Waking up in the morning can be many things. After a long night’s sleep, it is good to wake up to the freshness of a new day, to birds chirping and tweeting melodies only they know to sing. The day may be welcoming or it may be dreary. Yet still, the goodness of a new day cannot be dismissed. It’s a blessing to witness the golden sunrise, for many ‘slept and did not wake up’ to see it.
The Ringing Bell
When I was a student in boarding school, I hated to hear the rising bell ring. While I was in Form One, the bell-boy was a master at it. Not only was he always on time, his ring was ‘electrical’, like the splutter of a machine-gun. He could have easily been in competition with a mechanical alarm clock.
I admired the ring for its vibrancy but I hated to be woken that way, after sleeping too late for a twelve-year-old boy. I just don’t know how he did it; all I know is I never liked his consistency and his determined commitment to his task. Very admirable chap, easily a role model for many and very respectable, even among his mates.
Bells alert us. They enable us keep a schedule. They let us know what time it is and what we ought to do. As we have this conversation on pensions, we are being alerted that, with each passing day, we get closer and closer to an era that is not supposed to be daunting or ominous but can be if we don’t prepare well.
The meat, the gravitas, is the preparation. How well do we prepare for life after work? How do we place ourselves to assure security during our pension? Opportunities abound and if we set our minds to it, we shall achieve something good, though it is never an easy task.
PNDC Law 247
A state-sponsored pension scheme has been with us for a while, as was in my previous article. Prior to the advent of the three-tier pension scheme, there were attempts to correct the inadequacies of the existing scheme.
PNDC Law 247 of 1991 sought to convert the hitherto provident scheme into a pension scheme which allowed for the provision of Old Age Pension, Invalidity Pension and Death and Survivors Lump Sum benefit. Minimum number of months of contribution was set at 240.
The full pension was earned at age 60, irrespective of gender, and reduced pension was earned between 55 and 59 years. Importantly, pensions were paid monthly to qualifying members after a 25% payment of lump-sum to qualifying full and reduced pension members.
Famous CAP 30
After operating for fifteen years, workers agitated for a change. There was a clear contrast between benefits received by members under the non-contributory 1946 Pension Ordinance, known as CAP 30, and those received by members under the PNDCL 247.
In response to these, a presidential commission, chaired by a renown educationist and seasoned trade unionist, T. A Bediako, was set up in 2004. The commission’s objective was to come up with a pension scheme that ensured retirement income security for all workers in Ghana.
The Bediako Commission’s recommendations and the work of the subsequent Pension Reform Implementation Committee culminated in the National Pensions Regulatory Bill, passed by Parliament on October 29, 2008 and given presidential accent on December 4, 2008. The National Pensions Regulatory Act, 2008 (Act 766) was promulgated shortly after on December 12, 2008 and formally launched on September 16, 2009.
Act 766 and NPRA
Implementation of the new scheme, however, began from the 1st of January, 2010. In 2011, two accompanying regulations, the Basic National Social Security Scheme, (LI 1989) and the Occupational and Personal Pension Scheme (General) Regulations (LI 1990) were passed by the Parliament of Ghana for effective implementation of the Act 766.
The law birthed the regulator, the National Pensions Regulatory Authority (NPRA) to oversee and set regulations for the entire pensions industry in the country.
The new pension scheme has several main features:
- It is compulsory for all formal sector workers and optional for self-employed workers
- It is structured as a three-tier pension scheme
- Tier 1: A mandatory basic contributory social security defined benefit scheme managed by SSNIT
- Tier 2: A mandatory fully-funded and privately managed defined contribution occupational scheme
- Tier 3: A voluntary fully-funded and privately managed provident fund and personal pension plan which is also a defined contribution scheme.
Instructively, mandatory contributions for formal sector workers to the Tiers 1&2 schemes are as follows:
- Employer contribution (on the behalf of the worker)- 13.0% of employee’s basic salary
- Employee contribution deducted at source- 5.5% of employee’s basic salary
Of this 18.5% contribution, 13.5% is paid to the Social Security and National Insurance Trust (SSNIT) for Tier 1. SSNIT pays out a superannuation pension, an invalidity pension and a survivor’s lump sum to qualifying members. 5% is paid to a privately managed scheme with a corporate or member-nominated (in-house) trustee body.
The allowable investment plans for pension funds under the three-tier scheme ensures that pension funds are held in secure investments and manages risk inherently. A large portion of funds were prescribed to be invested in Government Treasury securities and only a small portion would be held in volatile and risky assets like shares.
As the industry has grown, slightly less is currently required to be invested in government treasuries. There has been talk of pension funds playing a significant role in national development and taking in a bit more risk.
The Three-Tier Pension Scheme
One of the greatest features of the three-tier pension scheme is the opportunity it creates for workers in the informal sector. For the first time, a national pension scheme is created to, among others, enable informal sector workers, the majority of workers in the economy, to contribute to a retirement plan.
The young man who is a cobbler at Kwame Nkrumah Circle in Accra can now belong to a ‘family’ of contributors and make a meaningful payment into the plan. Pensions contribution and beneficiary payments are no longer the preserve of formal salaried workers.
Since the informal sector contributor is likely to begin active work at an earlier age, than the formal sector contributor, he or she is more likely to have a longer working life (more months of contribution). The flexibility of contributing an amount that suits an informal sector worker’s cash flows or earnings while building towards a meaningful life after work makes it an attractive proposition.
The Story of Ernest
With contributions being tax deductible up to 35% of basic salary, the Tier 3 scheme, in particular, should enable workers to be more aggressive in their pension preparation plans. For instance, Ernest at Kokompe, salvages car parts from wrecked cars and trucks. On a good day, he easily makes two thousand Ghana cedis.
However, such ‘good days’ are beginning to come about twice a month. In between, he barely averages three hundred Ghana cedis a day. A young lady spoke to him about setting up something for his pension life. After much persuasion, he agreed to start with an amount of five hundred Ghana cedis a month.
That was a few years ago. Looking back, he realized he had made a good decision and his funds were growing. For a few months, he had not contributed because times were difficult. Yet still, he had averaged about four hundred Ghana cedis in the first year, and five hundred Ghana cedis in the second year. When he checked his statement, it amazed him how much he had accumulated over just two years. If he continued this way, he mused, he would have a tidy sum to complete his house and get a container shop to sell his wares.
This scheme has not been without criticism. Michael W. Kpessa, in his paper, “Retirement income security under Ghana’s three-tier pension model: Assessment of risks and options for reform” published in 2011, observes that “… the design of the three-tier scheme in Ghana has several risks and institutional weaknesses that can compromise the income security of the aged. Thus, he argues for the need to reform the new scheme by:
(a) establishing a statutory pension benefit insurance;
(b) scaling back the number of pension service providers;
(c) capping amount of each contributors’ funds that service providers can spend on administrative issues; and
(d) activating constitutional provisions on social assistance to augment the three-tier model.
Notwithstanding the aforementioned, the three-tier pension scheme is proving to be the best scheme ever, ensuring safe and study returns while opening up the gates for everyone to partake in it. As pension funds grow, Ghana can begin to do even more without compromising on safety. For us who haven’t as yet begun preparing for life after work, the bell still rings. Wake up!
Through his writings Kwadwo has discovered his love and knack to simplify complex theories spicing them with everyday life experiences for the benefit of all.
The Head of OctaneDC Research, Kwadwo Acheampong, has over a decade experience in fund management and administration, portfolio management, management consulting, operations management and process improvement. Feel free to send him your feedback on his article. Email: [email protected]