Annuity regulation: A relief window for retirees?
From Abosede Musari, Abuja

FOR many years now, the issue of retirees pension has been a major concern to all, especially when one sees and considers the plight of the aged men and women who suffer so much and live below their initial standards of living before retirement.

Some of them have had to live unbearable lifestyles after retirement, because they found it difficult to access their retirement benefits. Sometimes they are even left on queues for several days and months unending just to obtain their pension. One will even wonder why the service they have committed the better part of their lives to no longer treat them with dignity and respect.

The case of the military retirees who have lived under the Zone 3 pedestrian bridge in Wuse, Abuja for years now, is a handy example in a matter like this, showing the harrowing experiences that retirees go through under a poor or mismanaged pension programme.

For this reason, the Pension Reform Act of 2004 was instituted by the Federal Government to eliminate problems such as these and give retirees hope of a good and quality lifestyle after retirement. This system is also to eliminate the fear of retirement or of even working for government among younger workers.

By the Pension Reform Act of 2004, all employers are mandated to establish a contributory pension scheme from which payments of retirement benefits will be made to retiring employees whether in the Federal Public Service, Federal Capital Territory or the private sector.

As provided for by the Act, the modalities for payment of retirement benefits are through life annuity, which is obtainable from life insurance companies or through programme withdrawal, which is obtainable from Pension Fund Administrators. Either of the two methods is available depending on the choice of the employee and no insurer or pension fund manager is permitted to pressure any employee to sign up to any package except one which he chooses.

Life annuity is a stream of periodic payments which commences at a specified date, which is either the normal retirement age or at 50 in the case of early retirement and payments are made either on a monthly or quarterly basis depending on the retiree’s preference. The evidence of such payments are also to be presented to the National Insurance Commission (NAICOM) for proper verification and monitoring to ensure retirees’ payments are not delayed or denied them.

Apart from instituting the Pension Reform Act, NAICOM, in collaboration with the National Pension Commission (PENCOM), have gone a step further by issuing a regulation to life insurance companies on the conduct of life annuity business in order to protect the interest of the retirees whose funds are at stake.

In this regulation which was presented to the public in Abuja recently, life underwriters were given step by step guide on how the government, through NAICOM and PENCOM, would have pension matters handled so as to bid a permanent farewell to the difficulties that have been experienced in the past.

The document provides that all payments to the annuitant, which is the retiree, shall be made not later than the 25th of every month and that life insurance companies shall maintain separate books of account in respect of the retiree Life Annuity Funds, which shall be audited annually by a firm of chartered accountants.

“The retiree shall have the option of changing his or her insurer not earlier than two years once the life annuity contract has been executed. For the purpose of annuity for retirees, the guaranteed period shall not be less than 10 years. Where the retiree dies within the guaranteed period, the surrender value of the remaining amount within the period shall be paid in lump-sum to the estate of the retiree or named beneficiary,” the document reads, adding that the life annuity programme shall be for the lifetime of the retiree, with a guarantee period of 10 years.

Apart from the fact that the document makes it possible for employees to get fully registered for life annuity with an insurer of his choice within a month, it also stated that the fully registered life insurance company that will transact annuity business must comply with solvency margin of not less than 30 per cent of the annuity fund fully confirmed by its appointed actuary, approved by NAICOM.

The company must also show preparedness for the speciality of annuity business by filing with NAICOM, relevant training and human capital development programmes planned for its employees. It must continue to comply with the PRA 2004 as regards the remittance of employees’ monthly contribution into the Retiree’s Savings Account (RSA).

The regulation also provides guidelines on how annuity funds should be invested by life insurance companies. Insurers are required to record in separate and distinct account, the investment of all funds relating to the retiree life annuity. It must be in a separate book apart from other funds managed by the company. This will ensure that retirees’ funds are not tampered with in any way.

“All debt instruments in which annuity funds are invested shall have a minimum investment grade level rating of “BBB” by at least, one recognised risk rating company. Any bank or discount house in whose money market instruments, life annuity funds are invested shall have a minimum corporate rating of “A” range by at least, one recognised risk rating company. Life insurance companies are encouraged to invest retirees life annuity funds only in ordinary shares of companies that are rated by at least one recognised risk rating company,” the document reads.

By the regulation, life insurance companies are not permitted to invest more than 35 per cent of retirees’ funds in real estate, 20 per cent in quoted equity, 50 per cent in money market instruments, 25 per cent in corporate debts and five per cent in the other forms of investment order than in government securities where they could invest 100 per cent of the funds.

