- the role of SSNIT and corporate trustees
In a stakeholder meeting dubbed: ‘Extending Pension Coverage to the Self-Employed and Informal sector Workers’, the Director-General of the Social Security and National Insurance Trust (SSNIT) gave the indication that they intend to onboard about one million people unto the SSNIT scheme. Also in the Business & Financial Times edition of June 17, 2022, there was a story captioned: “SSNIT engages Christian organisations to extend informal sector coverage”.
This by no means is a good initiative; but it kept me wondering if informal sector coverage is under their jurisdiction, and under what legal pensions regime are they trying to operate in? Yes, under the previous Pensions Law, PNDC Law 247, SSNIT, as an organisation was solely responsible for all forms of pensions – both formal and informal, and by March 2011, their Informal Sector Fund is said to have enrolled about 83,400 members. Is SSNIT still solely allowed to operate that Informal Sector Fund under the present pensions’ regime?
To what extent under the Pensions Act, 2008 (Act 766) can SSNIT solely dabble in informal sector pensions since this seems to have been ceded to Corporate Trustees under tier 3, or with their collaboration under tier-2? What about the self-employed? What pension arrangements can they have? Can we say “all self-employed people are informal sector workers” or “are all informal sector workers self-employed? What does the Pensions Act, 2008 (Act 766) say about informal sector and self-employed, and is it SSNIT or Corporate Trustees or both that are responsible for them?
I intend to look at what is meant by informal sector generally and then attempt to find a nexus between the meaning of informal sector and the self-employed as intended and defined under Act 766. This is to give clarity especially to the role of SSNIT in the informal sector under the new pensions regime where its mandate is to cater for the first-tier of the three-tier pension scheme.
General meaning of informal sector
There will be the need to look at informal sector with an international perspective, then drill it down to the Ghanaian perspective to be able to appreciate the intent of the definition of informal sector by ACT 766.
- International perspective
There are various approaches in categorising the informal sector but the two approaches I intend to use for the purposes of this article are the ‘Enterprise Approach’ and ‘Labour Approach’.
The ‘Enterprise Approach’ is in terms of characteristics of the production units; enterprises, place of work in which the activities take place mostly distinguished as “employment in the informal sector”. These include dressmaking, hairdressing and catering.
The ‘Labour Approach’ is in terms of the characteristics of the persons involved or of their jobs, distinguished as ‘informal employment’ with respect to the employment relationship and protections associated with the job of the worker. These include masons, carpenters and labourers.
In January 1993, the Fifteenth International Conference of Labour Statisticians (15th ICLS), leaned toward the ‘Enterprise Approach’ where the enterprises are those that are private and owned by individuals or households that are not constituted as separate legal entities from their owners and for which no complete accounts are available that allows for a separation of the production activities of the enterprise from other personal activities of the owner.
The International Labour Conference (ILC) in 2002 used the term ‘informal economy’ to refer to “all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements”.
According to (Hart, 1973), informal sector refers to “Unregulated economic enterprises or activities”.
- Ghana’s perspective
The informal sector in Ghana is made up of proprietary of micro and small-scaled enterprises. According to Farrell et al, 2000 and Ofori, 2009, operators in the informal sectors are predominantly self-employed operating from their homes or with a table and chair on a public space.
Adu-Amankwah (1999) categorised the informal sector in Ghana into two (2) broad sectors, the rural informal sector and urban informal sector.
The rural informal sector is made up of agricultural activities, fishing and fish processing activities, and rural agro-based processing activities.
The urban informal sector comprises: services (eg. caterers, cooked-food sellers etc.); Health and sanitation workers (eg. refuse collectors, herbal healers, chemical sellers etc.); construction workers (masons, carpenters, steel benders, small-scale plumbers, house-wiring electricians, and carpenters). According to Farrell et al, 2000 and Ofori, 2009, most urban informal sector employers fail to contribute to pension scheme on behalf of their employees; and employees in the informal sector could lose their jobs at any time at the whims and caprices of their employers.
Some informal sectors have been organised into trade unions, such as the Ghana Private Road Transport Union (GPRTU) which organises transport owners, drivers and their assistants; the General Agricultural Workers Union (GAWU) organising self-employed agricultural workers, and Timber and Wood Workers’ Union (TWU) made up of the small-scale carpenters, timber and wood workers, chainsaw operators.
