OVERVIEW:

 

The NASSIT Act, 2001 established a virtual state-monopoly in the NASSIT for the management and investment of pension funds in Sierra Leone. However, as is generally the case with monopolies and especially quasi governmental monopolies in Sierra Leone, we must continue to be vigilant and guard against inefficiencies in management and oversight, politically-driven investments, political interference, nepotism and a blotted bureaucracy which have in the past become hallmarks and recipes precipitating their subsequent failures and demise.

 

It is thus against this backdrop that the continued viability of the current retirement system remains to be seen especially as we continue to await the second statutory actuarial evaluation report and the failure by the Trust since 2006 to post an annual report encompassing the Trust’s operational performance and audited financial accounts for the fiscal years 2007 and 2008 (NASSIT website: www.nassitsl.org). Management and the Trustees must be reminded that pursuant to Section 16(1) of the NASSIT Act No.5 of 2001, the Trust is by law required to submit and publicly file such annual reports.

 

LONGEVITY RISK:

 

Despite the still very low life expectancy rate currently estimated at 41.24 years (CIA World Fact book Report March, 2009) and high infant mortality rate of 154.43 deaths per 1000 live births (UNDP Human Development Report, 2008) in Sierra Leone, the past few years have witnessed positive, though minimal movements in data reflecting a decrease in the nation’s longevity risk. This is borne from a comparative analysis of life expectancy figures of 35.4 years from 1970 to 1975 to 41.0 years in the period from 2000 to 2005 to the current 41.24 years estimated for 2009. Generally, the longevity risk in retirement is the hazard of aging and uncertainty of knowing how long one will live and how long social security retirement benefits, such as provided by the National Social Security and Insurance Trust (NASSIT) can go before one runs out of retirement funds prior to death. The focus of this article is thus how can one minimize the risk of running out of money in retirement through the use of annuities and retirement funds?

 

The Society of Actuaries in a survey report entitled “Key Findings and Issues: How Americans Understand and Manage their Retirement Risks” identified the following retirement risks viz: outliving assets; loss of spouse; decline in bodily function; healthcare and medical expenses and inflation. These retirement risks are not unique only to Americans as the same basic risks confront retirees in Sierra Leone as they seek to understand and manage their retirement options. Generally the most common retirement risks are categorized as follows:

 

According to the latest published data by NASSIT (NASSIT at a Glance Facts & Figures as at June 2008), the monthly average retirement pension payable currently in Sierra Leone is a paltry SLL108, 504.72 (One hundred and eight thousand five hundred and four Leones and seventy two cents). This amount represents a fraction of retirement income required by employees for basic sustenance in the current economic environment in Sierra Leone, where even a bag of rice costs more than the average monthly retirement provided by NASSIT. A retiree with even a modest family, not to mention our extended family system, would be hard pressed to provide and maintain a household based solely on the pension currently provided by NASSIT.

 

With a majority of the participants either at average or below average income earnings and hence contributing at the average and below average rates, it stands to reason that most of the scheme participants will not be eligible to receive pensions at even the modest average amount as currently computed by the NASSIT actuaries.  Thus, the goal of a comfortable retirement envisaged by the architects of the NASSIT risks becoming a fleeting illusion, unless other new retirement options and vehicles are incorporated into the nation’s retirement and social safety network.

 

As postulated by Kerry Pechter in her book “Annuities for Dummies”, “many people confidently walk the financial high wire of life without a safety net. Others, especially those who are approaching retirement, feel more secure when a net is there to catch them-just in case the tightrope snaps”. In the Sierra Leonean context however the social protection and safety net is needed by all and not just a few, thus my continued passion in ensuring that the Trust is professionally run and maintains accountability consistent with actuarial, retirement and insurance principles.

 

REPEAL THE NASSIT MONOPOLY:

 For with the inability of the NASSIT to provide the requisite financial safety net, based on the current actuarial projections, it is but prudent that government seeks to break up the NASSIT’s near monopoly over pension fund management in Sierra Leone to allow not only life insurance and annuity companies but more so retirement funds to establish and manage employer-sponsored retirement plans.

 

The NASSIT model is akin to the Social Security system in the United States which as a hybrid defined contribution and defined benefit plan, establishes and sets a fixed percentage both employees and employers contribute and also defines the benefit formula participants receive at retirement. As a result of conservative projections and outright ill-advised investments with little or no redeemable value-added equity to be realized in some investments even in the long term, the NASSIT cannot be solely relied on by Sierra Leonean workers for their retirement needs.

 

With the repeal of the NASSIT monopoly, employer sponsored retirement plans and annuities, with an investment and insurance component will be established and marketed to allow employees to save and invest in their own retirement.  

