75% lump payment will make retirees poorer – PenOP

Allowing retirees to access 75 percent of their pension contributions will impoverish them in retirement and defeat a key objective of the Contributory Pension Scheme (CPS), Pension Fund Operators Association of Nigeria (PenOp) says.

The position of the pension managers comes as some members of the House of Representatives are pushing a bill for a law to increase lump payment to retirees to 75 percent of their Retirement Savings Account (RSA).

One of the key objectives of the CPS is to ensure that retirees have guaranteed income in retirement that makes them reasonably comfortable and reduces their liability to the society.

Oguche Agudah, chief executive officer of PenOp during a public hearing on the bill at the House of Representative, said the argument that many people were suffering, receiving pittance when they retire was flawed and faulty.

According to him, the argument that people that have issues with the 25 percent lump payment currently allowed are those who have not been able to accumulate enough funds in their RSAs prior to retirement.

“Let’s not forget that the system is relatively new, and most contributions have only happened over the last 15 years or so. The way the system is designed, if one starts working at say, 25 years and works for 35 years, retiring at 60 years. If the employer and employee have contributed consistently over this period of time, then the funds in that individual’s RSA account would be sufficient to have a decent lump payment with enough funds remaining to earn a decent pension for life, Oguche said.

Oguche who cautioned the lawmakers against truncating a working system, urged them to rather address the inconsistencies within the system as opposed to destroying a whole programme that benefits the majority of pensioners under the scheme and the economy as a whole.

“What we suggest is that employers should be encouraged to pay gratuities at retirement and/or increase their level of monthly contributions in order to boost the balances and subsequent pension pay out of their staff.”

Arguing further, he said, we are seeing many people who, even though they are eligible for lump payments they elect, rather, not to collect it and enable it work for them while receiving payments on a monthly basis.

“The second thing is that there are studies to show that when people receive huge sums that they are not used to receiving, they spend it on consumptive rather than productive activities, which can give temporary satisfaction, but does little for the long-term benefit of that individual.”

“What would happen when large pay-outs are given to retirees is that they would not have any other fall back and ultimately, they may become a liability on the society. As a nation, we need to forestall this possibility so that we give retirees their dignity in retirement and reduce the possibility of them being a liability to society.”

“While releasing 75 percent of their balances might seem like a popular idea, it will not serve the pensioners themselves who we say we are trying to protect, or the economy as a whole. “

“Another pertinent point is that Nigeria needs to toe the line of international norms and standards. In other countries with developed systems, lump sum payments are highly regulated and restricted, for example, in Chile, the country which Nigeria modelled its pension system after, lump sum payments are largely restricted.”

Oguche also argued that rather than the question being put to us today is really a case of logic versus emotion; a case of long-term planning and sustainability versus short-term gratification.

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“As a House and as a Nation, we have been saddled with the responsibility of putting in place laws that create precedents and lead to economic growth for the benefit of all. The question we are faced with today is, do we want to promote more of individual consumption, or widespread economic development? Should we not advocate to utilize our collective savings to develop affordable housing estates complete with amenities so that people don’t need to build their own individual houses and provide amenities themselves? Should we not use our collective savings to improve our healthcare infrastructure and be able to provide affordable and quality healthcare as opposed to fostering more medical tourism?”

He said this is the question ahead of us today, stating that the proposal to increase lump payments to 75 percent, whilst it may seem popular and laudable it actually negatively affects both the retiree and the active contributors.

What we need to do is to strengthen the regulatory framework around investment in infrastructure by the pension funds, such that there is a better partnership between the private and public sector about infrastructure funding and impact investment. The pension industry is doing a lot of work in this regard, but we need concerted efforts from all parties involved, he said.