…in the liquidation of assets of a bank or specialised deposit-taking institution
The Bank of Ghana embarked on a clean-up exercise of bad banks in the country in pursuance of its legal mandate under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act930). The priority in the payment of claims under Act 930 however subordinates pension funds to other claims against any such bank that was put under receivership.
Pension is a tool used by governments to alleviate old age poverty. The funds are the life toils of workers during their active working times that is a mix of contributions from the employer, the worker and of course the government by way of tax incentives.
The government of Ghana made available and used about GHS12 billion (USD2.07 billion) as bailout funds to the receiver for claims to be paid. This included customer deposits, unpaid employee emoluments, creditors and any other claim. During the exercise, pension funds placed with some of these distressed financial institutions had to take a haircut on their investment income well below the treasury bill rate. This in my opinion, should not have been the case for such specialised funds. Pension provision in itself forms part of the government’s economic management tools in alleviating poverty in old age.
The burden of incidence in the absence of pensions, falls on government any way so it is the interest of government to make sure pension funds receive priority in any such process and with full payment since it is based on defined contribution and investment income is an integral and huge part of growing private pension funds as in tier 2 and 3.
More importantly, it was the government that pulled the plugs on the banks when the Bank of Ghana had not risk graded the banks for the fund managers to take the necessary informed investment decision. The safety net in the legal framework that on pension funds does not seem to give the necessary protection and needs to be reviewed especially in the National Pensions Act, 2008 (Act 766).
INSURABLE DEPOSITS UNDER GHANA DEPOSIT PROTECTION (AMENDMENT) ACT, 2018 (ACT 968)
Deposit insurance schemes are to guarantee depositors funds in the event of a bank failure and under section 13 of Act 968, excludes the insurance of pension and retirement funds. If pension funds are exempted, then there should be a safety net under some other law but this does not seem to exist. It is understandable why the exemption, since the funds grow in geometric progression and premiums would be an unnecessary cost to the holder of the funds and even the insurer should there be a risk event. Legal protection and not transfer of the risk to an insurance scheme must therefore be the solution.
PRIORITIES IN PAYMENT OF CLAIMS UNDER ACT 930
Under section 135 (1)(b) the allowed claims after secured creditors are paid are as follows:
- necessary and reasonable expenses incurred by the receiver and the Bank of Ghana, including professional fees, under sections 123 to 139;
- payments made by the institution responsible for deposit protection in respect of insured deposits in compliance with the Ghana Deposit Protection Act, 2016 (Act 931);
- credits extended to the bank or specialised deposit taking institution by the Bank of Ghana until the appointment of the receiver;
- statutory amounts owed to the Government or to a municipality, except as determined by the Government;
- wages or salaries earned by an employee not later than one hundred and eighty days before the appointment of the receiver, as may be specified by the Bank of Ghana except for wages and salaries earned by a director or some key management personnel;
- credits extended to the bank or specialised deposit taking institution after the appointment of the receiver;
- deposits not covered under subparagraph (ii);
- compensation of employees not covered under subparagraph (v);
- unsecured credits extended to the bank or specialised deposit-taking institution before the appointment of the receiver; and
- subordinated debt.
Also under section 135 (2), where the amount available for payment of any class of claim under subsection (1) is insufficient to provide payment in full, the claim of that class shall be reduced in equal proportions.
Where do we place pension funds? There is no special dispensation under Act 930 for the pension funds as part of deposits of the banks. Understandably so since the Bank of Ghana does not deal with only pension funds but protecting all depositors’ funds and it was up to the pension regulator to have made the case for it in the priority of claims. The last hope now is the specific Act relating to pensions.
EXEMPTION OF PENSION FUNDS FROM ATTACHMENT AND LIQUIDATION PROCESS UNDER ACT 766
Under section 209 of the National Pensions Act, 2008 (Act 766), despite the provisions of any other enactment, pension funds or assets kept with a custodian cannot be used to pay claims of the custodian’s creditors in case of liquidation and in winding up or cessation of business, pension funds or assets in the custody of the custodian cannot be seized.
Of course this provision relates to custodians (the banks having custody of the pension funds or assets) as custodian banks and not the banks holding the investment funds as an issuer of a fixed deposit certificate. It is however easy to know the intent of the framers of the law that they wanted to insulate pension funds from any form of liquidation, winding up or cessation of business of whoever holds them. I have no doubt they did not avert their minds to the issuer of the investment instrument who are not custodians.
Act 766 therefore does not give the needed protection aside funds being held by the custodian banks as part of their custodial services leaving that held in the banks as part of their normal banker-customer relationship at risk.
THE FATE OF PENSION FUNDS IN THE RECENT BANKING SECTOR CLEAN UP
With specific legal protection, some pension funds that had been invested in the collapsed banks had to accept “haircuts” in their expected returns to at least cut their losses to protect their principal amounts. Meanwhile the maturity values of the investments would have been used in forecasting, cash flow analysis and performance of the various schemes. This ordinarily is understandable but looking at the purpose for these funds they needed to have been ring fenced and treated with some public policy motive.
The benefit of making full payment for the funds to grow far out ways any haircut being taken now. Meanwhile, in the present dispensation of the investment guidelines by the NPRA, government has 60% access to the funds in securities with a minimum of 35% in long dated securities. Also Local Government and Statutory Agency Securities take up 15%. Basically, government can have access to a maximum of 75% in whatever combination is needed to fund development projects by nudging the industry players. So whatever you pay now can be taken back and the worker will also have the benefit of an improved retirement payment which ultimately takes the burden off the government. A simple win-win situation, more so when the pulling of the plugs of some of the banks was a planned one and happened overnight without giving any market indicator for the fund managers to want to take an informed investment decision to pull out their deposits. Of course the reason for that is not farfetched but the retirement funds should have been protected and not ambushed.
The funds not being given any priority in times of claims on a bank in liquidation, winding up or cessation of business defeats the intended goal of securing retirement income especially for low income workers. The informal sector worker selling in the market who decided to take up a personal pension plan in this circumstance would have been better off trading with it to make higher margins.
WAY FORWARD
The Regulator, NPRA, in my view has two options. Either to push for section 135 of Act 930 to be amended to give priority to pension and retirement funds or better still amend the Pensions Specific Act to make the funds priority in the liquidation, winding up or cessation of business of institutions holding pension funds or assets which is my preferred option. This will give confidence to contributors especially for personal pension plans under tier 3 that their investment is secure for more funds to be available to the government to finance long term projects. The National Pensions Act needs a thorough review anyway having travelled over ten years with a lot of lessons being learnt.
CONCLUSION
Pension funds are “sweat” funds full of emotions for which workers have mandatorily forgone present consumption for a better future in retirement. The government in its wisdom has given tax incentives such that the contributions, investment returns and the lump sum retirement payment are not taxed just for the funds to build up substantially for the retiree to have a comfortable life. It makes no reason why the funds should not be given priority in payment claims against a financial or any entity that holds private pension funds or assets that is under liquidation, winding up or cessation of business.
As lessons learnt in the recent cleanup of the banking sector, NPRA should take the necessary steps to facilitate the needed legal amendments for private pension funds to have priority in payment claims as part of actualizing their vision of “Ensuring Retirement Income Security” and living the vision “To Regulate Pensions through Effective Policy Direction to Secure Income for the Retired in Ghana”
The writer is a Chartered Banker holds an LLB and the former CEO of National Pensions Regulatory Authority (NPRA
