Pension schemes non- compliance in the informal sector, effects on the aged


Social protection is an essential mechanism for a sustained poverty eradication and development. One of these social protection instruments is the informal pension scheme. In terms of social protection, the numbers of informal sector workers who have access to social benefits through institutionalized social security schemes are negligible.

The coverage of pension systems in Ghana is limited to the small segment of the population in the formal sector. Coverage is thin partly because, traditional contributory pension schemes are not responding to the needs of the informal sector. As a result, a large share of the adult population has no access to contributory pension schemes during their working lives. This means; they will not be eligible for a pension. It also means that, the elderly coverage gap will persist in Ghana. Expanding coverage to a larger group of workers is especially important because the elderly is now often cared for by their children. As the children move to cities, their ties to the elderly and home villages weaken. As a result, the elderly may be left behind with fewer resources.

Traditionally, the family was the critical focus in the provision of support when members become old and are threatened by economic deprivation, disability, and social isolation. In appropriate cases, the community as a whole provided the social net for those aged without a family. In contemporary times and especially with the decline of the extended family, there is a gradual shift away from primary reliance on the extended family towards dependence on more semi- formally institutionalized social security systems. The pressures created by the promotion of economic growth and social mobility together with the severe resource constraints confronting traditional systems, are all putting strains on the extended family as an effective cohesive unit that provides income security for the aged and the disabled, care for the sick and unemployed members of the family, the new born child and the mother, the orphan and even the complete stranger.

The informalities in the informal sector means fewer potential contributors and greater numbers of beneficiaries will be dependent over longer periods on the benefits. As the population ages, formal pension programs come under strain that can lead to increased costs, higher taxes and contribution rates. These pressures can limit private sector growth as the engine of growth in the market-led paradigm to development. 

Operation of SSNIT

Social Security as already emphasized on may be defined as any program of social protection established by legislation or any other mandatory arrangement that provides individuals with a degree of income security when faced with the contingencies of old age, survivorship, incapacity, disability, unemployment or rearing children.

The primary responsibility of the Trust is to replace part of lost income of workers in Ghana due to Old Age, invalidity or Death of a member where dependents receive lump sum payment; it is also responsible for the payment of Emigration benefit to a non-Ghanaian member who is leaving Ghana permanently.

The following are the features of SSNIT’s operation with reference to Act 766.

Mandatory for all workers in the formal sector and optional for self-employed.

Tier 1 – A mandatory basic contributory social security scheme managed by SSNIT.

Tier 2 – A mandatory fully – funded and privately managed occupational scheme.

Tier 3 – A voluntary fully – funded and privately managed provident fund and personal pension plan.

Contribution Rates:

Employer – 13%

Worker – 5.5%

Total – 18.5%

Out of the 18.5%, the employer remits 13.5% within 14days after the end of each month to SSNIT.

SSNIT effectively withholds 11% for the administration of Tier 1.The minimum contribution period is 180 months (15 years) in aggregate. The new minimum age at which a person may join the Basic National Social Security Scheme is 15 years and the maximum is 45 years. A fifteen-year annuity period is guaranteed. Pensions are paid monthly to qualified members.

The Pension benefits are earnings-related and based on a formula prescribed in the law governing the scheme. Other factors which affect the level of benefits are the age at which Members apply for Old Age Pension and also how long a member contributes to the Scheme. The Pension paid will fall between 37.5% and 60% of the average of the three best years’ salary depending on how long a Member contributed to the Scheme at age 60 and the Scheme the member belongs to. Those unable to contribute up to the minimum 180 months under Act 766 or 240 months under Act 247, receive a return of their contributions accumulated at a prescribed interest rate.

A member can opt for early retirement between ages 55 and 59 and receive a reduced pension.

Pensions are reviewed annually based on the changes in the average wage of contributing members and other economic indicators. Pensioners of the Scheme are made up of those on Old Age and Invalidity Pension who receive   monthly benefits through their bank accounts. Subsequently, SSNIT also remits 2.5% out of the 13.55 to NHIA for the members Health Insurance. Governing body of the Trust is a Board of Trustees with balanced representation of stakeholders. The entry age years are from 15years minimum to 45 years maximum.

The scheme also provided some exceptions, for instance 55years and above are exempted and made optional.

The scheme has also outlined the benefits and qualifying conditions for its beneficiaries such as the provision of superannuation and survivor‘s lump sum.

In accordance with the Transitional Guidelines and Directives issued by the NPRA under the National Pension Act 2008, SSNIT was to collect its own Tier 1 contributions and the 5% of the Tier 2 on behalf of the NPRA temporarily.

