Retirement Benefits – Programmed Withdrawal, Annuity Option – Challenges And Prospects

OBINNA CHILEKEZI

1.0 INTRODUCTION

he essence of having an effective pension scheme is to enable the retired workers to enjoy their retirement benefits as planned. Experience has shown that this has not been the case in reality as a result of factors which could be political, economical and social.

The outcome of not having an effective pension scheme in any society has led to the situation of pension burdens on the state, and most times, the relations of the retirees. It as a result of this, nations had embarked on journeys on how to tackle the problems associated with pension's scheme in the milieu.

In line with the above, the Federal Government of Nigeria decided to embark on a new pension regime following the passage of the Pension Reform Act, 2004. This new regime changed the pension scheme in Nigeria from that of Defined Benefits to that of Defined Contributions as practiced in Chile - the pioneer of the scheme.

1.1 OBJECTIVE OF THE SCHEME

The Pension Reform Act 2004 outlined the objectives of the scheme in Section (2) as follows:

a. ensure that every person who worked in either the Public Service of the Federation, Federal Capital Territory or Private Sector receives his retirement benefits as and when due.

b. assist improvident individuals by ensuring that they save in order to cater for their livelihood during old age and

c. establish a uniform set of rules, regulations and standards for the administration and payments of retirement benefits for the public service of the federation, federal capital territory and the private sector.

The government believes that with the achievement of these objectives, that the era that pensioners will not get their retirement benefits as at when due will be over. That is, the era that pensioners would queue under the sun, day in day out for their entitlement, with some of them dying in such queues would be over.

The essence of this paper is not to look at the provisions of the PRA 2004 entirely rather that we are to restrict ourselves to the retirement benefits payable under the programmed withdrawal option or the annuity option. To do this, we had to do an analytical exposé on annuity practice in particular as well as have an insight of the operations of programmed withdrawal.

Section 4 of the PRA 2004 provides on retirement benefits as follows:

• programmed monthly or quarterly withdrawals calculated on the basis of an expected life span

• annuity for life purchased from a life insurance company licensed by the National Insurance Commission with monthly or quarterly payments; and

• a lump sum from the balance standing to the credit of his retirement savings account : provided that the amount left after that lump sum withdrawal shall be sufficient to procure an annuity or fund programmed withdrawals that will produce an amount not less than 50 per cent of his annual remuneration as at the date of his retirement

2.0 PROGRAMMERS WITHDRAWAL

Simply put the programmed withdrawal means an arrangement between the retiree and his pension fund administrator, through which on retirement the retiree will be "withdrawing" his benefit - that is contribution and accrued interest or rather yields from investments on a monthly, quarterly or annual basis as agreed by the parties. This is also referred to as living annuity.

In this case, the retiree will continue to withdrawal from such "benefits" until it is exhausted. In looking at this option, we have to bear in mind the fact that the standard of lifespan of man has greatly improved as a result of development in medical services. This means that more than 50 per cent of people who retired at age 60 may lived beyond age seventy.

Come to think of it, some of the retirees to be catered for under the provision of the PRA, 2004 will do so after four years of contribution (see section 8 of PRA, 2004).

The contribution of this group of people, even if they had spent ten years, will not be enough to be withdrawn for more than two years, if they are to maintain a near -to-their-working standard of life before retirement.

2.1 WHO MANAGES PROGRAMMED WITHDRAWAL

The programmed withdrawal is to be managed and administered by the Pensions Fund Administrator (PFA). Incidentally, those PFAs have been the collectors of these funds and have been in constant touch with the contributors, they would most likely put a bearing on the contributors to choose the option of programmed withdrawal - which they offer, rather than the annuity option - which is being offered by the insurers.

Moreso, nothing precluded the PFAs to come out with programmed withdrawal products that could compete with the annuity products - for example, a form of guaranteed programmed withdrawal, and what have you.

2.2 CHALLENGES

Like I have said earlier, the option of programmed withdrawal will not be in the interest of the employees that retired within ten years of service. Unlike in the annuity option, where if the accumulated amount is low, the retiree could decided to "add" some money in increasing what he wants to buy, this may not be the case with programmed withdrawal.

A big challenge with this option is that the effect of inflation could make nonsense of the whole arrangement.

2.3 PROSPECTS

One major advantage which the programmed withdrawal has over annuity is that it is provided by the PFAs who will definitely influence the contributors to buy programmed withdrawal. It is as a result of this that the insurance industry should not only design products- (modified the annuity products to suite the Nigerian retirees' needs and such products should make room for the inclusion of inflationary provisions) but also engage in an aggressive marketing of these products. It is not unlikely that at the inception of this regime that the bulk of the retirement benefits will be in the hands of the PFAs.

With above, I believe that within the first decade of the payment of these retirement benefits, the bulk of the money will be with the PFA, but this will change over the years towards that of insurers, depending on how aggressive the insurers could come up with products to meet the needs of the retirees.

3.0 ANNUITY

The purpose of an annuity has been described as the scientific liquidation of an individual's estate; in contrast, life insurance is the systematic accumulation of an estate. (Mehr and Gustavson, 1987). Thomas (2009) in distinguishing between the difference between life insurance and annuity, beautifully and pictorially put it this way.

• Life insurance is generally purchased as a security that in the event you die sooner than expected, it provides economic protection to your loved ones if death occurs before our financial obligations to them are met.

• A life Annuity is purchased in case you live longer than it is anticipated thus outliving your assets.

In other words, the person that buys annuity pays the insurer a specified capital sum in return for the insurer's promise to make a series of payments within an agreed period, with payments most likely to end with the buyer's death.

As in life insurance, Mehr and Gustavson (1987) posit that the annuity is a risk-sharing plan among individuals of the same age. They added that "these people could not liquidate their estates on their own without fear of outliving their financial resources. With risk-sharing, the funds of those who die early off set the excess withdrawn by those who outlive their principal. While an insurer is ignorant of individual mortality, it can use the law of large numbers and the experience of a specific group of annuitants to predict results for similar group. Therefore, if the funds of many individuals are combined, each member can be paid a periodic amount, actuarially calculated so that no one outlives capital or income.

To be continued next week