Ghana’s pension environment went through reforms from 2004 to 2006. The reform was in line with World Bank’s call for countries to reform their pension systems to help curb poverty.
The outcome of the reforms, the 3-tier scheme, was implemented in January 2010. The essence of the pension reform was to improve pension provision within the country. An indirect outcome is the emergence of private annuity in Ghana, which has been explained in the latter part of the article. An annuity in Ghana is a great step towards achieving guaranteed income.
The major outcome of the reform was the introduction of the National Pensions Law ACT 766. The reform was also to give Ghanaians more options to prepare for their retirements.
The reforms among other things introduced the private arm of pensions which hitherto, did not exist. It opened the pensions environment for informal sector workers to engage with formal pension arrangements, which also did not exist for over 70% of the Ghanaian workforce.
Improved Lump Sum
Another objective of the reform was to improve the lump sum retirement benefits for Ghanaian workers. This led to the introduction of the 3rd tier, which is an additional tier for lump-sum accumulation. This 3rd tier is a voluntary scheme that has a higher rate of accumulation than the already existing lump sum option which sat with SSNIT and was later hived off as the 2nd tier private mandatory scheme.
With these developments, retirees and their beneficiaries were expected to end up with higher lump sums.
The Pensions Act
The improvement of the lump sum is however not the end. It is required that the lump sums are invested in vehicles that will provide long-term finance in the form of regular payments. This is where annuities come in. The Ghana Pensions Act, Act 766, Section 111, stipulates that “a contributor not covered under a mandatory pension or any other pension scheme is entitled to use a percentage of accrued benefits prescribed by the Board of the Authority to purchase an annuity for life payable monthly or quarterly from an insurance company licensed by the National Insurance Commission”. This gives room for annuity in Ghana.
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Obviously, this goes largely for the informal sector, but this applies to all who would earn a lump sum. The regulation (LI 1990, 126) has prescribed seventy-five per cent of the accrued lump sum to be used to buy an annuity in Ghana.
Annuity in Ghana- How it works
An annuity product can be likened to a milling machine. A milling machine basically grinds large chunks of a substance into smaller usable units. Likewise, the pension lump sums earned from the 2nd and 3rd-tier pension schemes should be invested to break it down into regular payments during retirement. It is expected that these payments should be enough to take care of you till the time of death. Hence, you collect your retirement lump sum benefits, and then invest the amount in an annuity product that ‘mills’ it down into regular periodic payments.
The one who buys an annuity with his lump sum and receives the regular payment is called an annuitant. Below is a pictorial illustration of how annuity in Ghana would work.
The regular periodic payments you receive, compared to your lump-sum investment depend on the agreed terms of the annuity and the features selected.
This implies that we can have two persons who both invested GH₵ 100,000 into an annuity product and yet they would receive different periodic amounts as payments. It all depends on your perceived mortality and the product features chosen for the annuity. Mortality is simply the indicative remaining lifespan of an individual.
The annuity rate could also be fixed or variable. Your payments could vary depending on the underlying or indexed reference rate, which in Ghana’s case could be a treasury bill rate, policy rate or policy rate. In the near future, I will further explain how you should buy an annuity in Ghana, and how the different options within the annuity product can affect how much you collect as annuitized payments.
Annuity in Ghana – Great but Tricky Product
An annuity is a very critical product for perpetuating financial provision during retirement. Much as it is this critical, the risks in buying an annuity product can be high. From the point of purchase till its end, there are various points of potential dissatisfaction with investors.
This makes annuities a specialised product that requires good guidance from an expert. As this is the first publication on annuities, I will not give much detail about how to purchase the product. All you need to get from this article is to seek advice before you buy an annuity if it is your time to do so.
After 10 years of the life of the 3-tier scheme, an insurance company has launched an annuity product. The time, of course, coincided with the period of payout of the mandatory 2nd tier lump. Though it kept long in coming, the first annuity in Ghana has been introduced into the market. In a combined effort between the National Insurance Commission (NIC) and Securities and Exchange Commission (SEC), there is now a framework for running an annuity in Ghana.
The Old Mutual Insurance company is the first to launch an annuity in Ghana. The product is named the Old Mutual Retirement Salary. Speaking to Ms Jennifer Gyasi-Koranteng, Corporate Relationship Manager of Old Mutual, she described the public’s reception of their annuity product as ‘awesome’.
“The amazing trend seen here is the rather huge interest from the working age category, 30-50-year-olds, who are calling on a daily basis to make inquiries, she said. We can take up to a hundred calls in a day“, she added.
This looks encouraging considering the rather obscured nature of annuities even in developed countries. It is expected that a few more annuity products will hit the market in the coming months, to give retirees choice and more options in securing retirement income.