 

THIRD SCHEDULE RETIREMENT FUNDS: What are they?

 

What I have elected to dub “Third Schedule Retirement Funds” emanates from provisions in the third schedule of the Sierra Leone Income Tax Act, 2000, which provides for the establishment of complying retirement funds with the approval of the National Revenue Authority (NRA) Commissioner.

 

This little known provision in our tax code already provides the legal and regulatory framework for the establishment of individual retirement accounts managed by these so-called Third Schedule Retirement Funds in Sierra Leone. These are intended to augment and provide other guaranteed income during retirement separate and aside from the NASSIT pension. Moreover, these retirement plans allow employees to save and invest for their own retirement by the employee authorizing the employer to deduct a certain percentage of his/her wages to be invested in the employer-sponsored plan.

 

Tax incentives and deferrals are usually provided by governments to encourage retirement planning, savings and participation.  Amounts contributed by employees into such plans are not taxable resulting in a larger carry home paycheck monthly. Moreover, as an employee benefit, employers also contribute a percentage into their employees’ retirement accounts, with a concomitant tax savings by the employer.

 

However, the provisions of The First Schedule Part IV of the Income Tax Act, 2000 which requires a 15% withholding from payments on pensions and annuities needs to be repealed as it is regressive and discourages retirement savings. It is also envisaged that employee contributions are on a pre-tax basis so that employees participating in these retirement funds can take advantage of favorable tax brackets and rates.  As an example, the tax rate for individuals with incomes over 480,000.00 Leones is 25% per annum while the tax rate for individuals earning over 7,500,000.00 Leones is 40%.

 

The United States based African-focused reinsurance consultancy company, Saddleback Re, in California managed by the author has over the past few months designed annuities and retirement policies to be introduced in Sierra Leone and managed under the provisions of the Sierra Leone Tax Code. Additional information on these retirement vehicles can be addressed to admin@saddlebackre.com.

 

ANNUITIES:  

 Annuities, whether fixed or variable, immediate or deferred are generally retirement tools or vehicles designed to supplement an employee’s retirement income and guarantee pension-like income over the life of the annuitant or beneficiary. These are only issued by insurance companies and have both a hybrid insurance contract and investment features.

 An income annuity generally provides for conversion of a large sum of cash into monthly, quarterly or an ann ual payout wherein an insurance company agrees to pay the annuitant or beneficiary an income over a certain period of time.

 According to the Sierra Leone Insurance Commission (SLICOM) 2006 Annual Report, the Life Insurance business sector is serviced by only 3 insurance companies, with a net industry wide premium of 1,323,640,000.00 Leones; with Aureol Insurance Company dominating with a 104% share of the market. Thus annuities which are principally life insurance contracts still have a long way to penetrate the Sierra Leone insurance marketplace.

 THE SOCIAL SAFETY NET PROGRAM AS AN ANNUITY:

 The Social Safety Net Program currently managed by the Ministry of Employment and Social Security represents a program that should have better been managed as an annuity. During the program’s launching in 2006, President Kabbah stated that “NASSIT has been able to pay back over 5.3 billion towards the establishment of the Social Safety Net Scheme. Additional support to the scheme amounting to 5.0 billion Leones will be made by government”. The program launched by President Kabbah in 2006 with paid up capital of 5.7 billion Leones and additional 5.0 billion investment pledged by government was designed to be administered by NASSIT, without any administrative costs and projected to reach an estimated 16,000 extremely vulnerable households, as a component of the country’s 2005 to 2007 Poverty Reduction Strategy Paper (PRSP).

 

However, since the Social Safety Net pilot adopted a cash transfer scheme the following has been expended, according to Ministry of Employment and Social Security presentation at the Regional Experts Group Meeting on Social Protection in Dakar, June 2008:

 

From the above figures the program as managed and supervised by the Ministry of Employment and Social Security clearly lacks long term sustainability, is too short term and lacking an entrepreneurial oriented vision. For with the amount of the initial seed money having been used to purchase annuities for all the participants in the targeted groupings, the benefits of retirement income and savings that annuities provide would have been made available to some of the most vulnerable members of our society. Rather the decisions of transferring management of the program from NASSITT, where the funds would have been better managed and invested to a Ministry program was a recipe for failure.

