By Mainza Masole
A lump sum or monthly pension?This question we have come to learn has a potential to ignite debate irrespective of the audience. As the Pensions regulator, this is good feedback because it indicates that the general public both young and old are considering provision of retirement income.
In this write up we shall endeavor to shed more light on this topical pensions matter. It our hope is that it will equip our readers with knowledge, information and skills to live a better life.
Since time immemorial, the question on the best option to provide for retirement income has been a matter that pension schemes, policy makers, other key stakeholders locally and globally, have grappled with. Pension benefits include a lump sum payment; income draw down and monthly pension paid by the scheme or through an annuity purchased from insurance companies. Options available to retiring employees vary across jurisdictions.
In Zambia, retirement income can be accessed through monthly pension only as the case is with the NPS for members who serve a minimum of 180 months; or a combination of a lump sum and monthly pension as the case is for LASF, PSPF and private occupational pension schemes. Central to any option that can be made available are the following key considerations: the level of income accorded in retirement; sustainability; and life expectancy.
It is important to explore how these variables play out in the retirement income options available in our local context.
A pension lump sum is a once off cash payment that a member of a pension scheme who has retired is paid by the scheme. As earlier alluded, those meeting the minimum requirement for a pension under the NPS will not receive a lump sum under the current legal framework. On the other hand, LASF, PSPF and private occupational schemes will pay to the extent permitted by applicable legislation. In the recent past there have been growing calls for all pension scheme, including the NPS to provide 100% lump sum payment of benefits to members.
Before responding to this call, it is important to reflect where we are coming from as a country. The National Pension Scheme had a popular predecessor, the Zambia National Provident Fund (ZNPF). We may have memories of how working individuals in communities looked forward to payment of a pension lump sum, “Mwabombeni” at retirement. It was also common that the money was all spent a few years down the line, while resulting in pensioners becoming destitute. The scenario outlined formed the backdrop of the landmark pension reforms in the 1990’s that saw the transition from ZNPF to NAPSA in 2000. This and other reforms aimed at strengthening the role of occupational pension schemes in provision of social security were undertaken to enable better retirement income outcomes.
Nevertheless, we cannot run away from the alluring appeal of taking a lump sum over a monthly pension. Therefore, it is important that we assess how the two options measure up to the key considerations for retirement income at any point this critical decision has to be made.
A 100% lump sum grants immediate access to pension benefits. One can use the funds as they please. You may even invest the funds into income-producing investments which if properly managed, may generate the same or better amount of income that the annuity would provide through its regular payments. Further, the pensioner retains control of the
principal to pass along to heirs.
On the other hand, the monthly pension payment option spreads out your accrued benefits over the remainder of ones’ life. The payments are low compared to a once off lump sum payment, but in Zambia this option includes 50% commutation of benefits.
Therefore, a pensioner who may wish to undertake their own investment activities can proceed while maintaining the monthly pension, which can cushion income in the event that the investment does not thrive.
Further, there are sustainability risks that have to be borne in mind for both lump sum and monthly pensions. The availability of viable investment options is a key concern for lump sums. The global economy has been sluggish over the past decade and our local economy has not been spared as well. Therefore, pensioners may require to be highly skilled in investment management or entrepreneurship to sustain their retirement income. One may argue that returns from fixed income securities have been superior enough to preserve the lump sum in the local economy, however, the key here is sustainability. Do we see current trends persisting in the long run?
The monthly pension has the advantage of transferring the risk of sustainability to the pension provider which maybe a pension scheme or an insurance company.
In this option it also possible to enhance income protection by opting for an indexed annuity. An indexed annuity structures the monthly payments in a manner that they are increased annually. Therefore, a pensioner is better protected against the rise in the cost of living. However, even with this option there is a risk that the employer or annuity provider may be rendered unable to pay pensions through bankruptcy.
The statistics on our population show that life expectancy in Zambia has been rising. This entails that more Zambians are living longer. Monthly pensions outrun lump sums by a mile on this variable for pensioners that live long. The risk of outliving one’s pension is high for lump sums given the depressed investment environment. Old age usually comes with reduced productivity and high expenditure on medical treatment. Therefore, a pensioner on a monthly pension may fare better as they will not be stressed about working to earn an income when they are sick.
Finally, we do not have a perfect system, but we can be rest assured that it meets the fundamental basics to make the vision of secure retirement income possible. How you choose to receive your retirement income is by far the most important decision that will affect the quality of your life in retirement
You can also call us on 211 251 401/5 for general enquiries.
Call 0950 136662 for insurance related complaints
or 0950 136663 for pensions related complaints.
The Author is the Manager-Prudential Supervision in the Pensions Department at PIA.