Annuity Business: The Bone of Contention Between Life Insurers and PFAs


The cold war between Pension Fund Administrators and Life Insurance operators over the years on the annuity business has taken a turn for the worse, following a recent directive by the National Pension Commission to life insurance underwriters to within three months surrender N145.05 billion of the annuity assets in their custody to Pension Fund Custodians. Ebere Nwoji reports

A recent directive by the National Pension Commission ( PenCom), to life insurance underwriters, requiring them to transfer annuity assets of retirees under their custody to Pension Fund Custodians ( PFCs), has caused serious tension in the insurance industry.

Indeed, the development, in which PenCom further ordered Life Insurance underwriters to stop annuity business for three months and within the period, transfer their annuity assets to the PFCs, has set battle stage between insurance managers and pension fund operators. The situation is gradually affecting the relationship between their regulators – the National Insurance Commission (NAICOM) and National Pension Commission (PenCom), despite that NAICOM sits in the board of PenCom.

A close watch at their mood towards each other now shows that there is cold war between the two agencies on account of the annuity business.

The law establishing the Contributory Pension Scheme (CPS) gives retirees the option to choose between buying an annuity with part of their pension savings from a life insurance company after retirement or take programmed withdrawal of the pension savings with a PFA. While annuity fund is in the custody of life insurance underwriters, programme withdrawal asset is with PFAs who transfer the same to Pension Fund Custodians (PFCs) for investments.

By definition, an annuity is a contract between an investor and a third party (usually an insurance company) whereby in exchange for making a lump sum payment, the insurance company promises to do the following: Provide an income for a certain period of time, or for life, Provide for accumulation, or asset growth, Provide a death benefit and Provide for long term care benefits. This could be in form of Fixed or Variable annuity.

In the ongoing controversy between PFAs and insurers, over the annuity business, while PenCom said the decision to move annuity assets from life insurers to PFCs is to ensure consistency with Pension Reform Act (PRA) 2014 and strengthen the processing of administration of retirement benefits, insurers said it is a form of de-marketing force and that is detrimental to their operations. They have therefore vowed to battle it out to the end.
PenCom, had early in November, issued a circular titled: ‘Strengthening the Administration of Retirement Benefits under the Pension Reform Act (PRA) 2014, with reference number PENCOM/INSP/CIR/TECH/16/17.

The commission in the circular signed by its Head Surveillance Department, Muhammad Umar and issued to pension fund administrators and Custodians stated that in line with the PRA 2014, it has resolved that the custody of retiree life annuity shall henceforth, be domiciled with PFCs as provided for in Section 56 of the pension act.
It therefore mandated all life insurance companies currently providing life annuity for retirees under the Contributory Pension Scheme (CPS) to open an operational account jointly with a PFC of their choice and advice the commission.
It maintained that all life insurance companies currently providing retiree life annuity under the CPS should transfer the corresponding assets in their possession/custody to the PFC of their choice.

The commission also noted that the approval of new request for annuity should be put on hold with immediate effect, until life insurance companies meet the custody and transfer conditions.

PenCom, said life insurance companies are required to open an account with the custodian of their choice and also execute custodial service agreement that shall state the terms and conditions of the contract between the parties.
The commission in the circular, gave address of a link that detailed the documentation and procedure of the transfer which in the view of insurers, is not to their favour.
The detailed documentation and procedure of the transfer in the view of the insurers is indirect way of taking the annuity business from them.

The insurers in their interpretation of PenCom’s action said it was based on envy and jealousy as it has become obvious that many retirees and workers now prefer annuity system of retirement benefit payment to programme withdrawal system.
As provided in the Pension Reform Act 2004 repealed in 2014, while programme withdrawal pays a retiree for 18 years, annuity pays for life hence people’s preference to it.

