Rising pension cash-outs worry insurers
Lewanika Timothy | Monday April 15, 2024 06:00
Since October 2022, amendments to the Act have provided for enhanced withdrawals at retirement, raising the commutable or cash payout of the pension at retirement, from one-third to 50% of accrued savings.
In a briefing on the group’s financial results recently, BIHL CEO, Catherine Lesetedi, revealed that seven out of 10 pensioners are opting to liquidate the portion of their retirement benefits that the law allows, instead of saving them for the continuous monthly payments called annuities.
“The effected law on pension funds now allows for pensioners to cash out 50% of their retirement benefits as opposed to the previous 33.3%,” she said. “What we have seen is that seven out of 10 people now opt to cash out their benefits instead of purchasing annuities and we believe this will cause further liquidity challenges for the insurance industry.”
Lesetedi’s comments echo statements from the Debswana Pension Fund, which reported that in December 2022, 18 out of 21 members retiring in that month commuted the full 50% of their pensions.
“The regulations say up to 50% not that it should be 50%,” the pension fund’s CEO, Gosego January said at the time. “However, because it’s money and it’s available, we all want to take it.”
The changes in the percentage commutable on retirement came as part of wholesale amendments to the pensions sector after retirees’ incomes and the livelihoods of members had been ravaged by COVID-19, illnesses, rising interest rates and inflation.
Lesetedi said that the trend currently is that pensioners cash out 50% of their benefits, while industry experts said that this has resulted in the overall reduction of funds available for the purchase of annuities by as much as 16.67%.
Lesetedi further added that the changes to the Retirement Funds Act give Batswana capital but many do not have the financial acumen to handle this. The CEO labelled the situation as a “poverty trap”.
Most insurance firms have resorted to creating after-sales programmes for pensioners, establishing investment avenues for pensioners after they cash out their savings.
Pension sector experts and the Non-Bank Financial Regulatory Authority have cautioned that in fully commuting the 50% they are entitled to, retiring pension fund members have less to survive on into their old age. In fact, many cash out as much as they can without a solid plan of what to do with the funds.
Phineas Sesinyi, acting Retirement Funds director at NBFIRA, previously told BusinessWeek that the trend of fully cashing out the 50% portion of their retirement savings, would possibly land many pensioners in old-age poverty.
“A pension fund provides for financial stability after you stop working, by providing a stream of income and helping you have the standard of living you had before you stopped working,” he said. “The pension fund is supposed to help prevent old age poverty. “I have had many walk-ins who say my pension is now too small to survive on and I ask why they decided that they want the whole 50% and not a smaller percentage. “The new law does not mean that you have to take that whole 50%.”