In 2004, the Government initiated a major reform of the pension System in Ghana. The process started with the establishment of a Presidential Commission on Pensions, which reported its findings to the Government in March, 2006. Following consideration of that report, the Government issued a White Paper in July 2006, which accepted almost all of the Commission’s recommendations. In order to implement the new pension system, an 8- member Pension Reform Implementation Committee (“the Committee”) and a Consultant was appointed in October 2006.
The Committee commenced work in November, 2006 and as part of its Mandate submitted proposals for National Pension Reform Bill to Government in 2007. Cabinet approved the Bill and submitted it to Parliament for passage into law. The Bill was passed by Parliament and received Presidential assent in December 2008. A new Pensions Law, the National Pensions Act, 2008 (Act 766) was promulgated on 12th December, 2008
The new Pensions Law caters for the establishment of a contributory three- tier pension scheme with a Pension Regulatory Authority. The Authority will approve, regulate and monitor Trustees, Pension Fund Managers, Custodians and other institutions relating to pension matters. It will also advise government on the overall policy on pension matters in Ghana.
In a previous article on the Pension reform in Ghana, the writer looked at the benefits and safeguards of the new Three-tier Pension Scheme which will be regulated by a National Pensions Authority which will oversee the efficient administration of the composite pension scheme.
The three tiers were explained as follows:
a.first tier basic national social security scheme, which will incorporate an improved system of SSNIT benefits and shall be mandatory for all employees in both the private and public sectors; (payment of only monthly pensions and related benefits such as survivors benefit)
second tier occupational (or work-based) pension scheme, mandatory for all employees but privately managed, and designed primarily to give contributors higher lump sum benefits than presently available under the SSNIT or Cap 30 pension schemes; and
third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives for workers in the informal sector and also provide additional funds for workers in the formal sector who want to make voluntary contributions to enhance their pension benefits.
It was also mentioned that the first tier basic national social security scheme will be managed by a restructured SSNIT; the second tier and the voluntary third tier will be privately-managed by approved Trustees licensed by the Pensions Regulatory Authority with the assistance of pension fund managers and custodians registered by the Authority; the pension fund managers and custodians will first be licensed by the Securities and Exchange Commission and thereafter registered by the Authority.
This article takes a further look at contributions and how the money contributed will be managed efficiently to ensure the integrity of the new scheme. It also looks at challenges, safeguards and other matters related to the new scheme.
New Contribution Rates
The new three-tier pension scheme requires an additional contribution rate of 1% to be shared equally between the employer and employee. The employer will now pay 13% (instead of the current 12.5%) and the worker will now pay 5.5% (instead of the current 5%) making a total contribution of 18.5% (instead of the current 17.5%).
Out of the total contribution of 18.5%, the employer will remit 13.5% to a restructured Social Security and National Insurance Trust towards the first tier pension scheme out of which 2.5% will be a levy for the National Health Insurance scheme. The remaining 5% will be remitted to the privately managed and mandatory second tier for lump sum benefits.
The minimum contribution for the mandatory schemes will be based on daily minimum wage and there will be a maximum contribution to check abuse by contributors who inflate their emoluments towards the last years of contribution to ensure a higher pension.
New Tax Incentives on Pension Contributions
Contributions up to 35% will be tax exempt. The first and second tier mandatory schemes will have a full tax exemption i.e. 18.5%and the third tier voluntary scheme will have a maximum tax exemption of 16.5%. However, contributors on the third tier who do not contribute to the compulsory scheme will be allowed the full 35%tax exemption.
Investment income and Retirement (Pension) benefit are tax exempt.
A National Pensions Regulatory Authority (“the Authority”) is to be established to regulate both public and private pension schemes in the country. The Authority will approve, regulate and monitor Trustees, Pension Fund Managers, Custodians and other institutions relating to pension matters.
The Authority will also sensitise the public on matters related to the various schemes; receive and investigate complaints of impropriety in respect of the management of pension schemes; receive, and investigate grievances from pensioners and provide for redress; advise government on the general welfare of pensioners and overall policy on pension matters.
