One-off vs. Staggered Payment: Should retirees have access to 100% lump sum pension upon retirement?

In recent times, raging controversy in conversations within the pension industry has shifted from late payment of pension entitlements, with the introduction of the PFA 2014 Act, which addresses some of the issues of around delay. The emerging arguments have, however, hinged on the inadequacies of the percentage of the lump sum given to retirees upon retirement as some stakeholders call for 100 percent lump sum payout in place of periodic pension payment.

The 2014 PFA Act allows for 25 percent lump sum to be delivered to a retiree upon retirement while the remaining is spread over the coming years to allow a guaranteed form of income for retirees and to ensure a good living standard for workers who succumb to old age as the lump sum received is invested into personal businesses in most cases.

Unsatisfied with the current scheme regulated by the National Pension Commission (PenCom), a group is now pushing that the lump sum should be reviewed to at least 50 percent or 75 percent with the balance or subsequent payment spread over the following years. Another forcefully argued position is that 100 percent payout be made to allow retirees make judicious use of their funds while they are alive by investing in plans that are far more yielding than what is obtainable from PFAs monthly interest.

As Uwaifor Oga, an advocate of 100 percent lump sum puts it, pensioners should be allowed to withdraw their whole sum if they so wish or better yet, dictate the kind of investments they want to the PFA. He added that the several years spent in service is enough for RSA account holders to handle investment themselves without necessarily involving PFAs.

Tapping Nigerians to wake up to realities, he stated that the interest given to an average pensioner is not up to the interest the pension fund administrators make on the savings whilst also regarding the scheme as manipulative amongst  the most lucrative businesses in Nigeria.

In response, some experts familiar with the industry have countered his assertion, pointing out that the pension sector today is one of the most regulated sector in the Nigerian economy, adding that use of years in calculating accruable pension to the retiree either by way of programmed withdrawal or annuity is based on the requirements of the use of mortality table in calculating pension payable to a retiring officer but does not necessarily mean termination of pension.

In addition, experts have pointed out that the portion retained by either the PFA or the insurance company is not just left lying fallow only to service monthly pension but invested and attracts returns on investment noting that it is possible that the fund is well and carefully invested so that the capital never depletes while the pension will be serviced by the ROI.

In a note to Business AM., Lloyd Onaghinon, a finance expert and management consultant, explained that the pensions reform act has the rules for how lump sums work, adding that PenCom rules have ensured that retirees can at least continue to earn up to 50 percent of the emoluments they were on before retirement on an ongoing basis and that determines how they are allowed to withdraw funds.

“By the definition of pension, you should not be allowed to withdraw 100 percent because that means that you would not be earning a standard pay on a monthly basis,” he explained, adding that the Act does not want retirees (all things being equal) to be off from a particular standard of living.

Responding to the question of fairness in terms of remitting earnings from the investment made using retirees fund, the expert said that the  PFAs and PFCs have to be paid for their work whilst also adding that it is impossible for retirees to get everything that is earned.

He said, “It is fair to all parties to benefit, including those making the investments and keeping the funds through a custodial relationship.”

Further drawing from PenCom rule, Onaghinon explained that  RSA holders cannot determine the specific investment their funds should be put in. However, he noted that they can determine buckets of investments based on risk propensity that they can put their funds in.

Speaking on the possibility of leaving retirees to paddle their own investment boat based on garnering sufficient experience to invest, the finance expert said it is self-deception. According to him, investment management is itself a field of endeavour and people are trained professionally to develop such skills and they are adept at it.

Analysing further, he remarked that an oil worker that spent most of his years on the rigs or a federal government staff that worked for a regulator all his life is hardly able to do anything when it comes to investment management.

“It is therefore not to be encouraged. There can be pockets of retirees who are astute investors but the vast majority have little to no investment management skill set. This field of endeavour should not be trivialised irrespective of what people think.

“The other question is, if such people could manage their investment better they would or should have started their own business just after retiring and would hardly need the pensions. If they have not demonstrated their ability to multiply returns in their work life and created an endeavour that will continue to help them achieve that, what is the basis of assuming they will manage their retirement funds better?” Onaghinon asked.

Meanwhile, as the argument becomes intense, Pension Fund Operators Association of Nigeria and the Joint Committee for Establishment and Public Service of the Senate and House of Representatives Committees on Pension have recently agreed to review the current 25 percent lump sum payable to retirees so as to address issues of adequacy and contributors’ agitation.

The two parties, who noted that the pension industry had continued to record impressive growth across key performance indicators since the pension reform of 2004 resolved that  a survey should be commissioned by PenOp to gauge the level of satisfaction with the scheme by setting up a task force to engage state governments and come up with innovative ways to help drive compliance by state governments.

But in the view of experts, matters relating to pension or the financial sector are very delicate and as such requires professionalism to handle as they are not matters that should be politically handled.

Onaghinon said, “When professionals leave this to the discretion of the probably not well informed National assembly, they will only make a mockery of the system. So, if you allow retirees to take all they have been able to save you defeat the simple definition of pension.”

Analysts have, therefore, opined that rather than look for a way of killing a good  scheme like this, government and employers of labour should be encouraged to be consistent and up to date in the contributions otherwise interest should be paid on any delayed contributions not remitted as at when due.