The National Pensions Act, 2008 (Act 766) introduced the 3-Tier pension scheme with the first batch of retirees taking their Tier-2 lump sum in 2020. Since then, there has been agitation on the amount received and a comparison being made with the old SSNIT scheme under Social Security Law, 1991 (Act 247) that workers would have been better off under Act 247.
Of course, Act 247 has served its purpose but the economic and demographic dynamics of the country has changed and it could not support the system anymore. It will be an act of intellectual dishonesty to want to roll back.
SSNIT under Act 247 was like a bucket with holes placed underneath under a tap flowing with water. Once the water was flowing the bucket was always full. A solidarity fund for any government to tap into for social development with no investment returns motive that could be abused and likely to eventually collapse.
There was the need for security of assets, quality of investment assets, liquidity, profitability of the investments and diversification of the portfolio as a whole and this had to be private sector led.
The agitation from the 2020 retirees in my opinion is to do with implementation challenges involving the issue of past credit which was kept with SSNIT and not given commercial investment rate of return.
Also, the age exemption of 50 years in joining Act 766 giving a transition investment period of ten (10) years was in my opinion miscalculated based on whatever assumption were made at the time. An extra minimum investment period of three (3) years would have done the trick with no agitation.
Ghana’s 3-Tier pension scheme structure under Act 766 is a best-of- breed system combining a mandatory government led solidarity fund as Tier-1, a private sector led investment fund as Tier-2 and laced with a supplementary individual led voluntary top up as Tier-3. Of course, ten (10) years down the line it will have its own unique challenges which we can resolve than taking the no-brainer road of reverting to Act 247 which has served its purpose and cannot support our present and future demographic and socio-economic dynamics.
REASONS FOR THE 3-TIER SCHEME
There was public workers’ agitation for their placement on the Cap 30, (a Scheme established by the Colonial Government under the Pensions Ordinance No. 42, Chapter 30 of 1950, for pensionable staff in the Civil & Public Services), due primarily to the disparity between the lump sum benefits paid by the CAP 30 Scheme which was higher than that paid by SSNIT.
His Excellency President J.A. Kufour in July 2004, then established a Presidential Commission on Pensions under the Chairmanship of the late Dr. T. A. Bediako as part of efforts to establish an equitable and sustainable Pensions Scheme for workers in Ghana since the Cap 30 was not sustainable.
The Commission was tasked to examine existing pension schemes and to make appropriate recommendations for a sustainable pension scheme that would ensure retirement income security for Ghanaian workers. In March 2006, the Commission made several recommendations, which were contained in the “Final Report of the Presidential Commission on Pensions”.
The Major recommendations included the establishment of a contributory 3-Tier Pension Scheme and a regulatory body for pensions, the National Pensions Regulatory Authority.
The 3-Tier Pension Scheme was to comprise of:
- 1st Tier: A mandatory Basic State Social Security Scheme, to be administered by a restructured SSNIT, which will pay only periodic monthly and other pension benefits (such as survivors and invalidity benefits). It will be a defined benefit (DB) scheme.
- 2nd Tier: A mandatory privately-managed occupational pension scheme. It will be a defined contribution (DC) pension scheme, paying mainly lump-sum benefits.
- 3rd Tier: A voluntary, personal pension scheme for individuals and provident fund scheme for workers.
The advantages of Act 766 in terms of features is not the subject matter of this article so will leave it but has been dealt with by the Presidential Commission on Pensions. We cannot role back to Act 247 because the disadvantages far out way the advantages due to the changing socio-economic environment.
COMPARING ORANGES AND APPLES
An international best practice for ranking pension funds is according to its adequacy by way of benefits to the poor, sustainability by way of coverage of private pension plans and integrity by way of regulation and quality of private sector pensions.
The underlying principles of Act 766 and Act 247, the conditions under which they were introduced and purpose are so different that we need to look at the big picture of the benefit to both retiree and the economic development of the country.
Comparing Act 766 with Act 247 is like comparing apples with oranges. What do we want?
- An efficient private sector led lump sum payment with transparency of how your fund is doing with possibility of topping up with a personal pension plan or a” black box” lump sum payment by government based on an actuarial formula.
- Where business and employment will be generated by private sector thorough service providers such trustee companies, fund management and custodian services with transparency in their operations under a regulator or a self-regulated SSNIT shielded by law, an indirect way of funding government social projects.
- Where any penalty for the late contribution payment by the employer, 3% per month, goes to the credit of the employee or to the scheme.
- Where government as an employer would have to make upfront payment of 5% to the private pension schemes for commercial investment returns based on defined contribution and pay penalty of 3% per month for any default in payment or can decide to owe under a wholly SSNIT scheme since the ultimate liability is on the same government and payment based on defined benefit.