In making payments, employers were expected to pay the contributions under Tiers 1 and 2 with separate cheques supported by separate contribution reports. The 5% contributions for Tier 2 are immediately transferred into an account at the Bank of Ghana on behalf of the NPRA. This was to continue till the custodians, fund managers are established by the NPRA. By law, it is mandatory for all employers in Ghana to contribute to social security on behalf of all their employees. The total contribution is 18.5% which is made up of 5.5% from the employee and 13% from the employer. Both contributions are based on the employee’s basic salary. The payment to the social security scheme is then split into 13.5% which is remitted to the Social Security and National Insurance Trust (SSNIT) – Tier one scheme and the remaining 5.5 is remitted to the Tier two schemes which are privately managed. The return is required to be submitted on or before the 14th of every month in respect of the previous month’s contributions. The Act mandates contributions by and for all employees.

The SSNIT Pension Scheme

The SSNIT Informal Sector Pension Scheme was launched in 2005, prior to the passage of the National Pension Act of 2008. This was the first pension scheme in Ghana targeting the informal sector. It grew to include almost 100,000 participants by 2012. After the passage of the National Pension Act of 2008, SSNIT management interpreted the act to indicate that SSNIT’s role was to provide tier 1 pensions and not necessarily to participate in the tier 2 or 3 schemes. Management also recognized that the scheme required different business processes relative to the main scheme and opted to focus on improvements to the main scheme.

The scheme generated high administrative costs, which SSNIT management did not want to subsidize from tier 1 contribution revenue. In 2012, the SSNIT Informal Sector Pension Scheme became the responsibility of the National Trust Holding Company, which further acquired a trustee’s license to operate under the new pension’s law. The scheme has continued to grow and currently has over 155,000 members. The scheme was brought under the supervision of the National Pensions Regulatory Authority (NPRA) in 2018.

The scheme continues to operate from an informal sector desk. The scheme was designed to include both a short-term savings account and a long-term retirement account. Members were allowed to contribute any amount and as frequently as they chose, daily, weekly, every two weeks, monthly, quarterly, twice a year, yearly, or seasonally. Each contribution was divided into two equal parts and credited to the two accounts, that is, short-term and retirement savings. Members were allowed to withdraw the accumulated savings in the short-term accounts after five months of membership. Members could also use their short-term accounts as collateral to access credit from other financial institutions.

Contributions could be provided at a branch office in person, through organized trade associations, through a marketing agent of SSNIT, through a bank standing order, through payroll deductions, or through money transfers in each of the SSNIT regional offices.

SSNIT management has now determined that the National Pension Act does not precludes SSNIT from managing tier 2 schemes, and it is interested in moving back into the informal sector market. It is exploring whether it should revive the current scheme or create a new one. To revive the scheme would require buying the scheme back from the National Trust Holding Company. A launch date in late 2019 was announced with the intention of maintaining the new scheme more directly within the existing SSNIT organizational structure to reduce costs and build on synergies with the tier 1 scheme.

Several other entities (trustees) are experimenting with products aimed specifically at informal sector workers under the tier 3 legal framework.

The initiatives have interesting features, including the use of mobile money, wallet accounts, short message service reminders, and standing orders, but retain the short-term savings account–retirement account structure of the original SSNIT scheme. Although the schemes have recently been introduced on the market, they seem to be effective in reaching out to the informal sector. Nonetheless, their longer-term viability is not assured.

The history of pension Act in Ghana dates back to The Pension Ordinance of 1946. This is a non-contributory pension scheme known as CAP 30 for workers categorized as senior civil servants. However, the establishment of a national social security system by Act 279 of 1965 was the beginning of a formal social security scheme in Ghana. The Act established a Fund known as the Social Security Fund into which all contributions were paid. In 1972, the Social Security Decree (NRCD 127) was introduced to address some of the anomalies and the problems associated with the 1965 Social Security Act. During this reform, the Social Security and National Insurance Trust (SSNIT) was established. A PNDC Law 247 in February 1991 led to complete eradication of CAP 30 and a revamped the SSNIT with proper management and administrative structures.

Based on recommendations by Pension Reform Implementation Committee that began in 2004, a new Pensions Law, the National Pensions Act, 2008 (Act 766) was promulgated on 12th December, 2008. This is known as the three-tier pension scheme. It consists of two mandatory schemes (first and second tier) and a voluntary scheme (third tier). The scheme provides that workers in the informal sector, just like their counterparts in the formal sector (on the First and Second Tier schemes) will also receive monthly pensions or a lump sum after retirement.


I am of the view that, informality represents distinctive issues in the provision of retirement income that cannot be addressed merely by extending conventional pension systems to these workers. Different solutions are needed to tackle the unique characteristics of this group, some members of which may have the potential to save, but not sufficiently to participate in traditional contributory pension systems. Even if a scheme responding to the characteristics of the informal sector is implemented, some informal sector workers will not have the means to defer consumption for the sake of preparing for old age and may need subsidies.

