A sequel to this topic has become necessary due to the feedback from the previous week’s article. For the sake of those who were left out, the previous week’s article was all about the necessity of having to pay one’s contribution earlier than the legally stipulated 14th of the subsequent month. One Finance Manager remarked ‘I had never thought about it this way! We are more concerned in not breaching the 14th deadline, and so we would hold on to contributions and only make sure we pay by the 14th’. A couple of feedbacks suggest that individuals, mostly employees, may be quite oblivious to the fact that their contributions may ‘innocently’ not be handled in the best and the most profitable way. Another member-nominated trustee who had the chance to discuss with the employer got a feedback that suggests that management had understood the principle of early remittance of the contributions, but were quick to hint that they had to ‘manage’ the cash flow of the organisation especially at the end of the month where a lot of payments go out. This is also very understandable as the business has to survive before an employee could even exist. In their terms the organisation has done this for decades and had developed an ingrained culture of paying contributions on the 14th of the following month. It was therefore going to be difficult to break the cycle since it has absolutely worked for them. My recommendation to this is to meet this early payment of contributions half-way to get value for employees.
Remitting employees’ contributions by say the 10th of the following month is a great way to create the balance between ‘managing’ the employer’s cash flow and grabbing added investment value on pension contributions for employees. In all, it is a good feeling to know that an issue like this sank in and that people would begin to take the needed steps to reap some value for their contributions. The illustrated scenario here in simplistic terms is that if within a calendar year, Ghs500 is invested on 10th January and another on 20th January of the same year in the same asset, it is agreeable that the former will earn more by virtue of having a longer period of investment that the latter. The longer contributions sit with employers and not remitted, the higher the potential gains lost. It would therefore be beneficial for employers and trustees to push for earlier payment of pension contributions into the fund. This is one way to make the most of the contributions. This is critical for the defined-benefit schemes 2nd& 3rd tiers.
One point needful to stress however, is that by the nature of the 1st tier scheme, managed by SSNIT, early payment does not really matter in determining qualification and the level of benefits one gets. Being a defined-benefit scheme, benefits are determined by a pre-determined set of conditions. Qualification depends on the period for which one has contributed for, which has to be a minimum of 180 months. The level of pension benefit depends on declared wages upon which the contribution rate (now 13.5%) was calculated on.
In one of my earlier articles, I have explained the implications of taking wages as untaxed allowances and how that can affect your level of pensions. Just let me use this opportunity again to alert that any part of our wages we draw as untaxed ‘allowances’ do not count towards determining your level of pension. In the wake of the qualifying criteria and determination of benefits for the 1st tier earlier, contribution remitted before the 14th would not matter. Employers only keep themselves out trouble if they comply.Employees should also do well to check regularly if employers are indeed remitting as mandated by law.
As stated above, the benefit for early payment of contributions lie with the 2nd and 3rd tiers which are defined-contribution schemes and therefore depend on level of contribution and investment returns. The aim of optimising the investment returns necessitates the need for timely remittance ofcontributions. Again it is important because the 2nd& 3rd tier contribution rates put together comes to 21.5% of gross taxable salary (assuming one is contributing fully to the voluntary 3rd tier). This is quite high and if well managed together would yield great fruits for the future. One of the good management techniques is to remit the 2nd and 3rd tier occupational contributions earlier than the legally stipulated deadline of 14th. If this is done consistently over a long period time, our occupational pension schemes can give us something to smile about on the day we bow out of active service.
Author: Yaw Korankye Antwi- The author is a Pensions Expert and a Certified Risk Management Professional. He provides content for the business website www.ghanatalksbusiness.com.
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