In 2004 the government of Ghana embarked on a major initiative that would change the face of the nation’s pension system for the better. This pension reform commenced with the establishment of a Presidential Commission on Pensions by President J.A Kuffuor. The commission submitted its findings to the government in March 2006.


Among other things, the commission recommended the creation of a three-tier pension scheme that would replace the existing SSNIT pension and the CAP 30 schemes. Having accepted almost all of the commission’s recommendations, the government set up a Pension Reform Implementation Committee and hired a Project Consultant to implement the commission’s recommendations.  The implementation committee’s work resulted in the National Pension Reform Bill that was presented to Parliament and subsequently passed by the legislature in October 2008. The Bill was signed into law by President Kuffuor on December 12th 2008. A regulatory body, the National Pensions Regulatory Authority, was set up to oversee the efficient administration of pension schemes under this law, the National Pensions Act, 2008 (Act 766).
The new three-tier pension system consists of two mandatory schemes and one voluntary scheme.    Tier-1 is a mandatory Defined Benefit pension scheme (benefits are based on a formula) that will be managed by a restructured SSNIT. Tiers 2 and 3 are Defined Contribution pension schemes (benefits are based on contributions and returns on investments) and will be managed by private service providers. Whilst tier-2 is mandatory, tier-3 is voluntary. Under the law, employers would make monthly contributions of 13% of workers salary into the mandatory schemes whiles workers make a monthly contribution of 5.5% into same – making a total of 18.5% mandatory contribution. These contributions are tax deductible, meaning no taxes are paid on this 18.5% of a worker’s salary contributed toward pension. Up to an additional 16.5% of a worker’s salary contributed into the voluntary tier-3 scheme would also be tax deductible. Thus, the new pension system treats up to 35% of workers’ salaries as tax deductible. Beyond, this 35%, workers can make additional voluntary contributions (AVCs) but these will not have tax reliefs.

Globally, Income Replacement Ratio is hardly 100%. According to Mr. Aidoo Mensah who is a seasoned Actuary, adequacy tests carried out on the new pension system indicate that the first and second tier mandatory schemes will provide an Income Replacement Ratio of between 74% and 79%.  A voluntary contribution of just 5% will provide a further 20% to 25% Income Replacement Rate. Clearly, those who choose to make the maximum 16.5% voluntary contributions will have more than 100% of the preretirement incomes replaced (not inflation adjusted). Considering our socio-economic environment as Ghanaians, it is untrue that one’s income needs reduce in retirement. Talk about family and community obligations such as out-doorings, funerals, supporting the education and livelihoods of nieces and nephews (distant and close) to mention a few. In Ghana any pension that ensures an Income Replacement Ratio of as close to 100% as possible is what we need and that is what schemes under Act 766 provide.
Another attribute of the new law is the provisions made for workers in the informal sector such as traders, farmers, fishermen, drivers, tailors, hairdressers, drinking and chop bar operators etc. Workers in this sector constitute a large majority (about 85%) of Ghana’s workforce. Any pension system that ignores the retirement needs of players in this sector cannot be considered a serious and adequate system. Under the law the informal sector will have two accounts; a retirement account (which will provide benefits on retirement) and a personal savings account with rules for redemption/withdrawal prior to retirement. Like workers in the formal sector, our countrymen in the informal sector can also look forward to a secured, stress-free   retirement.
Nothing can aptly be written about the new pensions system without stating the micro and macro economic impact on Ghana as a nation. A lot has been written about oil and its potential economic impact on our nation. Whilst this writer makes no attempt to dispute any of the written potential national gains from oil, I believe that the benefits from pensions are potentially much more substantial. For one thing, real money will be in the hands of real people (all workers) when they retire – not a few. This will undoubtedly lead to retirement security and to a large extent financial independence on the part of the Ghanaian retiree.
As a nation, the pool of funds that will be made available from pension contributions will serve as a source of much needed short and medium-to-long term financing for the development of our mortgage, money, capital and insurance markets. Expansion in these areas mean more temporary and permanent jobs for the citizenry, increased income taxes and more revenue from capital gains and corporate taxes paid to government. Ultimately increased government revenue should mean more self-reliance funding for education, health and infrastructural development and less dependency of foreign aid.
No matter how one looks at it, this is a good law that deserves commendation. Much more so because, the reform was treated by the Parliament of Ghana in a very non-partisan manner. This does not happen often. Additionally, the reform was started and passed into law by President J. A. Kuffuor but implementation begun under President J.E.A Mills. As a nation let us encourage all stakeholders, especially workers in the informal sector, to embrace and contribute our pensions into the three-tier pension system.