PENCOM and its latest improvements; thanks but no thanks

On 12/20/2022 PenCom issued a statement that the “The third edition of the pension improvement has been approved” which is for “existing retirees…who have accumulated significant growth in their Retirement Savings Account (RSA).”

An improvement is essentially an increase in the amount of pensions paid to pensioners on a monthly basis. The amount is paid out of your retirement savings account.

An improvement in pensions should be good news for retirees (programmed withdrawal pensioners), but it may not be.

According to the information received, the calculation is based on the following:

  • Sometime in late 2021, PenCom requested balances in the accounts of all retirees at the

October 2021 o In October 2022, PenCom directed PFAs to calculate, using an Excel template provided by PenCom, the amount of the retiree pension enhancement.

  • In December 2022, PenCom issued a statement regarding its third edition of the pension enhancement (see attached).

According to PenCom’s third quarter report, there are 315,112 retirees in programmed withdrawal for an amount of N13.88bn paid monthly.

A pensioners experience

Nairametrics spoke to a pensioner to gain an understanding of the impact of the “upgrade” on your financial well-being.

The pensioner, who preferred to remain anonymous, regretted that although they recognize the increase in pension payments, it lags behind inflation and is not enough considering the level of profitability recorded over the years.

  • “I started receiving a pension from my RSA at the end of 2016. Since December 2016, even after a monthly pension payment, my RSA has increased by 22.75% as of December 31, 2022. My PFA over those 6 calendar years through December 31, 2021 has returned an average return of 14.04%”
  • “Since 2016, the average annual withdrawal rate, that is, the pension payments for me, has been 8.05%. In other words, even though I am retired and collecting a pension, my RSA balance is growing at a faster rate than I am allowed to collect.”
  • “Last week I received a text from my PFA that under the 2022 pension enhancement program I am entitled to a pension enhancement and should call to find out how much. I called and was told it came up to an 8.67% increase (still subject to PenCom approval).”

The improvement is not good enough

While the decision to introduce the upgrade at a time of economic difficulty is appreciated, macroeconomic indicators suggest that it is not enough.

  • For example, Interest Rates: 17.50%, December Headline Inflation: 21.34% (Food Inflation is 23.75%), 20-Year Bond Yield: 14.80% (January 2042) or Yield of 10-year bonds: 14.75% (April 2032) and 5-year bond yield: 13.40% (February 2028).
  • These indicators suggest that the pensioner continues to be worse off.

Additional verifications by Nairametry suggest that the model for determining improvement rates is not transparent, making it difficult for a retiree to decipher how their improvement was derived.

An inquiry with a PFA on how the enhancement was determined suggests that the balance used was from October 2021, while an interest rate of 8% much lower than the long-term interest rate was used.

  • The AFP response was “Please note that the calculation of your RSA balance usage as of October 2021 was based on PenCom’s policy. The interest rate used in the calculation was also obtained from PenCom.”

A spreadsheet seen by Nairametrics also shows that assumptions that were not entirely explicable were used to determine the improvement, leaving retirees confused and with more questions than answers.

Questions to ponder

  • Are retirees defrauded?
  • Retiree RSA balances are growing, but payments are falling. Is it just about accumulating AUM and profit fees from traders?
  • Why are fees still included in the calculation when the general fund paid fees before the NAV per unit that is used to multiply the number of units to get the value of an RSA balance? NB: the custody fee is missing!
  • Why the mystery behind the spreadsheet? Where is the openness and transparency in the system?
  • Why the PenCom dictation? Why is PenCom approval required again?
  • Why is the upgrade only every 3 years?
  • Where is the competition if EVERY PFA is using the same template that returns the same result?

PenCom Improvement Policy

This article has been updated to reflect new information.

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