To start with, pension managers and other schools of thought have observed that pension systems in Africa are limited to small segment of its population in formal employment. This means that many workers in the informal sectors are not covered under traditional contributory pension schemes. Hence, they don’t enjoy pension benefits when they grow old. Their inability to contribute to pension schemes has been attributed to the peculiar nature of the informal sector.
In a discussion paper titled ‘Extending Pension Coverage to the Informal Sector in Africa’ as published in July 2019, the World Bank believes there is a need for countries on the continent to consider unique characteristics of the informal sector workers so they can adopt different solutions to cover them under pensions. Thus, some workers of the informal sector have the potential to contribute to pensions even though their incomes are not sufficient to qualify them for membership under the traditional contributory pension systems.
To achieve substantial coverage of the informal sector in pensions contributions, the World Bank identifies three (3) main principles which African countries need to consider. These include (1) administrative costs need to be minimised through reliance on technology; (2) leveraging stakeholders, such as informal sector associations, Microfinance Institutions (MFIs) – any institutional structure relied on in managing the scheme should have the capacity to identify informal sector workers who are able to save; and (3) the savings of informal sector workers should be professionally managed to optimise returns and to minimise asset management costs. It is believed that these principles will help build trust and encourage people to contribute under an efficient voluntary pension scheme.
The discussion paper also suggests that pension product-design and the institutional structure need to reflect characteristics of the informal sector to improve their chance of success. For instance, the informal sector lacks clear employer-employee relationships. Hence, policymakers must consider such peculiar characteristics when designing pension schemes for the sector.
Before making the case for a voluntary scheme, the World Bank makes some observations. It is not realistic to mandate that a pension scheme be implemented in the informal sector due to low-income levels. It states:” While some informal sector workers may have sufficient incomes to defer consumption and save for old age, others face competing demands on their incomes today – such as buying food, paying for children’s education, caring for family members, housing, health care costs, and so on. So, even if a scheme is designed as mandatory, some informal sector workers may not be able to contribute when those pressing and frequent demands arise. Some may not have sufficient savings to fall back on in the case of unexpected events which impact incomes.
“The second consideration relates to the challenges involved in implementing a mandatory scheme efficiently. Because informal sector workers are typically spread widely around a country, including in rural areas – experience shows that obliging the entire informal sector to contribute to a pension scheme does not produce any relevant impact. This is especially so because of the typical gaps in national identification systems, and the absence of robust know your customer (KYC) procedures to verify the identities of individuals.”
In advocating for a voluntary scheme, the World Bank points out that: “Reaching scale in a voluntary pension scheme without subsidies and other incentives may be a challenge. If countries have the financial resources to subsidise a voluntary pension scheme, they can use systems established through social safety net programmes to identify and target the poor who would benefit from subsidies to help save for old age.
“Social registries are increasingly used to support the implementation of safety-net systems in Africa. If countries have robust targetting mechanisms supported by social registries, these systems can be used to identify low-income individuals who would then receive subsidies. As in the case of matching contributions, the affordability and sustainability of these subsidies to support participation in the voluntary pension scheme would need to be taken into consideration.”
A short-term savings account would make the pension scheme more attractive to informal sector workers when scheme managers allow occasional short-term access to the savings. This incentive, it is believed, will help build trust in the scheme. “Second, the pension scheme could be made more attractive to informal sector workers by allowing them to use the short-term savings account as collateral for various financial transactions, including obtaining credit from MFIs (Microfinance Institutions) – thereby making it easier for them to access financing. Third, the short-term savings accounts could be used by informal sector workers following what has been described as ‘idiosyncratic or covariate shocks’.”
What’s more, the World Bank also posits that a robust institutional design is key to the success of a pension scheme in the informal sector. In this regard, the design should at least aim to (1) be innovative in providing incentives for people to participate and pay contributions, including subsidies, if this is affordable; (2) provide flexibility in the payment of contributions that will depend on the amounts and regularity of incomes among the participants; (3) use innovative technology to facilitate the payment of contributions; and (4) build up the confidence of contributors that they will receive their pensions when they reach the age of eligibility.
An institutional design should include the following elements: (1) a contribution collection mechanism; (2) a record-keeping infrastructure; (3) procedures for the investment of contributions; and (4) a Treasury unit.
Informal Contributions in Ghana
Since the introduction of an Informal Sector Social Security Scheme (ISSSS) over a decade ago in Ghana, authorities have made efforts at improving coverage. Based on that, the Social Security and National Insurance Trust (SSNIT) in April 2019 made public its aggressive plans to develop and distribute pension products through such mechanisms or channels to over 13 million informal sector workers by the end of 2020. The Trust plans to use public education (awareness), NIA (National Identification Authority) integration, Payments through Mobile Money (MoMo), SSNIT App, Ghana Revenue Authority (GRA) and Registrar General Department (RGD) integration.
How the Trust overcomes such foreseeable implementation challenges will determine the extent to which it can achieve the target it has set for itself. Indeed, some of the strategies being adopted in Ghana identify themselves with those enumerated by the Word Bank in the discussion paper. Nonetheless, some pointers contained in the paper are worth considering by the Trust to streamline its operations for better results.
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This script was written by a Chartered Banker with a flair for feature-writing. He works for a company that provides financial services. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside. Email: Kwaku.Anumu@gmail.com