Protecting Retirees’ Private Annuity Plan
As life insurance firms celebrate success in annuity business due to sudden interest by Nigerians, Ebere Nwoji reports that there are fears on the fate of retirees who entered into private annuity plan with companies that have weak financial base
Following the settlement of crisis between Pension Fund Administrators (PFAs( and operators of life insurance companies over annuity fund few years back, THISDAY findings reveal that growth in annuity business now surpasses insurance industry’s life premium.
Indeed many life insurance underwriters confess that annuity business has turned to be the cash cow of life insurance business.
By it’s simple definition, annuity is a contract between an investor and an insurance company in which the investor makes a lump-sum payment or series of payments and, in return, receives regular disbursements, beginning either immediately or at some point in the future.
The goal of an annuity is to provide a steady stream of income, typically during retirement.
Annuity Plan in Nigeria
In Nigeria, there are two forms of annuity plan the annuity under the contributory pension scheme controlled by the National Pension Commission through the Pension Reform Act 2014 and private annuity excluded from the pension reform act.
The annuity controlled by the pension reform act 2014 is one of the options provided by the act for retirees to receive the balance of their retirement benefit.
Under this arrangement, a retiree is permitted by the law after the receipt of his lump sum benefit to purchase annuity from insurance company of his choice and to receive monthly benefit for life.
Alternatively, the retirees can choose to receive his monthly benefit through programme withdrawal by leaving the money in the custody of his Pension Fund Administrator and after 18 years, he ceases to receive benefits from the company.
If the retiree chooses to buy the annuity plan the insurance company will manage the money for him and pay him monthly from the annuity plan till the rest of his life.
Annuity plan could be immediate or deferred annuity. With immediate annuity, the annuitant starts receiving his entitlement immediately with ten years guarantee and if he dies before ten years the benefit will be paid to his dependents.
PenCom intervention
Before the crisis over the annuity business under the contributory pension scheme, insurance firms were the custodians of the annuity fund but in 2016, the National Pension Commission under the administration of Chinelo Anohu Amazu raised an objection to this saying that the development was totally against the stipulations of the Pension Reform Act 2014, which states that all pension funds should be in custody of pension fund custodians and after much tussle, PenCom gave all life insurance firms three months to transfer every pension fund under their custody to Pension fund custodians.
PenCom shortly after this lifted the ban placed on life firms from underwriting annuity and with this, many life insurance firms bounced back to annuity business.
The following are life insurance firms operating in Nigeria: African Alliance Insurance Company, AIICO Insurance, Capital Express Assurance, Custodian Life Assurance, FBN Insurance, Mutual Benefit Life Assurance, Old Mutual Nigeria Life Assurance, Royal Exchange Prudential life Assurance, Standard Alliance life Assurance, Tangerine Life Insurance, Coronation Insurance, Zenith Life Assurance, Heirs Life , Stanbic IBTC Insurance, Enterprise life Assurance.
There are also some composite firms that write life businesses such as AXA Mansard, Cornerstone Insurance, Allianz Insurance, Gold link Insurance, Great Nigeria insurance, Industrial and General Insurance, Leadway Assurance, NICON Insurance, Niger Insurance, NSIA Insurance and Alliance &General insurance.
Most of these companies underwrite annuity business both the form under the control of PenCom and private annuity.
Some underwrite both the annuity under the contributory pension scheme and private annuity while some underwrite only the private annuity.
Before now, retirees were more familiar with programme withdrawal option of benefit but in recent times, many retirees prefer annuity because it guarantees their payment for life.
Also with recent developments like the outbreak of COVID-19, many people are beginning to embrace savings windows like annuity even owners of private businesses.
Fears
This has raised the fears on what the future of these life savings pensioners will be should any of the companies they saved their money with under private annuity arrangement goes down.
The fears are there because unlike the PenCom controlled annuity, the private annuity has little or no security as such if the underwriting company goes down, the annuitants will have no where to run to.
Barrister Ivor Takor of Pension Rights Advocacy said this was exactly the fear expressed by PenCom that made the commission to insist that all annuity funds under the Contributory Pension Scheme should be transferred to pension Fund Custodians.
He said with the current arrangement, even if any of the companies underwriting annuity should go down there is no cause for alarm as the funds they have underwritten is in the custody of Pension Fund Custodians.
For the private annuity, he said this is where there is fear because if the company goes down, the annuitants have nowhere to fall back to.
Among the life insurance underwriters, annuity has turned to be as juicy as government business.
Indeed some annuity underwriters confessed that the business was growing every day and was making the premium of life underwriters robust.
Future of annuity
The commissioner for Insurance, Mr Sunday Olorundare Thomas at one of the media retreats organised by NAICOM for journalists once told insurers that the coast was very bright for them, adding that although in other climes, pension fund is built inside insurance fund but the case in Nigeria is different but that his consolation is that all the trillion Naira declared by pension fund administrators and custodians as assets would later find their way to the vault of insurance firms through annuity underwriting.