 

Retirement budgeting may seem like an impossible task. However, cheap retirement options are out there. Affordable retirement budget alternatives and ways to choose the best retirement places take some planning, but the rewards are worth it.Cheap Retirement Alternatives Cheap retirement alternatives to consider include continuing to work well past retirement age. That may not sound that appealing, but consider this: a change in careers to something that’s always intrigued you can enrich your twilight years and make them more enjoyable. Instead of creating a cheap retirement plan that includes clipping coupons or staying in the house where you’ve always lived, consider a move to a new retirement community and a new career, too.Affordable Retirement Is PossibleIt’s possible to have an affordable retirement that’s enjoyable, too. The newest retirement communities have neighborhoods of homes where independence reigns supreme. These communities also offer assistance for their residents for grocery delivery or in-home health care needs. Other affordable retirement communities provide more or less assistance and involvement by the staff. If you’re budgeting for retirement, using an airline credit card or a rewards credit card to pay for retirement expenses can help. These cards offer seniors a way to earn rebates, rewards or free travel for using their cards to pay for everyday expenses. Rewards credit cards often offer double points or miles for grocery shopping or paying household bills. The points can be used to purchase airline tickets to visit loved ones or to get cash back or gift certificates.Best Retirement Places Offer Fun And New Friends Some of the most meaningful advice I’ve heard about choosing the best retirement place was actually pretty simple. Choose a neighborhood that’s filled with lively, fun people if you’re a social person. If you have a tendency towards being a hermit, then the best retirement places just have to be beautiful or otherwise suit your solitary needs. However, if you enjoy the company of others, a beautiful view outside your window will get boring very quickly. The best retirement places have a wealth of activities for seniors and a fun and engaged community.

by Marc Cram, CFP

As we baby boomers approach retirement many of us have started to take a much closer look at what we will need in the form of assets if we are to live to the age of 80 and beyond. Most of us have been very focused on accumulation of assets up to this point and may not have stopped to consider what the future outcomes might look like.

We all have had expectations of what our accounts might look like and some of us have had those expectations dashed by market corrections or other financial setbacks. I think it is time that we took a close look at what other expectations we have for the future versus what reality might spring upon us. If we are to be successful in our own retirements we should move toward it with our eyes wide open and our plans firmly in place.

What follows is a short examination of five areas that each of us should prepare for and a few ideas that might help you improve your chances of success. Some of this might appear to be doomsday like but I think we will all be better off if we prepare for the worst while expecting the best, so let’s dig in.Expectation #1: The stock market will continue to provide above average returns well into the next decade.

We know that investing in the stock market has produced the best chance of growing our assets at rates that beat inflation and other fixed money instruments over time. If you stay invested you will always get the average market return for the period you are in the market.

One thing we can say for sure about the markets, though, is that they will never go straight up or straight down. We tend to see periods of growth and periods of stagnation. In the short-term no one can predict whether you will make or lose money but we know that over the long term (10 plus years) you will get whatever the markets return.

The danger for us going forward is that when we start taking income from our investments, every negative year will shorten the lifespan of our potential income stream by as much as 5 years or more. If we want to live comfortably to ages of 85 or 90 we will need more predictable returns than those odds will give us.

Are you willing to bet that the markets will perform the way you want them to when you get ready to retire? I don’t think any of us is willing to take that bet and that is why more and more of us are looking for instruments that will guarantee us a minimum return and lifetime income streams with the money we already have accumulated. A little research on your part should yield some good choices for those assets you can’t afford to lose.Expectation #2: I will be in lower tax bracket when I retire.

I am sure you have been told this by every planner or investment professional you have ever talked to. They all encouraged you to fully fund your IRAs and 401ks because of the current tax deductions and the tax deferred growth with the promise that when you retired you will be in a lower tax bracket. I have conducted seminars for over 5 years now where I ask the question of my audience, “do you think future tax rates will be lower, the same or higher”? I can count on one hand the number of people who said lower or the same. When you look at our country’s current level of debt along with the future liabilities for our major entitlement programs (which we will look at next) I think you too will be hard pressed to think your taxes will even stay the same going forward, let alone reduce.

Whatever your current tax bracket is, can you imagine living on less than you are today? If your income stays the same and your deductions disappear because your kids are gone and your home is paid off, what chance do you have to reduce your tax burden? The reality is that during a 20 year retirement, if you have accumulated all of your retirement assets in tax-deferred accounts, you will pay 10 times more in taxes than you saved in taxes over your lifetime, assuming no tax increase. Every increase in taxes going forward will mean you will need to take more money out of your savings to maintain the same lifestyle.

One way to solve this dilemma is to start funding a private tax-free retirement plan using an insurance product that is linked to a market index and designed to provide maximum cash accumulation with a minimum death benefit. This product is known as equity indexed universal life. Here again, a little research on your part will reveal multiple, high quality companies that currently offer these products.Expectation # 3: I can count on Medicare and Social Security to be there for me like it was for my parents.

