THE IMPORTANCE OF LANGUAGE IN CONSUMER CHOICE OF FINANCIAL PRODUCTS

Communication is key to effective choice when it comes to financial products and services. However, communication can be spun to create marketing advantages and disadvantages where products are fairly similar. Such is the case with #Annuities in Nigeria as was evident at the @Chuks Okonta’s Inspen Online curated Retirement Summit.

What are annuities and how do they work? When I mentioned at the seminar that pension payments, whether by a Pension Fund Administrator (PFA) or a Life Insurance Company (LIC), are both annuities, the session Chair and some members of the panel of discussants felt that I had caused more confusion between what we call Programmed Withdrawal (“an “Annuity Certain”) and Annuity (“Annuity Life”/ “AL”). I then had a side discussion with a pension specialist who mentioned that those who choose Programmed Withdrawal (“PW”/“Annuity Certain’) do have any choice on what they are going to be paid and that PWs, in fact, behave as ALs "because of a 5% reserve fund that must be set aside by PFAs to cover the possibility of a pensioner (an “annuitant”) outliving the certain period agreed with the PFA for pension (“annuity”) payments". However, paragraph 4 of the National Pension Commission (PENCOM) Revised Regulation on the Administration of Retirement and Terminal Benefits 2022 (‘the Regulations) appears to give such choices subject to its Standard Retirement Benefit Computation (SRBC) template to “guide the RSA (Retirement Savings Account) Holder.

It became important for me to continue this conversation on informed consumer choice in helping pension savers and retirees to make the choice between a PFA and an LIC easier despite the language models that are used in marketing communication to gain market share on consumer choices.

I decided to check materials online on annuities and decided to use the following definition from an only journalist site addressed as www.annuity.org:

“Annuities are contracts with financial institution (insurance and pension fund administrator companies). The customers provide money upfront, and in return get regular payments. These are received through annuitization (i.e., the conversion of an amount of money to periodic payments (“annuity”) over a defined period that could be monthly, quarterly or annually) or a guaranteed lifetime income benefit.” Italics mine.

Thereafter, I looked again for the definitions of Annuity Certain and Annuity Life as follows:

“An annuity certain is a financial instrument used for retirement planning. It provides an income stream for a predetermined number of years, remitted to the annuitant (pensioner) or, in the event of their death before full disbursement, to their estate. Payments from an annuity certain are made on a fixed and regular schedule, which can be monthly, quarterly, semi-annually, or annually.” Italics mine. www.insuranceopedia.com

A life annuity is a contract with a life insurance company that pays out annuities (pensions) while the annuitant (pensioner) is alive (subject to a guaranteed 10 years minimum payment period in Nigeria). The primary purpose of a life annuity is for an annuitant (“pensioner”) to receive a guaranteed income for life, meaning until the policyholder dies. Payments from a life annuity certain are made on a fixed and regular schedule, which can be monthly, quarterly, semi-annually, or annually.” Italics mine.? www.smartasset.com

So, for a person saving towards retirement in Nigeria, it is important to understand what risk that they are willing to take and also what legacy that they intend to leave behind for their beneficiaries when choosing between a PW (a contract of “Annuity Certain” with a PFA) and an Annuity (a contract of “Life Annuity” with an LIC). ?It is also important to seek the help of financial advisors in order to understand fund performances of various PFAs depending on their time lines to retirement.

On choice, post retirement, it is important to understand the following:

1.??? Payment of annuity from a PFA will be computed based on the SRBC (see also para 2 of the Regulations).

2.??? The SRBC composes of an adjusted Mortality Table similar to what a LIC would use, an assumption of rate of return on the lump sum from the RSA and applicable commissions and fees.

3.??? Annuity payments must be equivalent of 50% of final salary and the amount required to pay these periodic payments must be calculated before any lump sum in excess of what has been calculated can be withdrawn by the RSA holder

4.??? The Annuity payments must provide payments for life (similar to an Annuity Life from an LIC) subject to the adjusted mortality table. Below gives an example starting from the minimum age of 50 at retirement under the Nigerian PRA using the “Commissioners 2001 Standard Ordinary Mortality” (which I will call ‘STORM’) in comparison with the WHO Life Expectancy (Nigeria) Tables.

5.??? Where the amount in the RSA cannot provide 50% of final salary in retirement, the concessionary regulatory lump sum of 25% can be paid out in lump sum.

6.??? If the amount in the RSA cannot provide at least 1/3 of minimum wage (currently N30,000), i.e., 10,000, then the entire sum shall be paid out in lump sum.

It was clear at the Inspen Online curated Retirement Summit that consumers were not aware of their choices within predefined framework. There was also a lack of awareness of the valuation of pension annuity payments made by both PFAs and LICs as it would appear that low-income workers do not understand why NGN8000 should be paid monthly, and workers representatives complained about how many retirees are being left in penury. There were also suggestions of being paid a national pension in addition to their employment pension to help cushion the impact of high cost of living. A subject for another day.

The Summit achieved its purpose of starting an open conversation and it is hoped that this would help improve consumer awareness and enable consumer choices.

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Adetola Adegbayi

Lagos 26th April 2024