We often hear cases of SSNIT chasing and even prosecuting employers who default in the payment of employees’ pension contributions. Most employees may not have the ‘power’ to demand such defaulted payments and may face the fear of being hounded by the employer.
Most employees may not even know their companies have defaulted, but the statement-disclosure mandate of the pension regulations enables contributors to know. For the informal sector contributor they are their own policemen and should be committed to it knowing the difficulties that befall us if we inadequately prepare for retirement.
The law mandates payment of contributions to be remitted to trustees by the 14th of the subsequent month. Following default, a rate of 3% contribution surcharge applies to the amount in arrears. Trustees should take such defaults seriously especially if it becomes norm. The losses incurred by such late payments are quiet substantial over long periods.
It is up to the contributor to ascertain not only the payment of the contributions but whether they are paid on time. This is one way for contributors to take hold of their retirement incomes.
The defined contribution (DC) schemes, notably the 2nd and 3rd tiers, are the most affected in this scenario. For the defined benefit, 1st tier, the account is credited once the payment is remitted, albeit late. Besides, SSNIT deals with the employers on the promptness of payment and they could be commended on the way and manner they place employers under check. Private Trustees are expected to do likewise, to take it up with the employer and subsequently report to the NPRA when such practices become the norm. The other service providers namely Fund Manager and Custodians could also report.
The law stipulates that payment of contributions into schemes should not exceed 14th of the subsequent month. However if an employer decides to pay earlier, say on the 5th rather than the 14th, the fund gains a lot more in investment returns because the contributions get invested earlier and therefore gain more investment days. If they choose to pay every month on 14th some good investment returns would be lost to the fund.
Here is an illustration.
If contribution is paid on 5th of month as opposed to 14th, there is a nine-day investment returns earned by the scheme which would be lost if contributions are paid on the 14th. On a straight line computation basis, the 9-day investment loss per month translates into 108 days of investment returns losses in a year. Over a five-year period in the life of the scheme 540 days of investment is lost which is nearly 1.5 years of investment returns lost. This is a whooping loss considering how long a pension scheme can run for.
If a scheme receives payment on the 7th of every month as opposed to the 14th, they gain 420 days of investment returns over the scheme that receives contributions on the 14th.
So for two schemes that received the same amount of contributions, the one that paid earlier say on the 5th gains more days of investment returns than the other that paid on the 14th.
If companies therefore breach the 14th day limit, that becomes robbery and contributors should not accept it. Unions and staff associations may also need to negotiate with their management on this.
The lessons for trustees are straight forward. Get employers to pay earlier! For member-nominated schemes, trustees can use their positions in the organisation to work it out. The main selling point to the finance director or management (who are also part of the scheme) is that, the schemes are defined-contribution and that the scheme’s fund values depend on contributions and investment returns. Organisations may probably be used to the old era where contributions were expected to be paid to SSNIT by the 14th of the following month.
But the 1st tier is a defined-benefit and that is a pre-determined benefit based on no of years of contributions and salary level. With regard to the 2nd and 3rd tier, the more the employer holds on to members’ contributions, probably to improve organisation’s cash flows, the more the employees lose value.
There is nothing legally wrong in holding onto contributions and paying on 14th, but out of ‘Best Practice’, the trustee should do more to get the contributions earlier than the regulatory limit. The earlier the more!
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. Also Listen to Pension and Business Audio tit-bits on Facebook, Soundcloud and YouTube. Mobile: 0201196080, Email: firstname.lastname@example.org,