Rationale behind review of retirement benefits for CPS under PRA 2014

By Dr Pius Apere (PhD/FCII) (Actuarial Scientist and Chartered Insurer) Chairman/CEO, Achor Actuarial Services Limited

Introduction

The framers of the law, PRA 2004 (as amended), did not consider the importance of pension increases when designing the two pension products in the CPS, namely Programmed Withdrawal (PW) and Retiree Life Annuity (RLA), to provide retirement benefits for the Retirement Savings Account (RSA) holders at retirement. Alternatively, the framers made provision for Guaranteed Minimum Pension (GMP) in section 84(1) of PRA 2014 to protect the RSA holders against some of the risks of low investment returns and the erosion of pensioners’ incomes by inflation. However, the economic hardships facing the retirees have called for review of some aspect of retirement benefits design in CPS as explained below.

PW Product Design

The delay in the implementation of GMP could be considered to be the main reason for PENCOM’s approval for redesigning PW product with Enhanced Pension (EP) feature for ONLY PW retirees effective from December 2017 which is akin to allowing for pension increases. EP is aimed at providing sustainable standard of living for the PW pensioners which in turn cushioning the effect of the non-implementation of GMP for only PW retirees at the detriment of RLA retirees as they were not considered in the review.

In an event held at Eko Hotel in Lagos on 26th June 2025, PENCOM had expressed worries about “the impacts of inflation on [CPS] savings [and proposed] to ensure that pension fund operators generate inflation plus returns for retirees and RSA holders”. The inflation-proof investment returns will be achieved by encouraging pension fund operators to invest in alternative assets thereby diversifying their portfolios. The resultant effect of targeting inflation-proof investment returns is to enhance a significant growth in the pension pot (RSA) at retirement and to cushion the effect of inflation on retirees’ regular incomes. The inflation-proof investment returns will be quite appropriate for PW retirees since their RSA balances after retirement are invested solely for their benefits.

RLA Product Design

The current RLA product design provides a regular fixed income for life as long as the RLA retiree is alive. In practice, the fixed regular income has been eroded by inflation over time leading to RLA retirees living in abject poverty relative to PW retirees who are receiving EP.

The CPS-Pack-2020 (A Guide for Retirees under CPS), jointly signed by both regulators (PENCOM and NAICOM) on 1st September 2020 stated that the periodic pension enhancement [for RLA retirees] may be applicable depending on the type of [RLA product] purchased”. Section 4.3 of Revised Regulation on Retiree Life Annuity Pursuant to the Pension Reform Act 2014 dated 1st September 2020 stated that “a retiree shall be at liberty to have increasing annuity features as an option subject to the RLA product being approved by NAICOM”. Thus, NAICOM has the regulatory backing to approve a separate RLA product design with increasing annuity feature (or periodic pension increase) for retirees to cushion the effective of inflation thereby making RLA product competitive.

PENCOM’s proposed inflation-proof investment returns from investments of the RLA Provider’s diversified portfolio (even though ring-fenced) may not directly benefit the RLA retirees if there is no alternative product design different from the current RLA product.

Gratuity Scheme Design

Gratuity is a defined benefit, a one-time lump sum payment, made by an employer to an employee upon retirement or when the employee leaves the organization after completing a minimum number of years of continuous service. Gratuity scheme (GS) is usually non-contributory as only the employer contributes to the scheme, which varies depending on the annual actuarial valuation of the gratuity liabilities in accordance with International Accounting Standard (IAS) 19 Employee Benefits.

Section 7(1) (a) of PRA 2014 allows a lump sum benefit (determined by PENCOM) to be withdrawn from a RSA holder’s total RSA upon his retirement or attaining age of 50 years whichever is later. Section 4(4) (a) of the Act explicitly allows employers to offer “additional benefits to the employee upon retirement”, which can include gratuity, severance benefit etc. that existed prior to 2004 and yet both the Federal and State Governments, alongside a number of private sector employers, ceased the payment of gratuities to their employees with the commencement of the CPS in 2004. However, many private sector employers in recent times have established standalone gratuity schemes to improve their employees’ standard of living in retirement but in compliance with PENCOM’s Guidelines for the Administration of Gratuity Benefits in April 2017 to ensure that full funding of gratuity liabilities is guaranteed.

The Director General (DG) of PENCOM has proposed to introduce gratuity benefits for the Federal Government public servants under the CPS during a meeting held on 13th June 2025 between the DG and Head of the Civil Service of the Federation (HCSF). Any decision to reinstate gratuity scheme into the CPS must be backed by law, which will require an amendment to the PRA 2014, particularly Section 7(1) (a) of the Act to avoid duplication of payment of lump sum benefits. In the same vein, State Governments are likely to introduce similar gratuity schemes for the state public servants.

The only possible constraint will be the Federal and State Governments’ ability to fund their gratuity liabilities including the cost of actuarial valuation whether as standalone scheme or embedded in CPS. The latter scenario will result in a Hybrid “Middle-way” scheme in operation – a scheme which offers both defined benefit (GS) and defined contribution (CPS) sections.

Conclusion

The review of retirement benefits for CPS under PRA 2014 as highlighted above is a welcome and commendable initiative to improve the retirees’ welfare.