In various ways such economically disruptive events would almost always impact financial ecosystem. As pension funds form part of a nation’s or global financial ecosystem, they would be affected when there is an event that ripples the system. COVID-19 or Coronavirus outbreak has been an economically disruptive event and would thus have some impact on pension funds in the country.
COVID-19 & Ghana’s Economy
The pandemic would affect pension funds differently in various parts of the world depending on the framework(s) that govern the management of pension funds. These could be in the structure, investment climate, regulation and the entire collective instruments that drive pensions. This article would however, look at the real and speculative impact of the Coronavirus pandemic on pension funds in Ghana.
As stated earlier, every event that impacts the larger economy or financial system would impact pensions as well, and COVID-19 has shaken the economy. A number of projections have been made about the economy including the fact that we should expect a recession. The World Bank has revised Ghana’s Gross Domestic Product (GDP) growth from 6.8 percent to 2.5 percent. People have lost jobs, businesses have shut down and contracts lost, some of whom would never be recovered. The country’s credit rating has been downgraded by Moody’s. These are some fall outs from COVID-19 on Ghana’s economy.
COVID-19 & Pension Funds
Pension funds would feel the impact of COVID-19 in terms of contributions, withdrawals and investments that provide growth to the funds through variable yield. This is true for defined-contribution pension funds, 2nd and 3rd tier schemes in Ghana. Funds under these schemes earn value through contributions and investment returns less the cost of running the scheme. Therefore, if investment returns slump, the growth of the fund and therefore its value within the period would be negatively affected. The impact would be felt at both the overall fund level and also the individual (contributor) level. Equities and equity-based mutual funds that offer variable returns are most likely to be hit. It is expected that they would recover over time when situations normalize. It would however affect the contributor who is taking out their funds now. They would take home a lower value due to the position of equity-based investments within the fund. One factor that offers respite, is that fact that most schemes may not have more than 10 percent of their portfolio in equity-related investments.
Global Market vrs Local Market
As a further illustration, the movements in the global oil market is expected to reflect in the local oil market. Oil stocks on the Ghana Stock Exchange (GSE) would be affected at some point. They could however pick up if situations normalize. However, there could be other companies on the stock markets who would also have gained as a result of the Coronavirus outbreak. Health and technology companies are notably gaining grounds.
As Ghana’s markets are not too sensitive to global patterns, the equities on the GSE may not be affected now or may do much later. If there are any local shake-ups the loss (or gain) to your pension fund would therefore depend on which companies’ stock trustees have selected and how much of the fund that have been invested in them. Again most (privately-managed) pension funds in the country do not have large exposures to the stock or equity market as earlier mentioned. Therefore if COVID-19 brings down the value of equities, pension funds may not be badly affected.
Fixed Income in COVID-19
With fixed income asset class grouping (government bills, bonds and bank’s fixed deposit), where rates promised are usually not altered, there may not be losses in already running investments. However, there could be future losses. The Bank of Ghana has reduced the policy rate from 16% to 14.50% as a way of mitigating the impact of COVID-19. Banks in following suit have reduced the interest rate at which they borrow from the market. Banks may not be able to give good rates for new investments as they would have adjusted their revenue expectations by giving interest-free loans and allowing delayed loan repayments among others. As reflected in the recent auction for Government bills and bonds, Government has done same by lowering their rates for new investments by as much as 175 basis points for the 3 year fixed rate bond, all of which is as a result of the Coronavirus outbreak.
Employment & Cash Flow Factors in COVID-19
Ability to contribute recedes when people lose jobs. There is also the tendency for contributors to partially or fully redeem their pension funds, especially in the case of 3rd tier funds.
Early retirement would make persons take their benefits earlier than expected causing them to lose future earnings into the fund. Individuals may take early retirement because they lost their jobs in the COVID-19 era and couldn’t see themselves into another employment.
Withdrawals from the voluntary 3rd tier funds (which also has a penalty of 15%, if fund is less than 10 years) would reduce the value of an individual’s final value. Coronavirus could cause cash flow problems that can lead to early withdrawals of pension funds.
Continuous contribution, non-withdrawals (retention), good investment returns are all the factors that push pension funds to grow. Consequently, their slacking would impact on the overall fund level, as well as at the individual level. Of course, if a contributor partially withdraws from their 3rd tier in these times, they should know that it would affect the final value of their benefit when they are ready to completely draw down on the benefit.
SSNIT 1st Tier
The case is different with the SSNIT 1st tier pension. The loss to an individual is where a contributor loses their job therefore their employer’s contribution. As the number of months of contributions is considered in arriving at a person’s pension benefit (rights), cessation of monthly contributions would likely lead to a loss on a contributor’s individual account.
On the corporate scale SSNIT would also bear the brunt of the COVID-19 economic impact. The expected returns on investments would not be fully realized thus creating a shortfall. This Coronavirus situation could adversely affect rate of annual adjustments SSNIT gives to retirees. The aggregate contribution from the working class is also reduced when unemployment goes high as has been predicted with the pandemic. SSNIT could also be stretched on paying pension to retirees but they have the support of government if it comes to that.
The Coronavirus’s negative impact on the economy would therefore affect pension funds at both the corporate and individual levels. However, effect of coronavirus on pension funds in Ghana should not be one that makes the cattle herd run down the hill.
Yaw is a Pensions and Management Consultant with M-DoZ Consulting and an Executive Director of M-DoZ Retirement & Investment Club. M-DoZ runs retirement & investment planning sessions for companies, churches, trade associations, groups, e.t.c. The club runs financial advisory clinics and helps its members to plan for retirement. Joining the club is free.
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