The Current Annuity Fund Arrangement




The Current Annuity Fund Arrangement – A Threat or Blessing to Insurers

Paper Presented By Alhaji Auwalu Muktari, Group Managing Director, Royal Exchange Plc at the 4th BusinessToday Insurance & Pension Awards on Wednesday, May 31, 2017.

 

Distinguished Guests,

Gentlemen of the Press,

Ladies and Gentlemen,

It is with great honour that I stand before you today on this occasion of the 4th Business Today Insurance and Pension Awards. I bring you warmest greetings and regards from the Group Managing Director, Alhaji Auwalu Muktari, who is away on an official assignment in Abuja. This paper is being delivered on his behalf, and I am Wale Banmore, Managing Director, Royal Exchange Prudential Life Assurance.

I find this topic very interesting because it directly affects my company and the Royal Exchange Group, especially as I head the life insurance subsidiary of Royal Exchange Plc.

As this is an insurance and pension forum, I will presume we understand the terminologies of the trade but for ease of understanding, let us start with a few basic questions:  What is Annuity? What are the various types? How does Annuity Work? Why the decision to move the Annuity Funds to PFA? Potential Impact to the Insurance Industry in Nigeria?

The Annuity Policy is a financial product that allows for periodic payments to be made to the person who has made a lump sum or periodic payment to the insurance firm, in this case, Royal Exchange from a predetermined date. It could be of two types: immediate and deferred.

Immediate Annuity:

You may choose your annuity payment to begin immediately after you purchased it. If you choose an annuity interval/period of one year then the first annuity payment will be made one year after the annuity is purchased.

Deferred Annuity:

Here the period of the annuity payment is scheduled to begin at some future date e.g. you may purchase an annuity this year and decide that the annuity payments should begin in 5 or 10 years time.

So it means that with Annuity, the policyholder has two options to choose from, depending on his/her economic plans and desires at the time.

Now let us look at the differences between the Annuity and Programmed Withdrawal, which is the main mode of payment from the PFAs.

With the programmed withdrawal, the retiree can choose to terminate his contract and purchase an annuity. Upon death, the listed balance in the RSA Account is paid enbloc to the registered beneficiary and returns on investment are credited to the retirees’ account, which provides the possibility for enhanced payouts.

The New Guidelines

Under the new guidelines recently issued by PENCOM and NAICOM, the annuity funds from all insurance companies who issue annuity policies will be transferred to Pension Fund Custodians (PFCs) of their choice. This amounts to over 34,312 annuitants having their funds, N167.84 Billion, leaving the insurance industry and moving to the designated PFCs. N167.84 Billion.

Going forward, all life insurance companies doing Annuity are directed to open operational accounts with the PFCs and all new annuities will be processed through the PFCS and not insurance companies. This effectively means that the insurance industry will be losing over N150 billion to the PFCs, as they will be the custodians of the annuity funds.

Issues:

The CPS Law: The law establishing the Contributory Pension Scheme 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 a programmed withdrawal of the pension savings with a Pension Fund Administrator (PFA). Has this aspect of the law been changed?

Investment Income for Insurance Companies: With the movement of over N150billion from the coffers of insurance companies to PFCs, insurance companies will definitely witness a significant drop in their profit margins, as there will be less investment income. How do they compensate for this drop?

Non-inclusion of Insurance Intermediaries: The new guideline, issued jointly by NAICOM and PENCOM makes no mention of insurance agents and brokers. The question is then, who will pay the insurance broker or agent their commissions and from which premium, since the funds have been transferred to the PFCs. Let us all remember that brokers and agents play key roles in the sale and distribution of insurance products in Nigeria.

Another key issue is asset liability balancing in the event of loss in investment, who will bear this cost? If an annuity asset loses value, the insurance company will cover this gap, but how will all this work out now with the new arrangements in place?

Unhealthy competition between the PFAs and Life Insurance Companies: A lot of retirees are opting for annuity policies over programmed withdrawal, as they have more access to their funds than through the programmed withdrawal. Could this be a major reason?

Way forward

NIA as a Pressure Group: One critical success factor in the interplay between PENCOM and NAICOM is the umbrella body of insurance companies in Nigeria, the Nigeria Insurers Association (NIA). It is important that the insurance industry speaks with one voice and presents a unified front in the campaign to ensure the Annuity funds remains with the life companies.

Losing over N150billion to the PFCs will result in a deep cut in the pockets of life insurance companies in Nigeria and will be the second time the insurance industry is losing a part of its business, after the transfer of Workmen’s Compensation to the National Social Insurance Trust Fund (NSITF).

It is important also that NAICOM is alive to its responsibility of safeguarding the insurance industry by ensuring that policies will not be initiated that are detrimental to the growth of the industry. This way, we will all witness an insurance industry that will be a net contributor to the nations’ economy.

Conclusion

Distinguished guests, ladies and gentlemen, I hope I have enlightened you on the issues at stake here today. To answer the question: is the new policy a threat or blessing to insurers? Only time will tell.

Thank you very much for listening and I wish you all a successful deliberation here today.

 

Alhaji Auwalu Muktari

Group Managing Director

Royal Exchange Plc