At the onset of Contributory Pension Scheme, perhaps due to lack of proper understanding and guidance, more people settled for programme withdrawal. With the result that year in year out, comparison of assets accruing from the two and number of registered retirees shows that over the years, programme withdrawal has always been on top.
For instance, as at March 2016, retirees under Programmed Withdrawal (PW) stood at 132,405 and annuity 29,620.
Also statistics released by PenCom for 2015 showed that the total number of retirees on Programme withdrawal increased from 126,775 in the fourth quarter, 2015 to 132,405 in the first quarter 2016.The 5630 increase represented 4.44 per cent from the figure recorded in the previous quarter.

It noted that a sectoral breakdown of those retired under the Programme withdrawal showed that the public sector accounted for 71.74 per cent (4,039) of the total retirees on Programme withdrawal during the quarter, while the private sector recorded 28.28 per cent totaling 1,591 retirees.

PenCom noted that the lump sum withdrawals within the quarter stood at N12.63 billion, which cumulatively amounted to N329.38 billion from inception. It said an average of N4.36 billion was paid monthly to the retirees of the scheme as monthly payment under programme withdrawal as at the end of the reporting period.
The commission said it approved a total of 3,288 applications for annuity retirement plan during the quarter, bringing the total number of retirees receiving their retirement benefits through annuity plan to 29,620.
PenCom maintained that the 3,288 retirees received N3.96 billion as lump sum payment and paid annuity premium of N15.44 billion cumulating to a total of N41.85 billion and N145.05 billion as lump sum payment and annuity premium respectively.

The retirees, it said were receiving average monthly annuity of N1.51 billion as at the end of March 2016.
But in recent times, there is drastic change in the system as more and more people are on daily basis migrating from programme withdrawal to annuity plan,a situation which has set pension Fund managers jittery.
For instance, at a recent end of the year party held for annuitants of Leadway Assurance in Lagos, most retirees who spoke to THISDAY on their choice between programme withdrawal and annuity said they now prefer annuity.
Some said they were initially in programme withdrawal but have now migrated to annuity because of wider knowledge and proper understanding of numerous benefits in annuity plan.

Mr. Lawrence Irewole, a retired police officer having annuity account with Leadway life Assurance said he was advised by his friends to migrate from programme withdrawal to annuity plan.
He said initially, he did not want to do it but that when he was educated on the benefits of annuity, he has to migrate.

Also Mrs. Olasupo Adeyola who retired from Africa Reinsurance Corporation,said she will ever remain grateful to the corporation and his Leadway Insurance for guidance and direction.
She said she has annuity plan and has no regret being into annuity and will remain there.
She said no regulator should tamper with annuity adding that it is beautiful plan that helps retirees.
She said initially, she was a bit skeptical but that it has been so good as payment comes on 12th of every month and that there is hoped it will continue throughout her life time.
She said she has decided to remain in annuity plan because she believes God she will live long and with her annuity plan, Leadway will keep on paying her.

She said she will always advise people to go for annuity because it is beneficial, it is faster therefore no government or regulator should force any one to leave annuity.
Apparently, one of the benefits of annuity, which attracts retirees to it is that the lump sum in a retiree’s Annuity account can be used as collateral to obtain loan from banks .This and the fact that annuity payment is for life gave boost to the plan and is attracting more retirees to insurers.

Observers of the two industries, said with the rate at which people are migrating from programme withdrawal to annuity, there is fear that in the next five years, if nothing is done, most PFAs would have lost most of their clients.

On their part, the PFAs seem to be sad that the monopoly they have been enjoying since the advent of contributory pension scheme in 2004 is suddenly being broken since insurance underwriters went into intensive marketing of their annuity plan and retirees are getting to understand the benefit they have in annuity.
indeed, with full entrance of life insurers into the annuity business since 2010, the PFAs are worried that their income from where they pay one percent returns to the regulator is going and their regulator seems to have kept quiet.

