In this report, NIKE POPOOLA examines the conditions for accessing benefits by workers and retirees under the Contributory Pension Scheme
Earning pension stipends is the last stage at which contributors can access their retirement benefits under the Contributory Pension Scheme.
But, according to the National Pension Commission, there are other ways that workers can have access to the funds contributed into their Retirement Savings Accounts before retirement.
The CPS seeks to, among other reasons, ensure that every worker receives their retirement benefits as and when due.
Conditions to access benefits
According to PenCom, one of the grounds in which a contributor can access the benefits under the CPS is through the mandatory retirement as stated under sections 7 and 16 of the PRA 2014.
A retiree must be at least 50 years or must have retired from service on attainment of maximum allowable length of service (generally 35 years in the public sector).
A worker can withdraw 25 per cent of the amount in his RSA. He can also withdraw his voluntary contribution, which is the extra contribution made above the 18 per cent stipulated remittance in his RSA.
Relatives of deceased workers can also access the pension benefits of their breadwinners.
The temporary access to 25 per cent of the pension as stipulated in sections 7(2) and 16(2)(5) PRA 2014 is for employees who lost their jobs and have not been able to secure another job after a period of four months.
PenCom has stated that to access this, the RSA holder must be less than 50 years of age, must have been out of job for four months or more, and can withdraw up to 25 per cent of the RSA balance only once before 50 years.
The benefit of a deceased person is to be paid to the estate of the deceased or his legal beneficiaries, PenCom says.
According to the commission, the benefits include accrued rights such as his entitlement prior to June 2004, contributions from July 2004 to the month of death, return on investment, and proceeds of Group Life Insurance Policy (300 per cent of his annual total emoluments).
It says where all the components have been consolidated, the benefits may be paid en bloc or where part of the components is yet to be credited into the RSA, the portion remitted will be paid pending the balance.
Voluntary contributions can be withdrawn before retirement or after retirement.
The commission says that withdrawal can only be made after two years of contribution, subject to tax on both income and principal amount for retirees and exempted contributors while tax is made on income earned only for active contributors.
Any VC withdrawal made after five years of contribution will be tax-free, it adds.
Under the VC, a foreign contributor is allowed to withdraw all the funds in their VC account after two years subject to deduction of taxes on income earned and capital when withdrawal is less than five years on contribution.
Foreigner’s funds may also include accrued rights if the RSA holder was in treasury-funded employment before the commencement of the CPS June, 2004.
Retirement options
There are two retirement options under the CPS, namely, programmed withdrawal and life annuity.
The features of programmed withdrawal are that it is a product offered by the Pension Fund Administrators for periodic payments (monthly/quarterly) to a retiree, and the RSA balance is spread over expected lifespan of a retiree (expected lifespan determined by actuarial/mortality table).
Under the programmed withdrawal, the pensions may be enhanced at regular intervals subject to returns on investment; the balance in the RSA is reinvested by the PFA for maximum growth, and it can be bequeathed as inheritance if death occurs at any time.
Life annuity, on the other hand, is a financial product offered by insurance companies for a regular income in consideration for the payment of premium from a retiree.
It provides regular pension payments for life as long as the retiree is alive, and it is guaranteed for 10 years in case of death.
PenCom says, “If a retiree dies within 10 years of retirement, monthly annuities will be paid 10 years to beneficiaries because annuity is guaranteed for a minimum of 10 years but if he dies after 10 years of retirement, no inheritance will be passed to the beneficiaries.”
For retirees who want the programmed withdrawal, the agreement with their PFAs will reflect the RSA balance, lump sum and monthly pension.
The commission says that provisional annuity agreement is a document issued by an insurance company to reflect the details of the retiree who wants to access his retirement benefits through annuity option.
It states that the agreed terms and amounts will be stated in the document such as the amount to be transferred to the insurance company as premium, annuity amount, lump sum and guarantee term.
Lump sum
PenCom says that the lump sum is the bulk amount paid to the retiree at retirement after determining the monthly pension from the RSA balance.
The amount paid as lump sum is subject to variables such as the RSA balance, gender, last salary, and age at retirement, using programmed withdrawal template.
According to the commission, the template determines the minimum monthly pension/maximum lump sum and maximum monthly pension/minimum lump sum from which a retiree can choose.
Lump sum is applicable to programmed withdrawal and annuity retirees.
PenCom says that the factors that usually cause differences in pension stipends are the age of the retiree at retirement, gender, RSA balance, size of annual total emolument and retiree’s choices.
Retirement documents
The requirements for the retiree are that the retiree should notify the PFA six months ahead of retirement and supply the PFA with the documents for retirement, such as official notice/acceptance of retirement from employer, last pay slip as evidence of ATE & GL/step, recent passport photograph, any other evidence of annual total emolument, quotation from an insurance company for the purpose of annuity product if desired, introduction of next of kin to the PFA before/at retirement, provision of details of bank account and contact address after retirement.
Monthly pension is paid directly to retirees’ bank account in line with the approved amount.
The Acting Director-General, PenCom, Aisha Dahir-Umar, says the roles of the commission in the pension benefits of retirees will include the provision of the PFAs with computation models for calculating programmed withdrawal.
According to her, the commission provides investment guidelines for active member funds and retiree funds, issues general regulations and guidelines to the PFAs, redeems retirement bond into the RSA after enrolment/verification exercise, approves (or rejects) benefits withdrawal arrangements and monitor the PFAs for compliance.
While speaking on the challenges, she says, “There is limited public awareness of the workings of the new CPS, different interpretations of some provisions of the Act by retirees, comparison of benefits under the old and new scheme by retirees and comparison of benefits by colleagues on similar position and different variables/data.”
She also notes that there is over/under-remittance of entitlements, leading to delays in processing retirement benefits.
To solve most of challenges encountered, she urges the retirees to liaise with the PFAs six months to retirement and supply the PFAs with official notice/confirmation of retirement from employer.
Dahir-Umar also urges the annuitant retirees to provide present quotation/provisional agreement from a life insurance company to the PFA for the purchase of annuity and other documents required by the PFA.
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