As regards investment in the real estate, an insurer is to seek approval from NAICOM before investing where a single property or collection of properties in single location constitutes more than 10 per cent of the total investment in real estate, either by acquisition or valuation.

Also, insurance companies are prohibited from investing annuity fund assets in the shares or any other securities issued by owned shares, a shareholder of the insurance company, subsidiaries or affiliates of the company or those of its shareholders. In this context, affiliates mean companies in which it has not less than 10 per cent shareholding.

The regulation does not permit insurers, their directors or subsidiaries to pledge annuity related funds as collateral for loans nor are they allowed to invest such funds on any security or asset not listed on a registered stock exchange.

In addition, the insurance company is mandated to file its quarterly statement of annuity business, schedule of monthly payments, monthly statement of receipts and payments, monthly schedule of investments, monthly statement of assets and liabilities, annual audit report, annual solvency certificate, actuarial valuation reports, initial and half yearly returns on training and human capital development programmes to NAICOM.

All these checks and guidelines are to ensure proper monitoring of the activities of the life insurance companies to protect the interest of retirees by making sure that their funds are not mismanaged.

On the other hand, the regulation requires the retiree to notify his or her Pension Fund Administrator within six months to retirement of the intention to retire from service. Within seven days of the receipt of his application, the PFA provides the retiring employee the necessary information and verified documents that will help the processing of his retirement programme.

Where the retiree has purchased life annuity, he is not allowed to change to programme withdrawal programme. Where a retiree chooses to withdraw a lump sum before purchasing annuity, the regulation says that the amount required to purchase annuity shall first be determined before any such lump sum withdrawal can be effected.

“Such amount shall be sufficient to procure an annuity that will not be less than 50 per cent of his annual remuneration as at the date of his retirement. Where the retiree savings account balance is inadequate to guarantee at least 50 per cent of the annual remuneration, such balance shall be applied to procure life annuity for the appropriate feasible monthly or annual amount,” the regulation states.

At the presentation of the document, Commissioner for Insurance at NAICOM, Mr. Fola Daniel said that the regulation was a result of the joint effort of both regulators, NAICOM and PENCOM, which set up a joint committee which had been at work to produce the regulation since September 2008.

The benefits of the annuity programme, according to him, included the continuous flow of regular income for the retiree, insulation from the risk associated with the investment of lump sum benefits, structured management of resources and the transference of the risk of diminution in assets and possible failure of investments of retirees to insurance companies which are better equipped to manage such risks.

“Following the release of the regulation, life insurance companies are expected to rise to the challenges of providing new products and modifying existing products to align with economic realities and value added needs of retirees. Expansion in the branch network, efficient deployment of Information and Communication Technology and prompt payment of benefits will provide the competitive advantage for the operators.”

“Whilst the commission is repositioning for the virile and responsive industry supervision and regulation is continuing, it is my expectation that excellent service will be the watchword of operators through compliance with good ethics and norms, thus making enforcement rules a distant necessity,” he said.

Director General of PENCOM, Mr. Mohammed Ahmad, in his address at the presentation, said that the release of the regulation was another milestone in the collaborative effort of both commissions at ensuring a better pension environment for workers in Nigeria.

“A couple of years ago, in collaboration with the commission, we issued regulations on group life insurance which is one of the requirements of the Pension Reform Act mandating every employer that falls within that category to take a life policy. I hope insurance companies are following up to make sure that that regulation is being complied with.”

“Today we are also taking another collaborative effort jointly with NAICOM to issue regulation on annuity. Section 4 of the Pension Reform Act provides that upon retirement as an employee, you are entitled to two options, you either take the programme withdrawal which allows your Pension Fund Administrator to continue to manage your fund until you exit the system or you take an annuity. Annuity regulations have not been developed until today.”

He noted that at PENCOM, it is their duty to ensure that when employees retire, they get their retirement benefits as at when due and that was the reason behind the issue of the regulation. He, therefore, promised that the commission will do everything within its mandate and means to make sure that any party involved in managing pension assets, whether it be an insurance company or a pension administrator comply with the provisions of the Act.

Issuing a note of warning to dubious operators, Ahmad said: “We expect very transparent and open competition. If there is any party or participant that believes it can take advantage of this system, let it think twice. We will go to any extent to protect the employees. That we cannot compromise. If anybody believes that he can take money from retirees and default later, we are going to take necessary actions.”

“As regulators, we will ensure that operators play the game according to the rules. We will ensure a level playing field. The process of purchasing annuity will be automated by having an online auction system. We will not take it lightly with any operator, either in the pension industry or the insurance industry involved in unethical marketing strategy,” he warned.