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New pension retirees shun life annuity for programmed withdr


July 14, 2008/ BusinessDay


The first set of retirees under the current pension reform, expected to retire between January 2008, and December 2009 have all opted for programmed withdrawal rather than life annuity with insurance companies.


As specified in Section 12 of the Pension Reform Act 2004 and as part of the implementation process of issuance of Federal Government Retirement Bond, the first set of retirees under the scheme have attained the age of 60 or 35 years in service, whichever is earlier.


According to the umbrella body of insurance companies, the Nigerian Insurers Association (NIA), indications from the National Pension Commission (PenCom) are that the insurers have not sufficiently demonstrated readiness to provide annuity products.


Industry operators are however worried with this development, which according to them, implies deceit from the authorities which had started since the coming on board of the 2004 Pension Act.


PenCom, in collaboration with the Budget Office of the Federation and Office of the Accountant-General of the Federation, had earlier carried out a verification exercise in preparation for the payment of the first phase of pensioners of the federal government parastatals.


Programmed Withdrawals, according to IBTC Pensions Limited, is where the retires’ pension is administered directly by the Pension Fund Administrator (PFA).


The retiree advises the PFA on an expected lifespan while balance of the Retirement Savings Account (RSA) will be programmed as a series of periodic payments based on this expected lifespan.


Implications are that, advising a shorter lifespan will result in larger period pay-outs, with the risk of the retiree out-living this lifespan, and having drawn down most of his RSA balance, while a longer lifespan will result in a smaller periodic pay-out, but gives a higher assurance of receiving benefits all through your life.


However, where the retiree dies before this expected life span, the balance will be paid to the named beneficiaries. Also, it is important to note that as the programmed withdrawals are made, the balance on the RSA will be continuously invested and still yield investment income.


In the other hand, purchase an annuity for life from a licensed insurance company implies that the entire RSA balance will be transferred at the RSA holder’s instance to an insurance company that offers a series of guaranteed periodic payments to the retiree until death. Annuities like other insurance contracts carry a measure of risk, with the insurance company undertaking to make a guaranteed value of payouts that may be more than the RSA balance depending on how long the retiree lives. It also implies a risk for the retiree in that after a number of years, usually 10 years after the contract (depending on the product) is entered into, and the retiree dies, the payments will cease and nothing will be paid to the retiree’s beneficiaries. 


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