to take it.
In the private sector, Mergers & Acquisitions (M&As) are enlarging the already saturated labour market because new investors usually capitalize on weak labour laws and kick out existing employees to evade pension liabilities. The immediate profit target is the savings from layoffs. Thus there is an army of young retirees who are eager to draw down their entire pension savings to start some business on their own. With no possibility of getting another job, this appears to be the only option. But, pension regulation does not have a provision for drawdown by any retiree and those who have attained a minimum of 50 years, can only take a 25% lump sum.
The Case for 75% lump sum payment
Unarguably, most retirees prefer a higher lump sum than the 25% regulatory lump sum that the law stipulates. A bill at the National Assembly is seeking to raise the statutory lump sum from 25% to 75%. However, PenCom and PFAs are opposed to it because it makes the business of managing pensions unattractive and confirms my earlier assertion that the pension scheme is for business owners and not for savers. But at least the system can save the “hen that lays the golden egg” to guarantee the survival of the market that trades on the weakness of savers. It is true that within the subsisting law, the retirees are entitled to only a 25% regulatory lump sum as prescribed in Pension Reform Act 2014.
In some cases, a 50% lump sum is payable based on the basic salary of the retiree at the point of exit. Unfortunately, many retirees are not well informed about the possibility and mechanism of receiving a 50% lump sum at once. It may be necessary to cover this aspect in a fresh article. The case for a higher lump sum at retirement is justified if trends like the survival rate of retirees, negative real returns on investments, and prevalence of critical and terminal illnesses including the need to engage them in productive activities are considered. Rather than focus on the legal transfer of their savings to those who survive them, the system may be strengthened to help them transit to another productive endeavour that makes life meaningful.
| RECORD OF DEATH BENEFITS PAID BY PFAS FROM INCEPTION TO MAY 2020 | |||
| S/NO | DETAILS | TOTAL | % OF TOTAL |
| 1 | Total Number of Deaths Adjusted for Errors | 45,241 | 100 |
| 2 | Death in Active Service | 39,678 | 87.68 |
| 3 | Death in Retirement (Programmed Withdrawal) | 5,563 | 12.32 |
The table above shows the high mortality rate of retirees since the inception of CPS till May 31, 2020. With about 45,241 deaths, post-Covid-19 figures are bound to escalate the number of deaths. . Death in active service accounted for 87.68% of this figure totalling 39,678 while death in retirement totalling 5,563 or 12.32 per cent makes up the balance.
