Maos Consulting Commentary on Circular 15 of 2019 -final

Your Actuarial, Insurance and Pension Partners
IPEC Circular Commentary
Circular 15 of 2019
16 January 2020

Introduction.
Circular 15 of 2019 (C15 of 2019), is increasing the pensions which could be commuted for a
lumpsum. It is also increasing amounts which can be preserved in order to buy pensions at
retirement for paid-up members within pension funds.
It appears the main objective of C15 of 2019 is to help pensioners preserve value in these
hyperinflationary environments.
What is pension commutation?
Pension commutation is defined as the giving up of all the pension payable from retirement in
exchange for an immediate lump sum.
So, under this C15 of 19, all pensioners receiving pensions lower than $6000 per annum, i.e.
$500 per month now have an option of giving up all their pension payable from retirement in
exchange for an immediate lump sum payment.
Commutation factors (calculated by the pension fund actuary) are used to determine the amount
of lumpsum that will be paid in exchange not receiving the pension. These commutation factors
are usually set as the present value of future pensions assuming the future life expectancy of
pensioners as well as future likely investment returns.
Why pensions are commuted?
Pensions are usually commuted in full if they are trivial, i.e. very small from both the
perspective of the pensioner and the pension fund.
From the pensioners’ perspective if the pension is so small that it is better off to be paid a
lumpsum than to continue receiving the small pension for various reasons, in this case because
of prevailing hyperinflation environment, for example, the cost of travel to collect the pension
maybe higher than the pension itself.
From a pension fund’s perspective, usually if the cost of administering the pension is relatively
higher than the pension.
In terms of C15 of 2019, pensions below $6 000 per annum (or $500 per month) are therefore
considered trivial .

The disadvantages of commuting pensions.
Commuting pensions has various disadvantages namely:
1. The lumpsum amount calculated may not be appropriately calculated. In our market
there is no guideline as to who should calculate this and how these amounts should be
calculated. This is worsened by the fact that it is very difficult to set long term
assumptions in a hyperinflation market.
2. If markets are depressed commutation are unlikely to lead to value preservations as the
lumpsum amounts to be paid maybe lower than the true underlying value of assets,
leading to commuting pensioners being paid low lumpsums.
3. Commutations may lead to a run down on the assets of the pension fund leading to
liquidity challenges. For example, it’s not clear how $500 per month can be considered
trivial given that the current average pensions being received are $184 per month
according to the Third Quarter Ipec Report. NSSA’s pension is also at $300 per month.
4. Commutations need to be clearly communicated to pensioners as some pensioners may
unlikely understand why their lifetime savings can just deemed trivial and be paid off
as a lumpsum.
5. Commutations are likely to exacerbate the low confidence in the pensions industry as
trivialising pensions may reinforce the outcry that after all there is no basis for saving
for retirement.
6. Most Life Insurers/ Pension Administrators are unlikely to encourage pensioners to
commute as this will lead to a depletion of the assets under management considering
that most pensions are receiving pensions below $500 per month.
7. There are also some psychological arguments that say pensioners tend live longer if
each month end, they are looking forward to receiving a pension, hence making them
commute these pensions may shorten their life expectations.

Amounts to be Preserved
In terms of the Pensions and Provident Fund Act and accompanying Regulations, if a member
withdraws from a pension fund through resignation s/he has an option to take her/ his Member’s
portion but is mandated to preserve the Employer’s portion which s/he can only access at
retirement to buy a pension.
Naturally it would make sense if this preserved amount is large enough to buy a decent pension
at retirement, hence the regulator should discourage preserving small amounts.
C15 of 2019 has raised the amounts which can be preserved from current $500 to the new
$6000. In addition, the circular has also given the Trustees a leeway to actuarially test if the
amount to be preserved can actually buy a pension greater than what the regular has deemed to
be a trivial amount, i.e. ability to buy a pension of more than $6000 per annum at retirement.
In some way there is now some consistency between the commutable pensions and amounts
to be preserved.
Conclusion
Though C15 of 2019, clearly seeks to preserve the value of pensioner’s benefits by giving
pensioners an option to receive full lumpsum amounts in advance, it may fail to achieve this
objective if the disadvantages highlighted above are not addressed. Ipec thus ought to need to
give clear guidelines as to how the commutations should be determined than leaving too much
discretion to Trustees. In additions, pensioners should also be given an option to have their
lumpsum either in cash, shares or property units.