Hence, I am of the conviction that providing old-age support for all elderly should be the ultimate, noble objective that government should pursue. Though, the government of the day does not have the resources to provide old-age support to all elderly by providing universal   social pensions or by heavily subsidizing contributions from individuals not currently contributing, however, there should be a national plan towards a full covering of our pension systems in Ghana. Because it is probable that a majority of workers in the informal sector in Ghana would need sizable subsidies to participate in a pension scheme even if the scheme is basic.

Statistical Characteristics of the Informal Sector

The characteristics of informal sector workers are diverse. The sector employs a wide range of individuals, ranging from wage earners and the self-employed to domestic workers, although self-employment is a predominant characteristic. Small farmers, street vendors, small traders, porters, casual laborers, and artisans are all part of the informal sector. Hence the informal sector workers can be classified into two main groups and several subcategories, as follows:

The self-employed, including employers in informal enterprises, own-account workers in the informal enterprises, and contributing family workers.

The wage-employed, including employees in informal enterprises, casual laborers, paid domestic workers, industrial outworkers, and homeworkers. These two classifications and multiple subcategories reflect the heterogeneity of the informal sector. Self-employment comprises a greater share of informal employment than wage employment in Ghana.

A research conducted by Josh Professional and Academic Research Consult shows that, self-employment represents 68 percent of informal employment in Ghana. Home-based workers and street vendors are two of the largest subgroups in the informal workforce. Taken together, they represent 10 percent–25 percent of the total workforce in Ghana. A substantial portion of the large informal agricultural sector is represented by small holder farmers who cultivate low-yield staple food crops on small plots with a limited use of inputs.

Employers represent only 8 percent of informal employment outside agriculture. Own-account workers—those who do not hire others—represent 51 percent. Contributing family workers represent 9 percent. A larger share of women informal workers are more than men informal workers. Women are far more likely to be own-account workers or contributing family workers, while men are far more likely to be employers.

Causes of the Informality

Workers and firms that have been excluded from the formal economy are found alongside firms and workers that have     opted out of formality on the basis of an implicit cost-benefit analysis. This shows that at least some informal sector actors have chosen to be in the sector. Specifically, some workers and firms, upon making implicit or explicit assessments of the benefits and costs of formality, choose to opt out of the formal sector. Given existing opportunities and constraints, they actually prefer informality.

In addition, the increased informal sector activity in Ghana can also be explained by the high ―cost of formality. The sector can be viewed as a rational response by micro and small entrepreneurs to over-regulation by government bureaucracies. The formal sector is often expensive to enter due to high start-up capital, cumbersome procedures for setting- up businesses which are often time-consuming. In addition, the legal and administrative requirements such as registration and licensing often pose as an obstacle to micro and small enterprises becoming legal. This is because the costs of compliance per worker are much higher in small businesses than in larger firms. This trend is quite evident in Ghana, where the costs of full administrative compliance are prohibitive, and thereby inhibit compliance

Ignorance on the part of some Informal Sector Workers

Most Ghanaians however remain ignorant about the laws and hence their rights and responsibilities as employees or employers. For instance, most workers in the informal sector (e.g. domestic workers) would voluntarily exit employment when aggrieved about their employers ‘conduct in conformance to their statutory right rather than resort to legal settlements. Although the Government of Ghana has instituted measures to promote and guarantee workers ‘rights, strict enforcement of informal statutory deduction benefits has so far been limited to formal sector workers. Most workers   operating in the informal sector remain far from enjoying their full rights. They are either ignorant about the law or are unable to secure the needed support to seek justice. They are largely unorganized and lack collective voice to make their concerns heard.

The frustration of a domestic worker is summed below:

Respondent 1 – Enock Sackey UPSA

I do not know I can take my employer to court if she doesn’t treat me fairly. But the reality is, do I have the money to hire a lawyer? So I think the best thing to do is to leave quietly if unhappy.

Respondent 2 Edward Asirifi – UPSA

I once had a madam [employer] who was very nasty and non-conformance to my statutory deductions. I was just  patient till the end of the month. Once I got my pay, I packed my things and left before she returned from work. The growing importance of the informal sector in Ghana has attracted increasing attention from both policy makers and researchers. There is an ongoing debate on whether the expansions in the informal sector in Ghana is the result of bottlenecks and red-tapes in the formal sector that hinder smooth operation of this formal sector.

The need for awareness 

It would not be justifiable to lay blames on the informal sector workers if they did not contribute to pension schemes without first knowing whether or not these workers are aware of the schemes. Josh Academic and Professional Research Consult conducted a survey with a number of respondents in the Greater Accra Region; the respondents were made to indicate whether or not they were aware of the SSNIT informal pension scheme.

