PenCom objects to bill seeking 75% lump sum payment to retirees

BY CHARLES ABUEDE

A bill titled ‘The Pension Reform Amendment Bill’ currently before National Assembly that seeks to allow a retiring worker to cashout “at least 75 percent’’ lump sum from their Contributory Pension Scheme (CPS) is being vehemently opposed by regulator, the National Pension Commission (PenCom), which is suggesting it has grave implications.

Aisha Dahir-Umar, director general, PenCom, says a major implication of the amendment is that a retiring worker can decide to take 100 percent of the money in his or her retirement savings account (RSA), and noted that this amendment was was based on a misunderstanding of the concept of pension payment under the CPS.

She said the proposed amendment contravened the 1999 constitution, which guaranteed the right to pensions for all public officers.

While expressing her views during a presentation at a public hearing organised by the House of Representatives Committee on Pensions, Dahir-Umar said, “That suggestion also converts the CPS into a Provident Fund and leaves such a retiree with no periodic pensions, contrary to the requirement of Section 173 of the 1999 Constitution.”

The hearing focused on a Bill for an Act to amend Section 1(c) and Section 7(2) of the Pension Reform Act 2014. The presentation which was obtained showed that Section 7 (1) (a) of the Pension Reform Act (PRA) 2014 allows for only 25 percent of the retirement saving to be paid as a lump sum to a retiree and provided that the amount left after the lump sum withdrawal is sufficient to fund a programmed withdrawal or annuity over 10 years or the expected lifespan of the retiree.

In the words of the PenCom director general, the provision of monthly pensions is central to the objective of mitigating old age poverty under the CPS and the PenCom retirement benefits payment template ensured that the RSA had enough balance and should be sufficient to provide at least 50 percent of the retiree’s terminal pay as monthly pensions.

“It is inaccurate to suggest that there is a fixed lump sum for all retirees; rather the lump sum is determined after securing a minimum replacement ratio of 50 per cent of last pay as monthly pensions,’’ Dahir-Umar said.

Speaking on the impending implications of the proposed amendment, the PenCom boss observed that it would amount to leaving only 25 percent to be spread for pensions thus resulting in meagre monthly pensions.

“It is doubtful if the 25 percent balance in a retiree’s RSA, after deduction of 75 percent lump sum would be adequate to reasonably cater for his livelihood in old age. It is important to note that the payment of 75 percent of the RSA balance as a lump sum upon retirement is not obtainable in other jurisdictions operating the CPS.

“This is due to its resultant effect of rolling back the principal objectives of the CPS. The objective seeks to provide a pool of pension funds that are invested for the benefit of retirees throughout their retirement life and not just immediately upon retirement,’’ Dahiru-Umar expressed.

The remedy for the agitation for the payment of “at least 75 percent lump sum’’ lies in the implementation of the provision of Section 4(4) (a) of the PRA, 2014 dealing with payment of additional benefits upon retirement.

“It provides that, notwithstanding any of the provisions of this Act, an employer may agree on payment of additional benefits to the employee upon retirement.

“Through this provision, employers may establish Gratuity or End of Service Benefit Schemes that are to be managed by licensed Pension Funds Administrators for the exclusive benefit of employees at retirement.

“These funds are usually separate from the RSA balances of employees and are paid directly to them at retirement.

“Ultimately, this would considerably enhance the amount available to employees as retirement benefits,’’ Dahiru-Umar added.