By Godwin Onoro, Pension Expert
In the last two publications, a clear path for this awesome journey – the stakeholders and the numerous benefits of the scheme to the stakeholders were enumerated. Being a journey, the final destination is when an employee retires and starts enjoying his/her pension.
If the retiree dies, the balance in the Retirement Savings Account (RSA) is paid to RSA holder’s beneficiaries on the basis of a Will admitted to probate or Letter of Administration (LOA). The contributors, who are the focal point of the scheme, have high expectations of the scheme and look forward to receiving their pensions either through Annuity or Programmed Withdrawal at retirement.
Being a contributory pension scheme, what accrues to RSA Holders at retirement is the accumulated monthly contributions up to the point of retirement and investment returns. The question is what would be the value of the monies that have been accumulated throughout the working lives of the employees at the time of retirement? Yes, you can see the quantum of the Naira, but what is it’s worth in the hands of the retirees?
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Remember, one of the objectives of the scheme is that it assists Nigerians to save in order to enjoy a decent living in old age. In effect, the scheme is designed to create future value for Nigerians and assure them quality standard of living after their working lives. Everything being equal, the quality of life one would enjoy at retirement depends on the quality/value of his/her savings at retirement.
Where the value of these savings is being diminished, the quality of life at retirement is also diminished. There are some thorns in the way of this journey. These thorns are not capable of thwarting this awesome journey but constitute tremendous nuisances in the way. These thorns do not affect retirees’ worth alone but every other savings.
For other savings, the decision to exit one saving plan for another is in the hands of the individuals unlike savings in RSA. Can these thorns be stopped from stealing from us or can their activities be curtailed? Let us refresh ourselves of these thorns in the way of this journey.
Inflation is one of these thorns on our retirement savings. It decreases the worth of our savings and so impact our ability to have quality standard of living at retirement. Put simply, the value of goods and services your savings can buy today will be more than what the same amount of savings can buy in the future. Whilst you think you have so much, what you have can only buy so little.
The impact of this on our future savings is better imagined. This analogy is unfair and not balanced! Don’t these savings earn some returns and compensate for the inflation? Yes, our retirement savings earn decent returns, but in an inflation ridden economy such as ours, the returns may not compensate for the rate of inflation. In order words, the rate of returns is less than the rate of inflation. Whilst inflation as at April 2021 was 18.12%, average annual inflation as at February 2021 was 14.1% and ten (10) average inflation is about 13.95%. Are these inflation rates not worrisome?
Devaluation is another thorn in this pleasurable journey. It is the deliberate downward adjustment of the value of a nation’s currency relative to another currency. Whilst devaluation is done to improve the competitiveness of a country’s exports relative to its imports, it has adverse impacts on savings. In simple terms, it reduces the value of our currency and eventually retirement savings.
Currency depreciation has the same impact on retirement savings as devaluation of a currency. It is the fall in value of a currency in terms of its exchange rate vis-à-vis other currencies. Currency depreciation is usually caused by weak economic fundamentals of a nation, political instability, high inflation rates etc. Just like currency devaluation, currency depreciation reduces the value of our currency which ultimately reduces the value of our savings. How do you mean? This is no fight sir.
We are all involved in this. Let us use the Naira to Dollar spot exchange rate to demonstrate their impact on our savings. Yes, the spot rate and not the parallel market rate. The average Naira/Dollar exchange rate in 2011 was N156.2 Naira to a dollar. Over a ten year period, the average exchange rate was N384.6 in 2020 and from January to mid May 2021, it was N400 to a dollar.
What are the implications of these figures? Can someone explain them to me! Yes sir. It is simple. Relative to the dollar, between 2011 and 2020, our savings relative to the dollar had lost about 146% of its value and this has far reaching implications on what these savings can now buy. To further bring this home, just imagine the retirement savings value of the Venezuelans, Zimbabweans and Lebanese. Ah, our case is different. May the good God help us! Amen.
The National Pension Commission through its well-thought-out investment guidelines had provided safeguards to address the returns and risks associated with the investment of pension assets. Largely outstanding is the mitigation of the impact of devaluation and currency depreciation on our retirement savings.
The architect of the PRA 2014 had anticipated the need for investment of some pension assets outside Nigeria (Section 87:1). This section of the Act has remained non-operational with the attendant negative long-term implications on retirement savings. What also impacts our overall retirement fortune is the fundamental of the economy that so much is hinged on.
It is our collective hope that the drivers of our economy would look inward, do what is right and put the economy on the right footing. By so doing, our retirement journey would remain pleasurable all the way.