As stakeholders await ongoing amendment of Pension Reform Act, PRA, 2014, the National Pension Commission, PenCom, has said the proposal for a 75 per cent lump sum payment for retiring workers under the Contributory Pension Scheme, CPS, is not feasible and should be jettisoned.
Reacting to the proposal during a public hearing on the Pension Reform Amendment Bill, a public hearing organised by the House of Representatives Committee on Pensions, PenCom’s Director-General, Mrs Aisha Dahir-Umar, warned of the implication for legislative approval for a retiring worker to to be paid such a percentage from his or her Retirement Savings Account, RSA.
The hearing centred on a Bill for an Act to amend Section 1(c) and Section 7(2) of the Pension Reform Act 2014.
The PenCom DG contended that this might have risen from a misunderstanding of the concept of pension payment under CPS, explaining that the proposed amendment also contravened the 1999 Constitution, which guaranteed the right to pensions for all public officers.
“That suggestion also converts the CPS into a Provident Fund and leaves such a retiree with no periodic pensions, contrary to the requirement of Section 173 of the 1999 Constitution,’’ she said.
Section 7 (1) (a) of the Pension Reform Act (PRA) 2014 allows for only 25 per cent of the retirement savings to be paid as lump sum to a retiree.
This is provided that the amount left after the lump sum withdrawal is sufficient to fund a programmed withdrawal or annuity over 10 years or the expected lifespan of the retiree.
According to Dahir-Umar, the provision of monthly pensions is central to the objective of mitigating old age poverty under the CPS.
The DG informed that PenCom retirement benefits payment template ensured that the RSA had enough balance and should be sufficient to provide at least 50 per cent of the retiree’s terminal pay as monthly pensions.
She noted that it was the residue after this provision was made that could be taken as lump sum, saying: “It is inaccurate to suggest that there is a fixed lump sum for all retirees; rather the lump sum is determined after securing a minimum replacement ratio of 50 per cent of last pay as monthly pensions.”
The PenCom DG argued that the proposed amendment would amount to leaving only 25 per cent to be spread for pensions thus resulting in meagre monthly pensions.
She said: “It is doubtful if the 25 per cent balance in a retiree’s RSA, after deduction of 75 per cent lump sum, would be adequate to reasonably cater for his livelihood in old age.
“It is important to note that the payment of 75 per cent of RSA balance as lump sum upon retirement is not obtainable in other jurisdictions operating the CPS. This is due to its resultant effect of rolling back the principal objectives of the CPS.
“The objective seeks to provide a pool of pension funds that are invested for the benefit of retirees throughout their retirement life and not just immediately upon retirement. PenCom supports the improvement of living conditions of retirees as evidenced by the periodic pension enhancement for retirees under the programmed withdrawal mode.”
According to her, the way out of the agitation for the payment of “at least 75 per cent lump sum’’ is the full “implementation of the provision of Section 4(4) (a) of the PRA, 2014 dealing with payment of additional benefits upon retirement. It provides that notwithstanding any of the provisions of this Act, an employer may agree on payment of additional benefits to the employee upon retirement.
“Through this provision, employers may establish Gratuity or End of Service Benefit Schemes that are to be managed by licensed Pension Funds Administrators, the exclusive benefit of employees at retirement.
“These funds are usually separate from the RSA balances of employees and are paid directly to them at retirement. Ultimately, this would considerably enhance the amount available to employees as retirement benefits.”