MANAGEMENT OF THE SCHEME
The first tier basic national social security scheme will be managed by a restructured SSNIT under a Board of Trustees with balanced representation of employers, organized labour and Government..
The second tier mandatory scheme and the voluntary third tier will be privately-managed by approved Trustees licensed by the Regulatory Authority with the assistance of pension fund managers and custodians registered by the Authority.
Trustees who must be licensed by the Authority will be entrusted with the overall responsibilities for the administration and management of the privately-managed second and third tier schemes. They (a)may delegate administration to third party service providers; (b) will not have access to pension funds and (c) will also be responsible for appointing pension fund managers, custodians and other service providers as well as ensuretheir compliance with regulatory requirements.
Pension fund managers will be responsible for achieving the best possible returns on the funds within the specific investment parameters set by the trustees. They will
(a) not have access to pension funds;
(b) first be licenced by the Securities and Exchange Commission and thereafter registered by the Pensions Regulatory Authority and
(c) be independent of trustees and custodians.
Custodians licensed by the Securities and Exchange Commission and thereafter registered by the Pension Regulatory Authority will be responsible for (a) the safe holding of assets of a fund, separate from the trustee and pension fund manager; (b) the settlement of transactions involving fund assets and (c) will be independent of pension fund manager.
Investment of Private Pension Funds
Trustees or pension fund managers are required to invest pension funds in permitted investments in order to obtain safe and fair returns on the amount invested. In doing so, they are bound by the duties and powers laid down in the law, the investment mandate of the fund and the list of permissible investments prescribed in the regulations.
There are restrictions on the investment of funds as well as restrictions on sale, purchase or disposal of privately- managed pension fund assets.
Transitional Arrangement: Temporary Pension Fund Accounts
Before the establishment of the Authority, the following transitional arrangements will be put in place to ensure a smooth transition from the existing to the new scheme.
The Bank of Ghana will set up a Temporary Pension Fund (TPF) with the approval of the Ministry of Finance and Economic Planning.
Every employer will open a temporary Pension Account with the Fund at the Bank of Ghana.
The 5% remittance to the second tier mandatory occupational pension scheme will be lodged in the TPF Account pending the licensing of Trustees, Pension Fund Managers and Custodians.
The Authority shall within ninety (90) days of licensing of Trustees, Pension Fund Managers and Custodians compute and transfer all contributions and returns thereof to the credit of the Pension Fund Account opened with the chosen trustees approved by the Authority.
Challenges and safeguards of the new scheme
The second and third tier privately-managed schemes are Defined Contribution (DC) Schemes and members accrued benefits depends on their contributions and returns on investments. One of the most significant variables affecting the benefit outcome under a DC Scheme is the investment return achieved. This is reflected in the fact that at the end of a typical career of 30-40 years, as much as two-thirds (67%) of the member’s final retirement account could be made up of accumulated investment returns, with just one-third(33%) made up of total contributions paid. Thus DC schemes succeed when investment returns are adequate and this is the major challenge of the privately managed schemes.
Therefore the new pension law should address, inter alia, these key issues:
(a) How funds are invested;
(b) Conditions under which investment policies are determined, and
(c) Supervisory and regulatory guidelines that are put in place to safeguard these funds.
To ensure that contributors’ interests are adequately protected, the National Pension Bill has in-built safeguards. These include stringent approval and registration criteria by the Authority; separation of functions of Trustees, Fund managers and Custodians; on-going monitoring among several others. Trustees licensed by the Authority would be required to take out adequate insurance to indemnify scheme members against any losses of scheme assets caused by malfeasance or misconduct of the trustees or their service providers.
Pension reforms are happening all over the world and Ghana is no exception. It is envisaged that the new three-tier pension scheme will enhance pension benefits and increase the retirement income security of workers both in the formal and informal sectors. The new scheme will also ensure improved living standards of the elderly; financial autonomy and independence of retirees; increased national savings and availability of long term funds for economic development; and the promotion of growth and development of the capital, mortgage and insurance markets.
I trust that all stakeholders would appreciate the advantages that the new pension scheme holds for them and their readiness to participate in the ongoing pension reforms in particular how the private schemes are managed.
Author: Daniel Aidoo Mensah – Project Consultant, Pension Reform