Redefining pensionable salary of Ghanaian workers to include some allowances will improve their pension benefits at the end of employment, a former Acting Chief Executive Officer (CEO) of the National Pensions Regulatory Authority, Daniel Aidoo Mensah, has recommended.
Currently, the monthly remuneration package of a worker includes basic salary, allowances, and non-cash benefits. However, the pensionable salary on which deductions are made for social security and 2-tier contributions are limited to only the basic salary.
This has largely led to low pensions for workers, according to Mr. Mensah, an actuary and pensions expert who was speaking at the Pensions Conference 2021, organised by Penguard Business Consulting and Ghana Talks Business.
“Overall, a worker who participates in the third-tier voluntary scheme will end up with an income replacement rate of about 100 percent. Those who put in more than 5 percent contribution will end up with over 100 percent of their income replaced in retirement. This should be the goal of every worker in this country- an IRR above the global standard ratio of 67 percent,” Mensah stated.
To improve benefits and ensure retirement income security for Ghanaian workers, a three-tier pension structure, comprising two mandatory schemes and a voluntary scheme was instituted.
A test of the adequacy of the new 3-tier pension scheme indicates that the first and second-tier mandatory schemes will give an income replacement ratio of between 74 percent and 79 percent. A voluntary contribution of 5 percent to the third-tier voluntary scheme will give an additional replacement rate of between 20 percent and 25 percent.
In 2020, the Social Security and National Insurance Trust (SSNIT) paid out a total of Gh¢3.3 billion as benefits. This is made up of over Gh¢2.9 billion paid to 227,000 pensioners, and Gh¢16.3 million paid to some 1,400 invalid pensioners. The Trust also paid Gh¢10 million to 192 emigrants, Gh¢273.7 million to 24,000 survivors and Gh¢51.8 million in lump sums and other payments.
Informal sector participation
The voluntary third-tier personal pension scheme was specially designed to meet the special needs of the informal sector in terms of how much can contribute and also the benefits are structured to meet their short-term and retirement needs.
However, there has been slow growth in the participation of the informal sector in this scheme. Currently, just 3 percent of workers in the informal sector contribute to structured social security schemes, thus 97 percent are not guaranteed any formal pension benefit.
“There must be appropriate and relevant regulations and guidelines for the operation of informal sector schemes,” Mensah said.
“The objective is not to impose the rules governing the structured/formal sector on the informal sector, but to apply rules which take account of its specific nature and the aspirations of those who operate in it.
We must develop innovative approaches of effective contribution collection systems adaptable to the informal wage earners. An example is using the pricing mechanism for cocoa farmers whereby contributions are deducted from the sale of cocoa to COCOBOD,” he added.