Custody of annuity fund: PenCom, NAICOM fight rough over fees, commission

As the controversy over the custody of Retiree Life Annuity fund between the National Pension Commission (PenCom) and the National Insurance Commission (NAICOM) rages on, stakeholders are of the opinion that both regulators are not having the interest of retirees or life insurers at heart.  They are only fighting for the fees, levies and commissions that will accrue from annuity. EMEKA OKEAGU, a financial analyst writes from Abuja;

On November 3, 2016, the National Pension Commission (PenCom) issued a Circular Ref: PenCom/INSP/CIR/TECH/16/17, directing Life Insurance Companies underwriting Retiree Life Annuity (RLA) under the Pension Reform Act (PRA) 2014 to transfer their RLA assets to licensed Pension Fund Custodians (PFCs) as mandated by the pension law.

Section 56 of the Act states that “from the commencement of the Act, pension funds and assets shall only be held by PFCs licensed by the Commission under this Act.”

The Circular stated that custody of RLA funds has to reside with PFCs and that insurance companies currently underwriting RLA are required to transfer existing RLA portfolios to PFCs of their choice within 3 months ending January 31, 2017.  In addition, approval and release of funds for new annuity requests was put on hold pending when insurance companies would open operational accounts with PFCs to receive any new premium.

Before the Circular was issued, PenCom had on October 26, 2016 communicated to the National Insurance Commission (NAICOM), its resolve to bring RLA assets of insurance companies under the custody of PFCs and by extension under its purview.

PenCom is in the process of issuing guidelines on how Pension Fund Administrators (PFAs) are to treat pending RLA requests by old and fresh retirees during the transitions period and pending when affected Life Insurance Companies open Operating Accounts jointly with the PFCs of their choice and meet the asset transfer modalities put in place by PenCom.

Going back memory lane

The PRA 2004 created a Pension sub-sector for the Nigerian finance industry, it set up the Contributory Pension Scheme (CPS) and established PenCom to regulate pension business, operators and industry generally.  The law allows a retiree under the scheme to draw his/her pension by way of Programmed Withdrawal provided by a Pension Fund Administrator or Annuity for life purchased from a Life Insurance Company licensed by the NAICOM.

The first set of pensioners under the CPS retired in July 2007 and up till 2009, retirees under the scheme only had the option of Programmed Withdrawal because of the recapitalisation and consolidation programme in the insurance industry then.  PenCom and NAICOM started collaborating in 2009 after the exercise ended and jointly issued a Regulation on Annuity in 2010, making it possible for retirees to choose annuity if they want.

Meanwhile, the disagreement over the custody of annuity assets between NAICOM and PenCom has been on for the past last two years.  While PenCom wants the assets domiciled in PFCs like other pension assets as provided in Section 56 of the PRA 2014, NAICOM maintains that Life Insurance Companies are free to hold RLA assets in line with the business and practice of insurance.

PenCom insist on custodian arrangement

The National Pension Commission has explained that its directive, asking insurers to transfer Retiree Life Annuity assets to Pension Fund Custodians was predicated on the need to safeguard pension funds under the Contributory Pension.  It said the security of pension funds under CPS is anchored on separation custody of pension assets from administration of the fund in line with provisions of Section 56 of the PRA 2014.

According to PenCom, transferring Retiree Life Annuity assets to PFCs would put to check some of the unwholesome and unethical practices in the business.  These include but are not limited to discounting annuity premiums and paying it back to retirees by insurers, delays in transferring annuity premium to insurers by PFAs therefore causing a gap in payment of pension to retirees among other things.

The Commission also maintained that Annuitants would enjoy Minimum Pension Guarantee (MPG) as provided in Section 84 of the PRA 2014 when it becomes effective only if RLA fund is domiciled in the industry.  It argued that since MPG will be jointly funded by the Federal Government, PenCom and pension operators, domiciling RLA assets outside the pension industry automatically disqualifies Annuitants from benefiting from it.  In the alternative, such annuitants should rather draw minimum from the Insurance Fund kept by NAICOM.

NAICOM wants insurers to keep annuity assets

On the other hand, NAICOM is strongly opposed to the position of PenCom.  It insists that what an insurer sold to an Annuitant is only a PROMISE to pay him/her pension for life in return for a premium and not to manage annuity assets on behalf of the Annuitant.

Justifying its position, NAICOM argued that an Annuitant does not run the risk of depletion of his pension fund since the insurer has assumed this risk.  Should the annuitant live longer than expected, the insurer suffers a loss and should he live less than expected the insurer makes profit.  This will be in addition to the profit accruing to his annuity fund.

NAICOM also said there is no need for the separation of the administration of annuity assets from its custody, adding that Life Insurers should be free to hold and manage their RLA assets and do not need a custodian since the interest of the annuitant is only concerned about the promise to pay his monthly or quarterly pension promptly.

Should the RLA fund get depleted, the insurer will make it up whereas PFAs only manage pension funds on behalf of RSA holders.  The retiree takes the profit or loss whereas the PFA earns commissions on profit raked in from the investment of pension funds on behalf of retirees.

