In January 2010, a new system of pension provision for Ghanaian workers came into effect following the passing of the National Pensions Act in December 2008 and its official launching in September 2009. The culmination of several years of agitation and review, the “Three Tier Pension System,” as it would come to be known, is intended to unify previous systems while correcting some of the imbalances in them.
Prior to the three tier sytem coming into effect, Ghanaian workers were provided for under the CAP 30 and the Social Security Schemes. The CAP 30 system, a colonial relic, was a non contributory system that provided for payments from the Consolidated Fund. Essentially a golden handshake at the end of active service for workers, CAP 30 was a huge drain on government resources. Also, one had to serve right to the end to be eligible, meaning that a worker’s security depended as much on his health holding out as on the clemency of his superiors.
As a replacement, a national social security system was set up, provided for and administered b y the Social Security and National Insurance Trust. Under it, workers contributed 18.5% of their salaries and received benefits under a defined formula. Benefits included a lump sum at the end of their working years at age 60, as well as monthly emoluments till they turned 72.
Under SSNIT, however, the salary replacement ratio was around 40%, as opposed to the global trend, which is around 70-76%.
While the two systems had their various weaknesses, the greatest agitation from workers stemmed from the inequalities between them. While some workers had opted for the new SSNIT scheme, others had opted to remain on the CAP 30 scheme, leading to differing payments to workers.
Frank Anderson, Public Relations Officer of the National Pensions Regulatory Authority, says this led to some anger among workers. “We could be in the same office doing the same work and earning the same amount but those on the CAP 30 would be paid more at the end of our service.”
Naturally, much of the agitation from workers was for the reinstitution of the CAP 30 scheme. However, after government’s acceptance of the recommendations of a commission set up for the purpose of looking options’ report, the new pensions system began its evolution. The new mandatory system replaces the previous systems as the single option available to Ghanaian workers. Workers under the CAP 30 system are to be phased off it in a transition period of four years.
The new contributory system provides for a three tier system. The first tier, provided for and managed by the SSNIT, is mandatory for all workers in both the public and private sectors, incorporating an improved system of benefits. These include monthly payments of 13.5% of a worker’s salary till the retired worker turns 75. Should the beneficiary pass on before he or she reaches this age, payments shall continue to be made to their dependants till that age. This was not the case under previous systems. The responsibility of issuing lump sum payments has under the new system, being taken away from SSNIT.
The second tier is an occupation based scheme privately managed and designed to give workers a bigger lump sum payment than was the case under the previous SSNIT pension scheme. Under this system, workers have to choose from among firms known as corporate trustees who will administer the funds. Workers contribute 5% of their salary to the trustees who invest the money through fund managers.
Workers can access a lump sum payment from their chosen trustee, which would have been investing their payments, when they retire. However, if the contributor becomes unemployed at 50, is permanently leaving Ghana, is certified to be medically incapacitated or voluntarily retires after age 55 he or she will be entitled to receive their benefit. Beneficiaries of the contributor also receive payments they die before reaching the age of retirement.
The third tier, which is voluntary, is also managed by corporate trustees. Supported by tax benefit incentives, it is for workers who want to enhance their benefits. The third tier is also available to workers in the informal sector who can contribute as individuals or as groups. Under this, workers in the informal sector, who were not covered previously and whose incomes are generally irregular and unpredictable, can also make provisions for their old age when they are no longer able to continue working and earning.
Generally, the new system has several advantages. As a contributory system, it relieves the government of the burden of paying workers sums of money out of the consolidated fund without the benefit of contributions from workers, which used to be the case under the CAP 30, for example. This, while giving workers higher lump sum payments and extended cover than under the previous social security system under SSNIT. Again, workers can use their future lump sum as collateral to secure a mortgage should they wish to purchase a house.
The new system, with its various requirements, has spawned a new ecosystem of various actors to ensure its running.
SSNIT, which used to be the sole provider, retains its role of providing monthly payments to retirees. Now taking contributions of 13.5%, 2% of which goes to National Health Insurance, SSNIT has been relieved of the responsibility of issuing lump sum payments to workers once they retire.
At the centre of the new system are the corporate trustees. Corporate trustees are the part of the system that directly interface with the worker, taking contributions for the mandatory second and voluntary third tier levels. When workers retire, it is the corporate trustees who will pay out a lump sum to the worker after investing their contributions.
Simon Ayivi of Axis Pensions, one of thirteen corporate trustees licensed by the NPRA explains their role.
“The trustee is in the middle. They register the investment scheme with the NPRA; they hire and fire fund managers; handle information and communication with the employees; provide compliance reports with the NPRA; deal with IRS to make sure that proper taxes are paid.”
Axis Pensions is one of new firms set up to handle pensions trusts under the new system. The NPRA has licensed some thirteen of them. While a good number are entirely new firms, others, like Enterprise Trustees leveraging brands that were previously involved in finance or insurance in this new industry. These firms are now retooling and training staff for the requirements of the new system.
Corporate trustees have to present an investment plan to the NPRA, which then vets and approves it. The real investment however is undertaken by fund managers. The NPRA has currently licensed thirty fund managers, many of whom have been in the investment business and have taken up licenses to be able to get manage pension funds.
Fund managers are also supervised by the NPRA which sets out the guidelines for investment. The guidelines are meant to ensure that the pension funds are not exposed to undue risk, endangering the futures of workers for whom they are meant to provide.
The NPRA also requires that pension funds are not mixed up with other funds. Thus, those funds can only be kept by specially licensed banks which are known as custodians. Custodian banks, thirteen of which have been registered are the banks to which pension contribution are paid, through which they are invested and from which the benefits are paid.
Atop this structure sits the National Pensions Regulatory Authority, which licenses the various actors, supervises their actions and makes sure that the regulations are obeyed. “Our ultimate concern,” Frank Anderson says, “is to protect the interests of the Ghanaian worker.”
While this new ecosystem is primarily concerned with ensuring that workers are properly catered for when they are no longer earning, it also has implications for the wider economy. With increased funds from the various contributions, fund managers say that the availability of a bigger pool of funds for long term financing should have positive implications for business such as real estate while also strengthening the capital, mortgage and insurance markets.
The new three tier pension system is currently in its infancy. Indeed, it is yet to pay out any claims. However, it is one based on sound principles and best practice. Given the quality of players involved and the robustness of supervision, it deserves confidence. As it evolves, its impact on the wider economy will be even more profound, securing a lot more than the pensions of its contributors.