As 2020 beckons, credibility of pension reforms comes under spotlight

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Beginning in 2020, private pension schemes are expected to pay out the first official lump-sums since reform of the pensions sector.

But industry experts are hinging the credibility and sustainability of reforms on the ability of schemes to promptly pay beneficiaries without facing liquidity challenges.

Some financial institutions, including savings and loans, microfinance companies, finance houses, investment banks and mutual funds, are facing liquidity challenges and struggling to pay investors their principals and interest.

In view of this, pension industry players are urging pension funds and trustees to avoid such pitfalls so as to maintain confidence in the sector.

“Currently, people are being denied their investments and returns on fixed deposits and others. Do you think pensioners have that kind of patience? If my pension is due, I just want my money,” Ernest Amartey Vondee, Director of Research & Planning at the National Pensions Regulatory Authority (NPRA), said.

“They should not take the liquidity issues lightly. If it works well, it works for all of us. How will trustees be able to speedily make payments? You can speed-up payment of claims if you have good records,” he cautioned.

The Pensions Act of 2008

In 2008, a new Pensions Act was introduced with a contributory three-tier pension scheme. This saw the establishment of a National Pensions Regulatory Authority to oversee the administration and management of registered pension schemes and trustees of registered schemes.

It also saw a reshaping of the Social Security and National Insurance Trust (SSNIT) to manage the basic national social security scheme and cater for the first tier of the contributory three-tier scheme.

The second tier is a mandatory fully-funded and privately managed occupational pension scheme, and the third is a voluntary fully-funded and privately managed provident fund and personal pension scheme.

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Data from the NPRA shows that Ghana now has 30 corporate trustees, 17 pension fund custodians, 77 pension fund managers, 723 individual trustees and 261 pension schemes.

This has led to a significant increase in pension assets value – from GH¢5.1billion or 6.75 percent of GDP in 2012 to GH¢20.8billion or 10.1 percent of GDP as at the end of 2017.

NPRA’s investment guidelines

With the NPRA’s investment guidelines directing which sectors pension funds are invested in, there are inherent risks which could pose liquidity challenges since funds are allowed to invest in fixed deposits, debentures, bonds of banks and other deposit-taking institutions.

Pension funds are also allowed to be invested in ordinary shares of limited companies listed on a stock exchange with good records, and declared and paid dividends in the preceding five years, among others.

According to the limitations in Guidelines on Investment of Pension Scheme Funds, as issued by the NPRA, Pension Fund Assets still have extra limitations regarding the percentage of funds or assets under management to be invested in particular securities.

For example, a maximum of 30 percent of Pension Fund assets may be invested in local government securities; up to 5 percent of pension fund assets can be invested in eligible bonds, Real Estate Investment Trusts (REITs), Mortgage Backed Securities (MBS), and debentures of any corporate entity; and a maximum of 35 percent of Pension Fund assets may be invested in Money Market Securities.

Updated data speeds-up payment

Mr. Vondee urged trustees to have updated data and information on contributors, so that when it comes to payments beneficiaries can be served with speed.

“SSNIT has introduced an initiative known as the ‘Age55 project’, which means once you hit age 55 you make sure that all your records are correct and your employer has made payments on your behalf, because it is the employer’s responsibility and not yours. But you have to check and be sure all your payments have come through, because all these things go to enhance your pensions – and if they are not in place, it will go against you.”

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Pensioners pin hopes on private schemes

With the first-tier scheme – SSNIT – paying significantly low incomes to pensioners, Mr. Vondee noted that the onus now lies on the private pension schemes to support the income of pensioners. “How well have these investments performed to give the retiring people relevant and adequate retirement income security?” he asked.

Data from the NPRA show that in June 2018, out of the 190,079 people on SSNIT’s payroll, 99,066 or 52.1 percent received pensions of less than GH¢500 a month. Also, 56,444 people, which represents 29.7 percent, received more than GH¢500 but less than GH¢1,000.

“What then will be their expectations? How well are the tier-2 and -3 schemes performing? They are going to judge your performance by relating it to the SSNIT scheme. I hope the private sector will perform much better and offer the income security we are all looking for.

“If not, it will appear as though the reforms were useless. While you are in your active working life, your employer might help you in a number of way – including transport, accommodation and health subsidy; but when you go on retirement, the whole burden falls on you. If you do not have adequate income, you could be a good candidate to die early,” he said.

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