The insurance regulator also argued that it is exclusively empowered to regulate insurance business, to ensure safety of insurance funds and assets including Retiree Life Annuity fund.  Moving the Retiree Annuity assets to Pension Fund Custodians would amount to usurping its powers, it reasoned.

Lacuna in the Pension Law

With this controversy raging and both regulators holding onto their positions, it is evident that there is a lacuna in the laws relating to RLA fund custody.

The PRA 2014 allows a retiree to draw his pension by way of either programmed monthly or quarterly withdrawals calculated on the basis of an expected life span or annuity for life purchased from a Life Insurance Company licensed by NAICOM with monthly or quarterly payments in line with guidelines jointly issued by PenCom and NAICOM.

The first problem here has to do with the Regulation of RLA business.  The law did not empower any of the two feuding regulatory bodies to do this it rather placed a joint responsibility on them, asking them to issue guidelines for the business jointly.  The law was silent on how to resolve disagreements between the two agencies of government when there are disagreements.

The second problem lies in the fact that Retiree Life Annuity is an insurance product licensed and regulated by NAICOM in line with insurance laws and practice.  But custody of all annuity assets is placed squarely on the shoulders of Pension Fund Custodians licensed and regulated by PenCom as provided by Section 56 of the PRA 2014.

Another controversy relates to whether Retiree Life Annuity is an insurance or pension product.  If it is a pension product then custody of the assets should rightly be with PFCs as demanded by PenCom but if it is an insurance product, Life Insurers could hold and manage such assets in line with relevant insurance laws and regulations and propagated by NAICOM.  The law did not make any provision on this as such the two regulator feud over control of RLA assets.

Also serious confusion could arise over the investment of RLA assets and payout of its benefits should custody revert to PFCs.  Before now, RLA assets used to be managed in line with guidelines issued by NAICOM whereas PFCs honour instructions on investment of fund and payment of benefits from PFAs only if they are in tune with guidelines issued by PenCom.  Where there are disagreements between guidelines issued by PenCom and NAICOM, which guidelines will Life insurers follow bearing in mind that they are not regulated by PenCom and which guidelines will PFCs follow since they are not regulated by NAICOM.  The law was not specific on this.

Life Insurers’ Position

For a life insurer, continuation of the RLA business and the need to invest premium to earn enough return to pay annuitants and return dividends to shareholders is uppermost in his mind.  He is not worried about who holds the fund in trust for him since the custodian will not interfere with its administration.

If a life insurer is allowed to hold the fund, it will render returns to NAICOM but if custody goes to a PFC, he will render returns to PenCom.  Wherever the pendulum swings, the life insurer will make returns, he will pay fees, levies and commission as the case may be to a regulator, PenCom or NAICOM.

For this reason, life insurers are not bordered about who keeps custody of the annuity fund.  Most of them are ready to open Joint Operational accounts with PFCs and transfer annuity assets under their purview so long as their business is not interrupted.

Annuitants position

The Annuitant is only interested in getting his monthly or quarterly annuity paid promptly.  For as long as his insurance company is able to deliver on the promise, he does not need to know how, where and when the insurer invests the premium he paid.  Whether a PFC holds the fund or Life Insurer the retiree is not going to get more that the agreed amount monthly or quarterly payment under contract.

Stakeholders’ position

If the retiree is not interested in who takes custody of annuity assets and the insurer is not bordered about where the fund is kept since he enjoys unrestricted access to it for investment purpose and can draw his profit as at when due, then why the feud?

Stakeholders in retirement benefits administration in the country believe that PenCom and NAICOM are not fighting over the security of the fund or in the interest of the retiree and operators.  They are feuding over who takes the fees, levies and commissions accruing from Retiree Life Annuity business. If the fund is kept with PFCs, PenCom is statutorily empowered to earn fees, levies and commissions payable on the business whereas if a life insurer should hold it, NAICOM will be the one to rake in the fees, levies and commissions from the business.  This seems to be where the crisis lies, stakeholders observed.

An insurance and pension practitioner who spoke on condition of anonymity said “the two bodies are not really declaring their interests and the underlying cause of the disagreement.  I believe they are fighting over who should earn the fees, levies and commission on retiree life annuity business and capitalising on the lacuna in the law to justify their positions.”

“They are not fighting over the protection of the fund since both regulators have the capacity to adequate protect Retiree Life Annuity fund.  They are not fighting in the interest of the operators since the insurer still retains his business and earning capacity no matter who takes custody of the fund.  They are not fighting over the well-being of retirees because they cannot be denied their monthly or quarterly annuity no matter where the fund is domiciled.  It is only a fight over the income that accruing from annuity business,” he declared.

Another practitioner, pleading anonymity advised that “since PenCom ensured accumulated and protection of the fund and NAICOM is overseeing its safety and payout in line with the agreement, the two bodies should share the benefits flowing from the business.  They should agree on a sharing formula.  This is the only way forward.”