The reality is that both of these programs are in trouble and will only get worse as the 80 million baby boomers enter retirement. Ask anyone under the age of 40 if they think Social Security will be there for them and you will soon see that this reality is already well entrenched in our culture. The facts are that 60% of current retirees say that 50% of their income currently comes from Social Security, 34% say that it is 90% of their income and 22% say that it is 100% of their income.

By one account, it is predicted that by 2019 Medicare will consume 24% of all tax receipts and by 2042 it will consume 51% of all taxes collected.1 If you think universal health care will solve this problem, you must realize that Medicare is a form of universal health care and anything that will replace it will be burdened by the same reality of baby boomers living much longer in retirement than their parents ever did.

As for Social Security, it is predicted that the Social Security trust fund will begin be tapped into in 2018 and be completely depleted by 2044.2 If we had made changes to this program years ago we might have been able to extend it but I don’t see any congress willing to touch this problem until it is too late.

The bottom line is that benefits will need to go down, we will need to wait longer to be eligible and taxes will need to go up to pay for the massive increases in cost that will result from the higher usage figures projected. We are going to have to become responsible for our own retirement planning and should these promised benefits materialize for us we should feel lucky if we can plan an extra night on the town every month.Expectation #4: I will live to my normal life expectancy.

This might well be true but then you must ask yourself, what is my life expectancy? When Social Security was instituted the average time spent in retirement was 3 years. Many of us today will spend 20 to 30 years in retirement. Statistically speaking, if you are a single male age 65 you have a 50% chance you will live to age 85 and a 25% chance to live to 92. If you are a single female age 65 you have a 50% chance you will live to 88 and 25% you will live to 94. If you are a married couple age 65 one of you has a 50% chance to live to 92 and a 25% to live to 97.

If these numbers don’t get you thinking about how long you will need for your money to last consider this. One of the fastest growing age groups in the United States are those people over the age of 100. There are currently over 27,000 people over 100 and that number is sure to grow as the baby boomers begin to age. Expectation # 5: I will stay healthy well into my final years.

There is no doubt about it; we are much more conscious of our health and taking care of our bodies and minds than any generation in the history of the world. We are finding new ways to combat disease and to stave off illness as well as to treat conditions that would have killed us only a generation ago. However, all of this has come at a price and that price needs to be calculated into our future income needs.

According to a study by Fidelity Investments, a retired couple without employer-sponsored health insurance can expect to pay $215,000 for out-of-pocket health care costs like premiums and co-pays. Moreover, this number does not include significant costs like long-term care, which isn’t fully covered by Medicare. These numbers also assume you live to your life expectancy and not beyond. Last year these costs rose by 7.5% and we do not know what kind of increases we may see in the years ahead. As we have outlined above, Medicare costs could easily rise by double digits in the next 20 years.

If we add in home health care and long-term care into this equation we can easily double the numbers above and put a further strain on our already over taxed retirement funds. One thing you can do about potential long-term care needs is to purchase a long-term care policy from one of the many experts in this field.

What you can do to prepare

The numbers aren’t pretty but there is no need to despair. Whether you have years to prepare for retirement or you are already there you can create a plan to succeed and prosper in your own retirement. To summarize let’s go over the realities again:

• Investment directly into stock market investments can leave you at the mercy of the markets and geopolitical events. You will need to be in investments that can give you predictable returns without the threat of market downturns.

• Taxes will probably be going up over the next few years and into your retirement. It would be best to use your tax-deferred retirement plans early in your retirement and it may be prudent to move them to tax-free instruments at your earliest opportunity.

• Government entitlement programs will take a larger and larger share of the tax revenue in the future and future benefits may well be reduced or eliminated. Start taking responsibility of your future income needs by using instruments that can give you market based growth in a tax-free environment.

• Plan to outlive your own life expectancy. Create plans that will provide income streams you cannot outlive. There are many instruments on the market today that provide living income benefits you cannot outlive and that can be funded with both taxable and tax-deferred assets you now own.

• Expect to stay healthy but plan for the probability that you will need to spend more on heath care in the future. Purchase a long-term care policy that will pay for future needs at home and in care facilities.

One thing you can do right now is to get educated and speak with a professional advisor, preferably one who carries the CERTIFIED FINANCIAL PLANNER® designation. The sooner you take action the greater your success will be. Remember, by planning for the worst while expecting the best, you will be the ultimate winner and your retirement years will be all you have dreamed they would be.1 According to Medicare Trustee Thomas R. Saving, a professor of economics at Texas A&M University and senior fellow at the National Center for Policy Analysis.

2 Trustees of the Social Security Trust Fund