Legislative and compliance updates under the Pension Act

The country’s leading insurance company, NICO Pension — in partnership with the Reserve Bank of Malawi (RBM) — invited pension trustees and employers to a seminar at Amaryllis Hotel in Blantyre where they were encouraged to provide employers accurate information on the pension system.

This comes against the background that a lot of employees are not adequately informed of how the pension scheme system works and its benefits, a development that is leading to a lot of misinformation through social media.

Maravi Express provides the presentation made by Peter Ellis Kambalame — RBM’s Principal Examiner, Pension Regulation (Financial Sector Regulation Department):

Objectives of the Pension Act

•Ensure that every employer to which the Act applies provides pension for every person employed by that employer;

•Ensure that every employee in Malawi receives retirement and supplementary benefits as and when due;

•Promote the safety, soundness and prudent management of pension funds that provide retirement and death benefits to members and beneficiaries; and

•Foster agglomeration of national savings in support of economic growth and development of the country

Rights of employees under the Pension Act

•Right to be a member of a pension fund (Section 9)

•Contribute a minimum of 5 percent of pensionable emoluments (clean wage) or (basic salary +house allowance) (S12)

•Transfer pension benefits to an unrestricted pension fund- at least once in every two years (S14)

•Move with pension benefits to a preservation fund or another fund where an employee switches employment (S44)

•Be represented by a trustee with equal rights as those of the employer (S26)

•Fund information (S58-60)

•Fund investment strategy;

•Investment performance and financial  position;

•Fees and charges payable by fund members;

•Rights and entitlements of members or  of beneficiaries under fund rules

•Make voluntary contributions (contributions above the minimum requirement) (S12(4)

•Nominate beneficiaries for death benefits (S70,71)

•Access all contributions and investment income on the contributions (vesting scales are prohibited) (S64-72).

 

Access rights

Access must be in line with the conditions under the law:

•On Retirement either due to age (between 50 and 70), ill health or minimum of 20 years of service with a single employer

•Cash lump sum of 100 percent where the accumulated amount is less than the threshold; otherwise a:

•Cash lump sum of 40 percent of accumulated amount; and

•60 percent balance to be accessed as an annuity for life

•One can also access a programmed withdrawal of the accumulated amount. The market is yet to offer the service due to a complication in the definition. An amendment has been proposed

 

Rights of employees on death

•Beneficiaries to receive both pension and life insurance cover in line with the nomination form

•On early withdrawal/leaving service of employer – member to access only employee contribution plus investment income on these contributions. Employer contributions and investment income to be transferred to a pension fund of the member’s choice.

•On leaving the country permanently – member to access 40 percent immediately and having satisfied the trustee that the member has left the country permanently, the 60 percent balance is paid after 12 months

Why do you need a pension?

•Because you will probably live longer in retirement; and

•you need some form of income to replace your salary/wage

•A decent replacement income should be at least 40 percent of final salary.

•The more cash you access as a lump sum the less the income replacement, and vice versa.

How do I replace my income by 40% of final salary?

•Contribute more than the minimum – Voluntary contributions

•Contribute for a longer period of time

•Retire late – don’t go for early retirement

•Retire normal but defer payment of pension to later years

•Have other retirement plans and consolidate at retirement

Life expectancy

•At birth a Malawian is expected to live an average of 65.2 years;

•At age 40, a Malawian is expected to live an average of 33.8 more years;

•At age 50,  an average of 26.6 more years;

•At age 60, an average of 19.7 more years (source: NSO, Malawi Population and Housing Census)

•This is the reason why you need a replacement income, otherwise known as a pension.

Status of the Pension Industry

•Currently the Registrar has licensed a total of 51 pension entities which include

•9 unrestricted pension funds,

•2 self-administered restricted pension funds,

•18 standalone restricted pension funds,

•4 pension funds operating under an umbrella scheme,

•6 pension services companies,

•8 corporate trustees and;

•4 pension brokers

 

Growth of the pension industry

•Pension assets have increased to at K1.02 trillion, representing 14.7 percent of GDP – Sept 2020 from K74 billion in 2011

•Quarterly pension contributions now averaging K27 billion

•Pension assets earned investment income of around K99.7 billion

•Pension Members increased to 466,920 in September 2020 from  73,837 in June 2011

•Over 2,995 employers participating as at September 2020 from under 300 in 2010

•Over 3,000 minor accounts (section 71 requires that trustees must hold and invest benefits for beneficiaries who are under 18 years of age)

•So far 17,094 employees have accessed benefits under section 65 in 2020;  and

•cumulatively from June 2011, over 127,929 employees have benefited from early withdrawals

 

Opportunities for Pension Asset Growth

• Pension assets growth projected to hit K2 trillion in 2025 or before, if the past is anything to go by!

•Pension funds to be mandated to invest at least 5% of its assets in a public infrastructure

•The investment must be through a security or equity issued by a special purpose vehicle; or a public private partnership contract

•Public infrastructure projects should include national and international airports; power generation (transmission and distribution); health care facilities; oil or gas pipelines, refineries or other installations; ports and harbours; power stations or installations for harnessing any source of energy.

