You Can Calculate Your Pensions Yourself

Owning your Retirement Savings Account (RSA) is one of the key features of the Contributory Pension Scheme (CPS).

Interestingly, the scheme allows RSA holder to have a grasp to his/her details and monitor its growth or depleting end of it where there is a lapse.

Barely two decades of its existence, the scheme has not only offered hope for a befitting retirement but also ensures sustainable and transparent pension ad­ministration. For retirees under the CPS, understanding how monthly pensions are paid, how pensions are calculated, and how enhancements can be made over time is crucial.

How Monthly Pensions Are Paid

Retirees under the CPS have two pri­mary options for receiving their monthly pensions: Programmed Withdrawal and Annuity.

Programmed Withdrawal is managed by Pension Fund Administrators (PFAs) and involves structured monthly pay­ments drawn from the retiree’s Retire­ment Savings Account (RSA).

Annuity is a life insurance product purchased from an insurance company, ensuring steady monthly payments for life.

The disbursement process depends on the type of benefit being accessed. For example, Programmed Withdrawal involves monthly payments structured over the retiree’s expected lifespan.

The 25percent Loss of Job benefit al­lows employees who lose their jobs and remain unemployed for at least four months to access 25percent of their RSA balance.

The 25per cent Equity Mortgage bene­fit allows a portion of the RSA to be used as equity contribution for a mortgage, subject to specific conditions.

For Death Benefits, the RSA balance is paid to the designated beneficiaries.

All disbursements start with the cus­tomer completing the necessary docu­mentation for the benefit type, obtaining approval from PenCom, and then receiv­ing payment.

How Pensions Are Calculated

The calculation of monthly pensions depends on several factors.

First, the balance in the RSA is a key determinant, which includes contribu­tions made by both the employee and em­ployer, plus accrued investment returns, forming the total RSA balance at retire­ment. Second, life expectancy assump­tions are made, and PenCom periodically determines the average life expectancy used in calculating the programmed withdrawal.

Third, retirees can withdraw up to 25% of their RSA balance as a lump sum, pro­vided the remaining balance can fund a reasonable monthly pension.

The monthly pension under Pro­grammed Withdrawal is calculated using the formula: Monthly Pension = RSA Bal­ance / Number of Expected Monthly Pay­ments (Life Expectancy in Months). For example, if a retiree has an RSA balance of N10 million and a life expectancy of 20 years (240 months), the monthly pension will be approximately N41,667 at the start of the programmed withdrawal.

For retirees choosing annuities, the in­surance company determines the month­ly pension based on the purchase price, interest rates, and life expectancy.

Conditions for the Calculations

Pensions are calculated only when the individual has reached the statutory re­tirement age of 60 years or has completed 35 years of service.

Individuals who retire before the stat­utory age may access their RSA balance but must meet specific conditions, such as being out of employment for at least four months. In the event of the retiree’s death, the remaining RSA balance is paid to the designated beneficiaries.

Impact of the New National Minimum Wage on Pensions

In line with President Bola Ahmed Tinubu’s approval of the new National Minimum Wage Act, which increased the wage from N30,000 to N70,000, PenCom has updated its regulations.

If a retiree’s monthly or quarterly pen­sion is less than N23,333.33 (one-third of the current minimum wage), they are al­lowed to withdraw their RSA balance en bloc or continue receiving their current pensions pending the commencement of the Minimum Pension Guarantee Pension Fund Administrators (PFAs) must now use ₦70,000 as the basis for processing retirement benefits under the relevant provisions.

This adjustment reflects the com­mitment to ensuring retirees receive adequate support to meet basic living standards.

Understanding Basic Lump-Sum Withdrawals

Retirees can withdraw a portion of their RSA balance as a lump sum, subject to PenCom’s regulations.

The lump-sum amount is determined such that the remaining RSA balance can provide a monthly pension of at least 50percent of the retiree’s last monthly basic salary.

This provides immediate liquidity for retirees to address pressing financial needs, such as settling outstanding debts or making investments.

However, taking a larger lump sum reduces the RSA balance available for monthly pensions.

Movement in Fund Unit Prices and Associated Fees

The fund’s unit price fluctuates based on market conditions and the perfor­mance of the underlying investments during the period under consideration.

The returns for the fund are calculated after deducting audit fees and manage­ment fees. Management fees comprise fees charged by the PFA, Pension Fund Custodian (PFC), and PenCom.

These fees vary depending on the specific fund and are calculated either on the Net Asset Value (NAV) or as in­come-based (derived from income gen­erated by the fund during the period), as is the case with Fund IV.

Enhancing Monthly Pensions Over Time

To ensure that retirees receive im­proved monthly pensions, several mea­sures can be implemented within the CPS.

First, PFAs should adopt robust asset allocation strategies to maximize returns on pension funds, particularly by diver­sifying investments into infrastructure, real estate, and other high-yield sectors.

Second, encouraging voluntary contri­butions during active employment can significantly boost the RSA balance at retirement.

Third, employers can enhance an em­ployee’s pension beyond the 10percent statutory requirement.

In addition, lowering fees and charges associated with RSA management will leave more funds available for disburse­ment to retirees.

Fourth, introducing a mechanism to adjust pensions in line with inflation can maintain retirees’ purchasing power.

Fifth, educating employees about the benefits of making additional voluntary contributions and starting early savings is crucial.

Finally, offering incentives for employ­ees who delay retirement allows them to accumulate more savings and reduce the strain on their RSA.

The CPS provides a structured frame­work for ensuring retirees’ financial se­curity. Understanding how monthly pen­sions are paid, calculated, and enhanced can help individuals plan effectively for retirement.

By implementing measures to boost RSA balances, optimise investment re­turns, and reduce fees, the CPS can con­tinue to deliver sustainable and improved pensions, providing dignity and financial independence for retirees.