Who needs 75% pension lump sum upfront?

This subject has been reverberating in the recent past. It is the matter of 75 percent upfront pension lump sum payment agitation for retirees. It is of grave concern for all, the industry, the public, the government and even the pensioners. Some industry members and experts have wondered if what is being requested for is properly understood. Ordinarily, nothing should be wrong with taking what is considered yours legally. The fact that you live long enough to receive the any part of your pension money into your account is exciting. It really feels good. It is like overseeing what is yours and your future. It is well deserved, haven worked and earned it. However, is the easy way out seemingly the best? Who does not like the good feeling of some good money ‘cooling’ in his or her account?

The answer lies in understanding the purpose and intention of pension. Pension is both a reward and recognition for common goodwill of workers for aging on the job and a need for a soft landing after active work years. The employer, Government or private sector as defined by the law is mandated to make such provision. This collective social security arrangement is to both attend to and fend off the burden of later life social and health challenges on aged citizens from the governments already over-burdened other responsibilities. Because of the failure, abuse and burdens of the previous Defined benefits system, DBS, a novel contributory pension scheme (CPS) evolved based on the pension Act of 2004 and its reform of 2014. Without doubt, a novel idea, no matter how beautiful, will continue to be relevant by responding to the dynamics of the times. It is a kind of public-private synergy for higher efficiency and guarantees.

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The Nigerian system requires that employer and employee contribute agreed minimum percentages into a managed fund determined actuarially predetermined by the Act guiding pension management, for investment, security, and growth over a period. The longer the years of participation, the higher the accumulation, the better for investment returns and benefits size. Some present complaints on the size of the individual pension fund at retirement is because of the relatively short period the CPS has been in operation. The longer one is in participation in years of service, the larger the accumulation, the better the returns on investment on compounded basis.

An important question now is, who really owns the pension money accumulated so far at retirement? The answer is that it is a mutual fund – government and the employee. The government is very interested in how you spend the pension money for sustainability and coverage over the remaining years of the retiree. This to avoid becoming a social burden on it or the younger workforce. Thus, it is not just a personal savings scheme as it is perceived to withdraw from as may be desired. That is why it is regulated to avoid abuse and ensure the governments social responsibility program is not jeopardized by any whim or individual caprice.

The government is like a father who trains a child to be independent to have a steady life. No parent wants a situation when a child has to fall back to the parents for support financially if and when they have mismanaged their lives. Consequently, any personally mismanaged pension benefit is a potential liability on the government and the system.

So, it is beyond the notion or mentality of “it is my money”. There are other collective interests on how the money is used securely for the period a pensioner lives. while pension money looks like wholly owned by the retiree, what the retiree does with the money, to the extent that the retiree does not become a burden is important to the government.

Additionally, a critical aspect of the desire of Nigerian retirees to withdraw huge part of the individual Pension money upfront is based on ignorance of assumed enough financial literacy to better self-manage the funds. There are permutations and agitations being circulated on how people would have done better managing their own funds. This is misleading and a great disservice to the retirees. The investment environment is dynamic. Highly unpredictable, except the skills acquired overtime in funds management. Also, benefits of group and institutional investments is inestimable when compared to an very new to that world. Recently, money market, T-bills, indeed equities surprised a lot of people on how low rates and pricing could be, like 1%. Yet, fund managers stabilized their funds, hedging with more stable class of investment for higher averages.

Again, how easy would it be to be a businessman that one has not been up till retirement? The business environment is now very dynamic and highly knowledge and experience driven. Many have dreamt of starting a business at retirement that they knew little about. What is the failure ratio of many start-ups? Research shows that 90 percent fail over s stretched study. Based on the research, 21.5 percent failure in the first year, 30 percent in the second year and 50 percent in the 5th year. The business idea might even be of a crazy one from a relation who knows of your retirement money coming and has planned with it in mind. Then the money evaporates, as well as the ‘crazy’ relation.

The truth is that pension money is not adventure money. People should be winding down then. Largely, what is not done or achieved by then, when one was healthy and more agile should be considered more carefully before being attempted.

A third reason why people think they need the upfront pension 75% lumpsum is trust deficiency in the overall system. This is understandable, given where we are coming from. In many instances, they think that their money is safer being in their hands and the liberty that comes with it.

In some other cases, retirees want to cover for a perceived gap or failure in their retirement plan using a huge part of their pension money. This may be to build a house or some huge project. Pension money is not meant for those. As much as possible, these should be carried out before the retirement age. 25% upfront approved by law may be agreeable to complete outstanding projects, but not 75%. The future is gone if 75% is taken. What is there left as guarantee for the monthly income? Especially when health is becoming challenged? There will be no guarantees with the ever-growing inflation with what is left. The buying power is ever decreasing, the way it is now.

Sadly, majority of people live a day-to-day life and plan poorly for their retirement. They delegate and relegate that important function to their employer, only to discover very late how wrong that posture has been. Very few employment places may give you that latitude of laxity. How can one leave his future and destiny in another person’s hand? Thus, people who are poorly prepared, make these agitations and concerns. It is result of poor planning and visioning.

We have other people who have wondered why the pension money could so much be accumulated to one industry, and still counting. They have their imaginations on what they could do with the money. But, because of the tight guidelines of the pension funds management and how tightly impenetrable it has been, some people have sworn to break the tight rein on the funds, out of possible envy. This may be possible only by law. Thus, the various ‘hacking’ attempts this far.

So, the so-called benefits of the 75 percent upfront pension payment is illusory and distractive by way of core purpose of pension. This is not to mention the other economic benefits the safe keeping and growing of the funds is doing for the nation.

A family and nation that saves and invests well, grows. That is what pension is doing for us. That is what it is doing for the world. It is growing infrastructure investment and development. It is growing confidence in availability of long-term investments and development funds, thus bridging critical development gaps. It is a buoy for the capital market, stimulating growth in the economy and the employments. This fund must be jealously protected. The ratio of pension assets to the Nigerian GDP was just 8 percent as at end of 2020. This is far from what obtains in the world. Netherlands was 214 percent in 2020; USA was 156.5 percent; South Africa was 78.8 percent; South Korea 61 percent, to mention a few.

Now, who wants 75 percent pension upfront payment? Not me.

Etaduovie, MD/CEO IEI anchor pensions managers