Also productive rural and agricultural infrastructure; public roads; public transport infrastructure; railways; sewage works and sanitation; waste infrastructure; water works and water infrastructure and ourism infrastructure including four-star or higher category classified hotels

Emerging issues and challenges

Objective 1

•Membership at 466,920 in September 2020

•Public Sector Pension Fund registered – 85,416

•2,995 employers

•Centralized National Pension Database System – to register employers and employees

•Employer inspections done jointly with Ministry of Labour

Issues

•Pension contribution evasion — non placement of employees, non contribution, partial contribution or placement

•Enforcement challenges — mandate vis-à-vis presence

•Administrative penalties – IRC only recommends

Objective 2

•Pension benefits paid Dec 2019 – K73.4 billion

•Preservation of pension benefits

•Early withdrawals have increased threatening financial security in retirement

•17,094 withdrawals from Jan 2020 to Sept 2020

•127,929 withdrawals from 2011 to date

Issues

•Awareness on importance of pension

•Pension contribution arrears

•Decumulation phase – needs more attention

 

 

Decumulation (annuities)

•There are 4,296 pension members on annuities

•Members on annuity are 0.35% of the elderly population of 1.2 million in 2018

•Civil Service has 35,288 pensioners

•There were 7,768  that took full commutation of pension benefits in 2019

•Programmed withdrawal in the offing

•Average retirement age is 57 years

 

Pension contribution arrears and regulatory actions

•Pension contribution arrears increased to K27 billion in September 2020, a significant rise from K16.5 billion in September 2019 and K13.1 billion reported in 2018 — a worrisome development

•Press release to remind all employers of their obligations under the Pension Act;

•Engaging employers to provide a payment plan;

•Naming and shaming of non complying employers;  

•Imposition of administrative penalties in line with S 75 of the Financial Services Act;

•Prosecution of non complying employers

 Objective 3

•Prescribed registration and licensing requirements for trustees and pension entities

•Conduct off-site and on-site examination of pension funds

•Issued directive to regulate payment of pension benefits – penalties for delays

Issues

•Corporate governance – a challenge

•Data integrity needs to improve

•Draft directive to regulate pension fund investments

•Impact of COVID-19

 

Objective 4

•Pension assets at K1.02 trillion, representing 14.7 percent of GDP – Sept 2020

•Quarterly pension contributions now averaging K27 billion

•Pension assets earned investment income of around K99.7 billion

Issues

•Investment opportunities limited

•Growth in assets has not translated into investments in infrastructure

•Draft directive on investments in infrastructure

Impact of pension on the social and economic sector

•Pension funds create jobs in the financial services industry through capital funding of businesses

•Provide source of finance to employers, businesses, government; income to the old aged; income to beneficiaries; income to unemployed

•Have deepened the capital markets

•Provide source of finance for infrastructure development

 

Review of the Pension Act

In 2014, the Pension Act was amended as follows:

1. Section 2 to provide more time for Government to comply

2. Section 16 to allow registration of pension funds by the Registrar of Financial Institutions

3. Section 56 to allow issuance of directive on off-shore investments

4. Section 65 to allow issuance of a directive on early payment of benefits. Currently an employee who’s benefits are below K500,000 can withdrawal full amounts

Current proposals

1. Insertion of new definitions and amendment of existing ones for better interpretation of the Act. Including definitions of ‘Programmed Withdrawal’, ‘retire’, ‘close relation’

2. Deletion of Umbrella fund provisions to minimize the confusion with unrestricted funds. The difference between the two is that an Umbrella Fund pools funds from registered pension funds whilst an unrestricted pension fund pools funds from employers and employees who have no pension fund

3. Enhancing the scope of the National Pension Scheme to cover the mandatory occupational pension scheme and the voluntary personal pension scheme

4. Conferring the Ministry of Labour the mandate of enforcing mandatory provisions pertaining to employer obligations

5. Providing for a sanctions regime for non-compliance with mandatory provisions of the Act

6. Providing for the establishment of voluntary schemes (personal pension plans and provident funds) to cater for individuals who are self-employed and any person who wish to save for retirement; exempted from the mandatory pension scheme; or not covered by any pension fund under the mandatory requirements of the National Pension Scheme.

7. Allowing pension fund members to use 40 percent of their accumulated pension benefits to secure a primary house

8. Allowing early withdrawals if out of employment for minimum of 3 months

9. Individual representation on unrestricted schemes

10. Providing guidance on the treatment of pension benefits, which have not been claimed by a beneficiary

11. Termination and winding up provisions

 

Centralized national pension database

•Electronic System to be used for providing a permanent pension number to a pension member for tracking pension benefits.

•Standardise data quality held by Administrators.

•Improve efficiency and effectiveness of pension administration and supervision.

•Reliable pension data for policy decision making

•Assurance on completeness of information received from other Administrators

•Easy monitoring of employers with contribution arrears

•Pension members will view their benefit statements