Private pension in Ghana is based on the concept of Defined Contribution (DC), where final benefits to be paid out are based on one’s contribution and the investment returns made. The performance of schemes therefore is key in the decision making process especially with respect to private personal pension plans as to which scheme to belong to, thus making information symmetry crucial.
Information symmetry in private pensions, where all parties, especially the contributors have to a very large extent perfect knowledge about what is happening to the investments is key in making sure employees and contributors are involved in the investment decisions that will affect their retirement income.
The key consumer protection information that needs to be made known to all parties include the assets under management (AUM) of all trustees, the rate of return being given by the various schemes as well as the concentration of investments assets allocated according to the investment guidelines by the regulator. This information will allow contributors push for smarter financial decisions by those entrusted to handle their retirement income to give fair and safe returns.
The three tier pension scheme which introduced private pensions by way of occupational pensions schemes (tier 2) and personal pension plans (tier 3) shifted responsibility of retirement income from the government to individuals to take care of their own destiny of retirement planning. Since most contributors are not that financially sophisticated to understand and compare pension schemes or products, the protection of the consumer is a key role by the pension’s regulator as members are responsible for selecting and switching service providers.
Disclosure and transparency is a pillar that the regulator must employ in making sure there is perfect knowledge in the industry by way of publication of key information that will allow the consumer to make informed and appropriate decisions in the area of investment returns, and the fees to which they are subject. Fortunately, the private pensions scheme fees under the three tier pensions scheme are fixed at 2.5% of the total assets under management so consumers have little to worry about fees except for the choice of scheme or trustee which is a legal right.
LEGAL RIGHT OF CONTRIBUTORS/SCHEME MEMBERS
Contributors have the right of choice with respect to which scheme to belong to and scheme members have the choice to switch service providers by way of Corporate Trustees. This is more so when the benefit payment is based on the investment returns of the various schemes. The sort of information needed for consumers to make such informed decisions therefore lies with both the Corporate Trustees and the Pensions Regulator.
ROLE OF CORPORATE TRUSTEES
The role of Corporate Trustees in consumer protection is to provide benefit statements that show monthly contributions and the investment returns indicating the annual rate of return and how that compares with the risk free rate of return as in treasury bills. The benefit statement is good information for scheme members to know how their investment is performing but does not allow for industry wide performance analysis for decision making. The schemes must also make public on their website the actual investment asset allocation positions as it compares to the approved investment guidelines by the regulator.
ROLE OF NATIONAL PENSIONS REGULATORY AUTHORITY (NPRA)
Bank of Ghana publishes Annualised Percentage Rates (APR) of banks with respect to loans to customers. This reflects the true cost (fees, charges, lending rate) of a loan that customers pay when they secure loans from the banks. By doing so, the consumer is able to compare amongst the banks the APRs of the various bank to make an informed choice as to which bank to borrow from or to negotiate the cost of borrowing.
Same is done for the various credit cards (Visa, Mastercard etc) being offered by the various banks in other jurisdictions so consumers can take smarter financial decisions. Aside giving the consumer the power and choice to decide which bank to deal with, it stimulates competition by way of pricing and good customer care. Unfortunately, in Ghana we are in a producer market when it comes to retail loans but the corporate entities have some bargaining power to want to switch. Same approach must be undertaken in the private pensions industry to bring transparency and consumer protection.
The pensions regulator, NPRA, is currently publishing the pension asset holdings by the custodians but this is of no use to the consumer since the custodians are not accountable to them. What needs to be published is the assets under management (AUM) as well as the rates of returns being offered by the various schemes and trustees to empower the contributors to make the needed financial decisions that will secure their retirement income.
Publishing the AUM will let consumers know the concentration of assets by the trustees to determine the associated concentration risks associated with large pension funds. It will also allow the trustees themselves to improve upon their strategic planning process and internal risk management processes. The sort of risk management methodologies required of large pension funds in terms of the impact of failure is so high that the required corporate governance structures, internal controls, systems and structures required of them is not the same as any other trustees hence the need for the public to know. On the world stage the various pension funds are ranked according to their AUM and this should not be a big issue for NPRA.
Publishing rates of return on contributions is another tool for consumer protection. It brings transparency and allows each contributor to take her retirement income into her own hands. Once contributors know how much each scheme or trustee is offering by way of returns above the risk free rate of return, of the treasury bill, employees have the opportunity to question their trustees during an annual general meeting.
This empowers the contributors to be more informed to make porting decisions by moving their funds to other more efficient schemes. This will also allow schemes that are offering rates of return way above industry averages to be put on alert. As the saying goes “if it is too good to be true then it is, beware”.
Information symmetry by way of disclosure of information by both the Corporate Trustee and the Pensions Regulator in bringing transparency into the private pension space is crucial in consumer choice and protection. To ensure retirement income security, the NPRA must going forward start publishing the quarterly Asset Under Management (AUM) of all Corporate Trustees in the pensions industry as well as the various rates of return on investments by the various schemes.
This will bring efficiency and competition amongst the Corporate Trustees to the benefit of the contributors. Also as a check on the supervisory role of the Regulator, the actual industrywide investments asset allocation made with respect to the investment guideline must also be published so consumers will know which assets the funds are being invested in and whether they are within limits since the guideline is in itself a consumer protection tool.
The author is a Chartered Banker, a licensed management consultant and was the former CEO of The National Pensions Regulatory Authority (NPRA), (Email: [email protected])