This was confirmed by the Managing Director Great Nigeria Insurance Plc, Mrs. Cecilia Osipitan whose company Great Nigeria Insurance in 2021 had its portfolios boosted by annuity business.
According to her, the company at the end of first quarter 2021, recorded impressive growth in its annuity portfolio to over N4.7 billion, indicating an 8,876.05 percent increase over N52.5 million recorded during the same period in 2020.
The composite insurer said the continued drive for market expansion was part of the comprehensive growth strategy that formed the bedrock upon which the company was built.
Oyinkansola Sobande, corporate communications and brand manager, of the company wooing other retirees to patronise the annuity plan, said that retirement should be the time to live that stress-free life after years of active engagement and not a time of financial difficulties.
She added that annuity sets out to protect the future of retiree through guaranteed income for as long as they live.
Annuity Over life insurance
THISDAY finding shows that since the settlement of the crisis on annuity business, it has turned to be the life wire of life insurance firms in terms of premium generation .For instance, Figures released by the Nigerian Insurers Association (NIA) showed that while gross premium income for life business increased by 27.6 percent (to N161.7 billion in 2017 from N126.7 billion in 2016), annuity business grew by 33.9 percent to a whopping N77.8 billion from N58.1 billion in 2016.
A breakdown of the figures show that while annuity business represented a 48 percent contribution to the life premium, group life business added N44.6 billion to the life premium to represent 28 percent contribution, while individual life business added N39.3 billion to represent a 24 percent contribution.
As at the end of second quarter 2019, the National Insurance Commission (NAICOM) said life annuity portfolio stood at N323 billion even as volatility, inflationary pressure and low returns on investment during the period compelled some insurance firms to suspend annuity business while others reduced their profit due to shrink in profitability.
Within the period, companies like Royal Exchange Assurance, African Alliance Insurance, and LASACO Assurance suspended their annuity business to concentrate on the older business
Niger insurance and AIICO insurance limited new businesses but currently, AIICO has bounced back to private annuity business while transferring its pension related annuity business to Tangerine insurance.
Currently, some of the annuity underwriting firms are obviously weak, a company like NICON Insurance Corporation, Niger insurance, Industrial and General insurance, Standard Alliance life, Alliance and General among others are showing signs of comatose, annuities underwritten by them under private arrangement has already gotten problem since they are unable to pay claims.
Though some of them like NICON and Niger Insurance have strong assets but they have been trying to convert such assets to liquid over the years without success creating fears among their insured what future holds for them.
Talking about annuity business, any body who bought annuity from any of them under private arrangement has automatically plunged himself into old age poverty which he or she was trying to avoid by buying the annuity plan.
This has raised the question on despite all the attractiveness of annuity plan especially the private annuity arrangement where is the security against any risk of underwriters’ failure.
Fears in other climes
The American Pension rights advocate expressed this same concern in a recent article titled: “As insurance companies take over pension plans, are your payments at risk?”
It reported that as insurance companies take over corporate pensions, advocates are concerned about risks to retirees.
The researcher Gretchen Morgenson noted that while risks associated with underfunded pensions for state and local government employees have been known for years, a new concern has arisen, pension rights advocates said this concern centers on the growing trend of insurance companies taking over pensions for employees of private companies.
“This is what we’ve worried about — when companies sell off their pension plans,” said Karen Friedman, policy director at the Pension Rights Center, a nonprofit focusing on workers’ retirement security. “Is it safe to transfer money out of pension plans insured by the [government-backed] Pension Benefit Guaranty Corporation to insurance companies where the protections for consumers are scant?”
Pension obligations are costly and companies have been eager to jettison them in recent years. Insurers have been happy to take on their assets — such deals have totaled $110 billion since early 2015.
But pensions taken over by private insurers are not protected from default by the government-backed PBGC, which protects the pensions of most private company employees. In addition, insurers are regulated by the states, not the federal government, and some are now affiliated with private equity firms, whose focus is often on short-term profits which can conflict with insurers’ long-term obligations.
Annuity Generally
Speaking on annuity generally, the New Business Development Manager, AIICO Victor Owotorose said annuity can be tailored to the specific needs of the buyer.
He said in addition to choosing between a lump-sum payment or a series of payments to the insurer, you can choose when you want to annuitise your contributions—that is, start receiving payments. An annuity that begins paying out immediately is referred to as an immediate annuity, while one that starts at a predetermined date in the future is called a deferred annuity.
“The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time, such as 25 years, or for the rest of your life. Of course, securing a lifetime of payments can lower the amount of each check, but it helps ensure that you don’t outlive your assets, which is one of the main selling points of annuities,” Owotorose said.