Surprisingly, 81% of the workers were aware of the scheme while the remaining 19% were not. This 19% of workers is considerably high and perhaps call for agent attention. Public education on the existence of the scheme as well as its benefits needs to be intensified. The survey went ahead to unveil the workers willingness to continue with the contribution and also find out if the non-contributors are also willing to join the scheme. In this case, only 16% of the workers are not willing to contribute to the scheme. Thus, the remaining 84% of the informal sector workers are willing to contribute to the scheme. This means that additional of the non-contributors are willing to join the scheme. This is quite encouraging and needs support to get these workers into the pension scheme for secured future.

Moreover, it was noted that although workers are generally willing to voluntarily pay for social security schemes, their willingness to pay however vary from sector to sector. Thus, it would be completely wrong to override the decision of non-contribution by some of the workers. This is because, every individual has his/her judgment of a decision.

Moreover, 16% of the respondent who are aware of the scheme but do not want to contribute to it surprisingly mentioned some benefits associated with the informal pension scheme. These were not different from those benefits as one would associate with the formal pension scheme.

They are as follow:

Secured future. In the view of the workers, there is a secured future for anyone who contributes to the scheme. They believed that with the scheme, the frustrations associated with old age and retirement are at least minimized if not completely eradicated.

Get money for family up-keep at old age. Thus, in their views, in the future days where they can no longer do any economic activity, their retirement benefits from the scheme would be able to cater for their needs.

Enjoy retirement periods. If for nothing at all, people should have a sound mind and able to live happily after several years of hard work at their active ages. It is often observed that at old, people are still seen struggling to make money for their daily bread. 


Existing formal sector pension schemes do not respond to the distinct needs of the diverse informal sector. Formal sector pension schemes tend to be designed based on formal employee-employer relationships, which are a typical in the informal sector. They also require regular monthly contributions, which are not suitable for informal sector workers who are usually characterized by irregular incomes. Participation in formal sector pension schemes may not even be affordable for informal sector workers. Recognizing these challenges, Government must seek innovative pension solutions that respond to the distinct needs of the informal sector. There is no one-size-fits-all program design that can be implemented across the informal sector. The design of pension products offered by an informal sector pension scheme should reflect the characteristics of the informal sector.

The informal pension scheme seeks to ensure that people at their old age do not go into frustrations due to poverty. In the above study gathered and analyzed, the scheme and its benefits are not only known by the workers but their willing to join the scheme is also high.

Nevertheless, awareness creation on the scheme needs to be intensified. Specifically, the elderly, the single, the highly depended upon and the higher income workers have a higher probability of contributing to the informal pension scheme. Similarly, traders, artisans, highly educated and highly depended upon workers have higher probability of contributing higher amounts monthly.

It is important that informal sector workers in general are encouraged to remain loyal or join pension schemes.

Also, the scheme may have to take pragmatic measures to restore the confidence of contributors. It is important that policy makers take early precautions on how to manage and improve informal pension schemes since the workers have direct control over their incomes. However, while these efforts are put in place, the workers should also be encouraged not to withdraw their membership in the scheme but rather see the scheme as a policy in their own interest. 

The communication strategy also needs to identify clearly the roles and responsibilities of all, including non-governmental organizations.  Associations of informal sector workers are typically able to communicate with and convince their members. Knowing that their association supports an informal sector pension scheme may encourage informal sector members to participate in the scheme. Associations could play a key role not only in marketing and encouraging their members to sign up for the scheme, but also in ensuring and maintaining a steady flow of contributions, which is crucial to building up a sufficient scale of savings.

Evaluating the gaps in the capacity of the above structures to contribute to a communication strategy to promote an informal sector pension scheme is important. In some cases, the gaps may be addressed and resolved; in other cases, other partners may need to be sought. For example, associations of informal workers sometimes lack ready access to all their members because of poor membership databases or the remoteness of members. Policy makers can evaluate whether assistance should be supplied to address these and other capacity gaps in the implementation plan of a pension scheme for informal sector workers.

On the other hand, formalizing the informal sector in Ghana is feasible but to do so, there is the need to recognize that there are two categories of participants, namely, new entrants and existing firms. Thus, it is essential that the formalization process makes it easier for new entrants to start-up and grow within the informal sector while at the same time allowing the existing firms to relocate to the formal sector.

This requires addressing a number of fundamental problems. First, improving access to capital which will provide information on existing credit and financial schemes for the informal sector; help develop group collateral for credit from financial institutions; promote savings and credit schemes; undertake campaigns and advocacy for increased financial opportunities for informal sector operatives. I believe, with this guidance, improvement will be restored in the informal sector.

The writer is the CEO of Josh Academic and Professional Research Consult and an associate member of the Institute of Chartered Accountant, Ghana (ICAG).

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