- Where SSNIT would be forced to be efficient in their investment choices or remain a fully-fledged solidarity fund basically paying today’s retirees with today’s contributions and acting as an indirect source of government funding social projects.
- Where SSNIT will have a Regulator to make sure conflicts of interest and non-arm’s length transactions are minimized as well as costs and risks controlled.
- Where government can only borrow from the private pension fund under an investment guideline approved by the Regulator based on an accepted investment risk appetite.
- Where the worker can experience the growth in investment and plan for retirement or rely on government promise to pay a sum on retirement. If you think government can never default, look at Greece and Venezuela.
- Where the worker has a tax benefit of 22% as against 5%.
THE ISSUE OF PAST CREDIT
Under Act 247, SSNIT paid 25% of benefits as a lump-sum together with the monthly pension of retirees.
Under section 94 (1)(d) of Act 766 accrued or past service or past credits earned by every contributor to whom the new scheme applies in respect of the 25% lump sum benefit shall have the lump sum determined by a formula agreed between the Pension Reform Implementation Committee and the Trust based on actuarial assessment. Of course, SSNIT would have collapsed if the past credit was to have been paid out since I doubt the money was readily available, in fact it could not have.
The agitation that the lump sum payment under the 3-Tier pension scheme (Act 766) for the first batch of retirees in 2020 is lower than if they were under old SSNIT scheme (Act 247) is based mainly on the fact that the past credit was not paid out from January 01, 2010 to the private sector trustees to be invested for an investment return and SSNIT is not giving an investment return beyond the treasury bill rate either.
The private sector would not only have given an investment return of at least 400 basis point above the treasury bill rate but at worst compounded it quarterly if not monthly. If this was done, adding the returns on the past credit with that from the tier two lump-sum would have shown a different picture for the 2020 retirees.
The benefit of pensions is realized over longer periods and the earlier one contributes the better the returns. It is for this reason that the National Pensions (Amendment Act) 2014, (Act 883) reduced the exemption age in Act 766 from fifty-five (55) years to fifty (50) years for reasons that the initial five (5) years investment period under Act 766 would not be enough for the contributor to have full benefit of the returns hence moved to ten (10) years.
It is also for this reason that Act 766 gives the maximum age to join the social security scheme to be 45 years.
It seems the amendment in Act 883 should have reduced the exemption age to forty-five (45) years for the investment period to retirement to be fifteen (15) years, more so when Act 766 has the minimum age to join to be 45 years. Why do I say so?
The agitation that the lump sum paid under Act 766 to the first batch of retirees in 2020 was lower than what they would have received under Act 247 is factually true based on the figures as at 2020 but would have been different if payment was to be made in 2023 and far better in 2025. This is what 5 years can do to an investment return. With the current rate of return on investments, using the investment rule of 72, which relates to estimating an investment doubling time, the lump sum under Act 766 as paid in 2020 would have doubled by 2024. Empirical evidence show that an extra three (3) years would have been in favour of Act 766.
Maybe we got the age exemption wrong but I find it not only intellectually dishonest but a myopic view for anyone to prematurely conclude that workers are better off under Act 247. Of course, in a worse-case scenario in any transition a few people would suffer and this is what seem to have happened. Government in November 2020 set up a 10-member committee to look into this lump-sum payment issue and it is acceptable if government wants to top-up the difference which is likely to affect 2021 and possibly 2022 retirees as well. This is a lesser evil as against SSNIT collapsing if the past credit was to have been paid out in 2010 but to think of rolling back to 247 would be a disaster even though Act 766 having travelled for at least 10 years needs some review especially in terms of its impact on the informal sector.
No two pension systems in the world are the same because the demography and economies are not the same. Pension systems are dynamic and learn from each other by adopting and adapting what is working well in other jurisdictions when another jurisdiction is having similar challenges.
The result being a mix of features for which the Presidential Commission on Pensions in my opinion did a good job in getting us the mix peculiar to our circumstances. We just need to fine tune it a bit from lessons learnt since it has now almost reached the end of the transitional period and out of the woods for its effect to be realized.
Pensions is sweat money and will always be full of tension but we do not need to have a knee-jerk reaction because we did not get some assumptions spot on. We cannot role back to a fully managed SSNIT scheme as was in Act 247 since the quantum of lump-sum for the 2020 retirees and possibly to be experienced in 2021 and 2022 retirees was, in my opinion, as a result of implementation assumptions.
The assumptions made, however, was to protect the SSNIT scheme with respect to the issue of handling the past credit which could not have been fully funded at the time. Also, hindsight the age exemptions of fifty (50) years should have been forty-five (45) years to have had enough accumulation and investment period.
We are just a couple of years away to reap the full benefits of the 3- Tier pension scheme, the game changer in my opinion for a better retirement for the Ghanaian pensioner.
The author is a Chartered Banker and was the former CEO of the National Pensions Regulatory Authority (NPRA). Contact: [email protected]