Granting loans to contributors from their RSAs?

At a forum organised by one of the Pension Fund Administrators at the Labour House in Abuja on Tuesday, July 30, 2019, a retirement savings account holder asked a question, and wondered why RSA holders should, or should not be granted loans from their own savings.

To most participants and even the knowledgeable resource person who responded to the question, granting such loans are far-fetched, strange and impracticable. The response to the question was neither here, nor there, in other words, probably a personal view.

It is equally apparent that the pension management entities and the framers of the Pension Reform Act 2004 as amended in 2014, have not envisaged or contemplated that possibility to incorporate it in the Act using clear definition. Section 89 (2) of the Act allows a RSA holder to withdraw money from the account to pay for mortgage, but it is not called “loan.”

The participant who raised the question reasoned that it would be entirely appropriate for the owners of the money to borrow part of it to invest in business under the same conditions for existing borrowers of loans from the over N9 trillion pension cash.

The matter is important, whereas the explanation by the resource person was not satisfactory. It did not give a clear position, even though there is near-definite provision for it in the guidelines issued by the National Pension Commission (PenCom) with regards to Micro Pension Plan.

Item 6.3(c) in the guidelines for Micro Pension Plan made a provision for “contingent withdrawal” of money from a micro pension retirement savings accounts. It says:

“Every contribution shall be split into two comprising 40% for contingent withdrawal and 60% for retirement benefits.”

This “contingent withdrawal” can be regarded, technically, as a loan as the RSA holder making it could be doing so to invest in a business to generate more income and be able to return it to the account, or even raise the regular contribution based on higher income or earning from the investment made with the proceeds of the “contingent withdrawal.”

Instead of calling it “contingent withdrawal” it should just be called “loan” in the same way it is done in the Republic of Philippines. Over there, a retirement savings account holder in their version of Contributory Pension System can be granted a loan from own account under the Pension Loans Programme (PLP).

A question and answer brochure extracted from that country’s Social Security System (SSS) website gave guidelines on obtaining such loans. The SSS is a contributory pension scheme with additional welfare services for the contributors.

The brochure says in part: “Under the PLP, qualified members can apply for a loan of up to six times their respective basic monthly pension plus the P1,000 additional benefit but should not exceed the maximum loan limit of P32,000.”

It gives further details: “To qualify, the borrower must be a retiree-pensioner and not more than 80 years old at the end of the month of the loan payment term. The borrower must have no deductions from his/her regular monthly pension, no existing advance pension under the SSS Calamity Package, and should have received his/her monthly pension for at least one month and posted in the pension fund’s system.”

But the borrower is made aware that it is not free money: “The pension loan has an interest rate of 10 percent per annum, computed on a diminishing principal balance, which will become part of the monthly amortization. Loan proceeds will be credited to the cash card of the pensionerborrower within five working days from date of approval.”

One important condition for granting the loan is this: “Payment for the said loan will start two months after the loan’s approval. The loan can be paid within three, six, or 12 months depending on the loan amount.”