To discourage people from taking annuity in place of programme withdrawal, the PFAs have leveled a good number of allegations against life insurance firms.
The PFAs often accuse life insurers of making bogus promises they cannot fulfill.
They alleged that insurers fail to understand that pensioners’ money is not like insurance premium that can be diverted and disappear without accountability and allowed to just go like that if risk did not occur.
The PFAs, at a joint seminar on annuity and programme withdraw retirement benefit pay held in Lagos two years ago, stated openly that insurers are not and cannot be the best managers and custodians of pension funds through annuity.
Though the two regulators tried to reconcile them, operators of the two sectors have not been best friends.

On their part, insurers claim they even understand the pension business through annuity plan better than PFAs.
They see the act that gave them the legal right to sell annuity as opportunity to recover their market share of pension fund after the Pension act of 2004 took away pension savings from insurance.
With their usual zealousness and untiring effort in insurance marketing, they pursue vigorously the marketing of the annuity plan to Nigerians and today, their effort is yielding result.

This is quite unlike the PFAs who have since inception been enjoying monopoly given to them by the law,as before the commencement of annuity business, pensioners’ money go to PFAs at will as the law compels employers to deduct the money and remit to PFAs without any marketing efforts.

With the ongoing tussle, industry watchers are afraid that the retirees, whose money they manage may be at the receiving end of the situation.

Already, they are at the receiving end because the rate of unhealthy competition and de-marketing goi g on between the two sub sectors is enough to throw the retirees into confusion and indecision on which way to go.
But Mr. Tinashe Muyambo, General Manager, Leadway Life Assurance, said he is happy that the two regulators are working on the issue.

He advised both PenCom and NAICOM to ensure they take a rational decision on the circular to come up with resolution that will work for the two industries.

He said Leadway has resolved to hold unto and be committed in fulfilling all the promises it gave to its retirees.
According to him, Leadway Life, has between 15000 to 20,000 annuitants under its management and pays close to N1 billion to them every month.
He said the company, will continue to do this because of its understanding of importance of annuity fund in every economy.

“Annuity, is an important business, economist said it is the backbone of an economy because it is savings put back to economy to generate income used and given back to the annuitants.
He said understanding the importance of annuity, Leadway has assembled professionals and actuaries from across the globe to help it understand its liabilities and investments in annuity business.

“It is very certain we will be there for life therefore we ensure we manage risk properly comply with all regulations to ensure we generate ongoing and sustainable business for life”, he stated.

Chief Executive officer, IBTC pension Managers,Binta Max- Gbinije, reacting to the development said the ongoing tussle which according to him was caused by marketers of annuity and programme withdrawal, insurance operators are equally tussling to gain higher market by convincing people to buy annuity instead of programme withdrawal.
He said what is currently happening between the two agencies is that everybody is looking for what is good for him.
He however said PenCom, as a regulator has no interest anywhere.

PenCom, he added, is actually implementing the law adding that what the commission is currently doing is written in the law that retirees should choose between programme withdrawal and annuity.
“What PenCom is insisting is that we should do things the way the law intended. All the pension assets should remain under custody as provided by the law”.

“It should be under custody. If you are doing annuity before now, the asset should be under custody.
According to him, before the circular, there are people doing annuity that have their assets with PFCs.
“I mean insurance companies so it is not anything new.”What is happening in the industry is a function of perception and where you have the agents, who are selling because those on annuity will tell you that some of the promises made have not been met.”

“So it is a case of people mis- selling. But when we have a portal or a product where all the information is made available to everybody and you can choose, the problem will be solved”. He explained.
He insisted that PFAs, have no interest de marketing anybody, adding that though he manages a PFA, he can even buy annuity when he retires because it serves a particular purpose.

He explained that what penCom is doing is to put everything under control and ensure that retirees get their pay every month.

According to the IBTC Pension boss, PenCom, knows how long every retiree under programme withdrawal will earn his monthly pay, the month he did not receive pay and so on .
He said the commission, in giving out the circular, wants to have the same information on retirees under annuity.
He said rather than the ongoing tussle, what insurers should ask is this, the requirement in the circular,is it going to help the contributor get his regular pay, is it going to safeguard his asset and if the answer is yes, then why resisting it.

He however said there is very active engagement to ensure that the issue is resolved.