On 20/12/2022 PenCom released a statement that the “third edition of the pension enhancement has been approved” which is for “existing retirees…who have accumulated significant growth in their Retirement Savings Account (RSAs)”.
An enhancement is essentially an increase in the amount paid of pensions paid to pensioners monthly. The amount is paid out of their retirement savings account.
A pension enhancement should be good news to retirees (pensioners on programmed withdrawals), but it may be turning out not to be.
According to the information received, the calculation is based on the following:
Sometime late 2021 PenCom requested balances on the accounts of all retirees as at
October 2021 o In October 2022, PenCom instructed PFA’s to calculate, using a PenCom-supplied Excel template the amount of pension enhancement for retirees
In December 2022 PenCom released a statement about their third edition of the pension enhancement (see attached)
According to PenCom’s Q3 report, there are 315,112 retirees on programmed withdrawal amounting to N13.88bn paid out monthly.
A pensioners experience
Nairametrics spoke to a pensioner to get an understanding of the impact of the”enhancement” on their financial well-being.
The pensioner, who preferred to remain anonymous, lamented that while they acknowledge the increase in pension payout, it lags the inflation rate and is not enough considering the level of returns recorded over the years.
“I began drawing a pension from my RSA in late 2016. Since December 2016, even after the payment of a monthly pension to me, my RSA has risen by 22.75% as of 31 December 2022. My PFA over those 6 calendar years to 31 December 2021, has returned an average return of 14.04%”
“Since 2016, the average annual withdrawal rate, i.e., pension payments to me, has been 8.05%. In other words, despite me being in retirement and drawing a pension, my RSA balance is growing at a faster rate than I am being allowed to draw”
“Last week I got a text message from my PFA that, based on the 2022 pension enhancement program, I am entitled to a pension enhancement, and I should call to find out how much. I did call and was told it amounted to an 8.67% rise (still subject to PenCom approval).”
Enhancement not good enough
While the decision to introduce the enhancement at a time of economic difficulty is appreciated, the macroeconomic indicators suggest it is not enough.
For example, Interest rates – 17.50%, December headline inflation – 21.34% (food inflation is 23.75%), 20-year bond yield – is 14.80% (Jan 2042) o 10-year bond yield – is 14.75 % (Apr 2032) and 5-year bond yield – 13.40% (Feb 2028).
These indicators suggest the pensioner is still left worse off.
Further checks by Nairametrics suggest the model for determining the enhancement rates is not transparent making it difficult for a pensioner to decipher how their enhancement was derived.
An inquiry with a PFA asking how the enhancement was determined suggests the balance used was October 2021, while an interest rate of 8% was used far lower than the long-term interest rate.
The response from the PFA was “Kindly note that the calculation on the use of your RSA balance as of October 2021 was based on PenCom’s directive. The interest rate used in the calculation was also obtained from the PenCom.”
A spreadsheet seen by Nairametrics also shows assumptions that were not quite explainable were used in determining the enhancement leaving pensioners confused and with more questions than answers.
Questions to ponder
Are retirees short-changed?
Retiree RSA balances are growing but pay-outs are falling. Is this just about accumulating AUM and operators’ earning fees?
Why are there fees still included in the calculation when the overall fund has paid fees before the NAV per unit which is used to multiply the number of units to get the value of an RSA balance? NB: the custodian fee is missing!
Why the mystery behind the spreadsheet? Where’s the openness and transparency in the system?
Why the diktat from PenCom? Why is approval required again from PenCom?
Why is the enhancement only every 3 years?
Where is competition if ALL the PFAs are using the same template that spits out the same result?
This article has been updated to reflect new information
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