RETIREMENT INCOME OPTION – PROGRAMMED WITHDRAWAL OR LIFE ANNUITY
The purpose of a pension scheme is to provide the employees of an organization with a means of securing on retirement, a standard of living reasonably consistent with that they enjoyed while in service. In effect, it is the totality of plans, procedures and legal processes of securing and setting aside funds to meet the social obligations of care which employers owe their employees on retirement or in case of death. Thus, Pension Fund Administration is geared towards meeting the objective stated above. A well administered scheme will therefore serve as an incentive to new employees and helps to hold back experienced staff.
In Nigeria, pension scheme can be grouped into contributory and non-contributory. All Pension Scheme up till 30th June 2004 were non-contributory schemes. The Non-contributory schemes dated back to 1951, when a colonial pension’s law designed primarily for UK Officers known as “the Pension Ordinance” was enacted and made retroactive from 1st January, 1946. This Ordinance had limited application for indigenous staff to the extent that it was granted at the pleasure of the Governor-General. It was not an automatic right of Nigerians. It could be withheld at the flimsiest excuse.
As at independence in 1960, the Pension ordinance CAP 147 of 1958 Laws of Nigeria (effective 1/146) as amended by Legal Notices, operated in the public Service up to 31st March 1974. This was drastically reviewed and replaced by Decree 102 of 1979 (new Pension Act CAP 346 of 1990 Laws of Nigeria). This Law has a commencement date of 1st April 1974. The Pensions Decree 102 of 1979 is the basic pension law from which other pension laws in the public service of Nigeria have developed. The other laws which cater for specific professional groups but retain the man ingredients of Decree 102 of 1979 are:
- The Armed forces pensions Act 103 of 1979.
- The Pension rights of Judges Act No 51 of 1988, 29 of 1991 and 62 of 1991.
All the pension schemes run in the public service up to June 30th 2004 were non-contributory in the sense that employees do not contribute from their salaries towards the pension and/or gratuity. The Government simply budgets pension amount as well as that of present workforce. Gradually the financial burden of pension/gratuity became very weighty on government especially when section 1(1) of the 1979 law states that “………. Any pension or gratuity granted hereunder to any person on his retirement from the public service of the Federation shall be computed on the final pay of the person entitled thereto and in accordance with the provisions of schedule 1 to this law”.
Prior to the enactment of this law, Pension calculation was based on “basic pay” and no “total pay”. As more persons joined the rank of pensioners, Governments started finding it difficult to meet pension obligation to pensioners. By 2002, pension liabilities nationwide was estimated at N2 trillion. This problem was further compounded by frequent increases in salaries and pension without a full assessment of the short and long term financial implication of these increases.
To address this problem, the Obasanjo administration passed into law, the Contributory Pension Act of 2004 otherwise known as Pensions Reform Act 2004. The scheme brought out a unifying law for both the public and private sector pension administration, makes contribution towards pension compulsory for both employer and employee and fully funded. The scheme is to apply to all employees in the public sector; all employees in the private sector in which there is, at any point in time, 20 or more employees in the employment of a company, firm or enterprise; and all employees of a company, firm or enterprise having less than 20 employees in its employment with annual turnover of not less than N25,000,000.
The objective of the Pension reform Act 2004 is to ensure
- That every person who worked in either the Public or Private Sector receives his retirement benefits as and when due.
- Assist improvident individuals by ensuring that they save enough to cater for their comfortable livelihood during old age.
- Establish a uniform set of rules and regulations for the administration and payments of retirement benefits for the Public and the private Sector.
The scheme stipulates that as from the commencement of this act, no person shall be entitled to make any withdrawal from his retirement savings account, opened under section 12 of the Act before attaining the age of 50 years. However, if the contributor loses his/her employment due to rationalization and/or redundancy, and having stayed out of employment for minimum of 6 months, he or she is entitled to 25% of the amount standing in his/her Retirement Saving Account (RSA).
Three possible Benefits:
- Programmed monthly or quarterly withdrawals calculated on the basis of an expected life span: or
- 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 saving 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 percent of his annual remuneration as at the date of his retirement.
This brings us to the main discourse – Programmed withdrawal or Life Annuity. There has been argument on which is better; the Programmed withdrawal or Life annuity. Of recent, the Head of LASCO Life Assurance Limited, Annuity Unit; Mrs. Fawatade Toyin appealed to retirees and pensioners in the country to embrace Life Annuity as their retirement income option. On the other hand, it is believed that Programmed Withdrawal is better. According to the Deputy General Manager (Technical and Support Services, AIICO Pension Managers Limited; Mr. Patrick Onos, majority of pension contributors might have been opting for programmed withdrawal instead of life annuity when they want to retire because they are convinced that they can continue to trust the Pension Fund Administrator (PFA), since the PFAs have been managing their pension contributions for certain number of years and so more comfortable allowing them to continue managing their money at retirement. Howbeit to above, let us compare and contrast the two schemes,
A Life Annuity is a financial contract in the form of an insurance product according to which a seller (issuer, typically a life insurance company makes a series of future payments to a buyer (annuitant) in exchange for the immediate payment of lump sum (single-payment annuity) or a series of regular payments (regular-payment annuity), prior to the onset of the annuity. It is a product offered by Life Insurance companies regulated by the National Insurance Commission (NAICOM). It pays pension for life with a minimum guarantee period of 10 years.
On the other hand, Programmed Withdrawal is a product of Pension Fund Administrator (PFA). It is the withdrawal of funds on a regular basis, which may be monthly, quarterly, etc. It pays pension over an expected life span. Retirement Saving Account may be exhausted during life time.
A retiree on Programmed Withdrawal can change to annuity with an Insurance company and can as well move to another PFA, unlike the Life Annuity where the retiree cannot move to Programmed Withdrawal.
Under Programmed Withdrawal, if a retiree dies within the guaranteed payment period of 10 years, the RSA balance shall be paid as lump sum to the estate of the retiree or named beneficiary as inheritance, but with Life Annuity, monthly annuities will be paid up to 10 years to beneficiaries because annuity is guaranteed for minimum of 10 years. However, if the retiree is using Programmed Withdrawal and dies after 10 years of retirement, RSA balance shall be paid to the beneficiaries of the deceased as inheritance, but if the retiree is using Life Annuity, no inheritance will be pad to the beneficiaries.
Under Life Annuity, monthly payments commence once the insurance company receives the premium unlike the Programmed withdrawal, where monthly payments commence from the date of retirement that is pension arrears (if any) are paid to the retiree.
With regard to longevity risk, the RSA balance may be exhausted during life time where the retiree chooses Programmed Withdrawal, but under Life Annuity, the longevity risk is passed to insurance company who pays the pension for life.
Idika Agwu Aja