National Pensions Act, 2008 (Act 766) and informal sector
Under section 211, ‘informal sector’ refers to production units which are engaged in legitimate economic transactions and are normally operated at a low level of organisation, with little or no division between labour and capital which operates on a small scale.
This definition seems to be from the ‘Enterprise approach’ perspective; therefore, it refers to those undertaking unregulated economic activity for which no complete accounts are available with no separation of the production activities of the enterprise from other personal activities of the owner.
There are seven other mentions of informal sector in the Act, and I will take each mention, make meaning of it to determine how it relates to the role of either SSNIT under tier-1 or the Corporate Trustee under tier-3
- The basic national social security scheme and tier-1
Part Two of Act 766 deals with the basic national social security scheme, tier 1, and is mandatory for all employees in both the private and public sectors;
Under 112 (3), “persons in the informal sector who are not covered by the mandatory first tier basic national social security scheme and second tier occupational pension scheme, shall have thirty-five per centum of their declared income treated as deductible income for the contributor for the purposes of income tax”.
The above pre-supposes that there are two categories of persons in the informal sector. Persons that are covered by the mandatory first tier basic national social security scheme and second tier occupational pension scheme and those that are not.
The first category are those that are covered under the mandatory provisions for which a total of eighteen and a half percent of their declared income is to be treated as deductible income for the contributor for the purposes of income tax as per section 3 of Act 766, with the rest of sixteen and half percent available for any other voluntary tier-3 pension scheme. These are persons employed by small-scale enterprises such as dressmakers, caterers and hairdressers and are not self-employed, hence, in line with an ‘Enterprise Approach’ of defining the informal sector. This is an area SSNIT should be concerned with and even should be in collaboration with Corporate Trustees since anyone making contributions to SSNIT under tier-1 must also make contributions to a Corporate Trustee under tier-2. The two are mandatorily linked. One cannot contribute to tier-1 without contributing to tier-2.
The second category are those under the ‘Labour Approach’ definition of informal sector, and are the self-employed in the informal sector such as a carpenter, hairdresser, dressmaker not working for anyone but herself/himself as self-employed. It is this second category that section 112 (3) of Act 766 is addressing to take advantage of the thirty-five percent of their income as deductible for income tax purposes with respect to pensions contributions.
The difficulty is, in practice, the self-employed dressmaker not using a PAYE system can only take advantage of this provision if she/he files tax returns to have the opportunity to declare her/his income to be in a position to treat the thirty-five percent of the declared income as deductible income. This is on condition that she/he is contributing to a personal pension plan under tier-3. The question is, will someone like a self-employed dressmaker file tax returns?
- The Corporate Trustee and tier-3
Section 107 (1)(b) states that “A personal pension scheme applies to individuals in the informal sector who are not covered by any retirement or pension scheme under the mandatory part of the three-tier pension scheme”.
The above reiterates the fact that there are individuals in the informal sector who are not covered by tier-1 and tier-2, hence, may make contributions to tier-3 which is managed by the Corporate Trustees. These, of course, are those in ‘informal employment’ such as the self-employed masons and carpenters that are supposed to take advantage of the tax incentive of thirty-five percent under section 112 (3). How they would do this is another issue.
Per section109 (2), “contributions by self-employed persons in the informal sector who are not covered under the mandatory scheme shall be credited to two separate individual sub-accounts (a) the personal savings account, and (b) the retirement account”.
The above means there can be self-employed persons in both the formal and informal sector, with this section actually referring to the self-employed in the informal sector and particularly those not covered by tier-1 and tier-2. The category referred to under this section are the self-employed such as masons, hairdressers and painters, and are under Corporate Trustees and not SSNIT.
Under section 110 (2)(b), “A member who has not attained the retirement age may withdraw all or part of the member’s accrued benefits from a scheme after five years from the date of first contribution in the case of personal pension scheme for contributors in the informal sector”, and also
per section 110 (5)(c), “A withdrawal of all or part of a contributor’s accrued benefits under a personal pension scheme shall be subject to the appropriate income tax for contributors in the informal sector before five years of contributions and before retirement”.
Section 110 above is referring to all persons in the informal sector who decide to contribute to personal pensions in tier-3 by Corporate Trustees.
Under sections 131 (3)(b)(i) & 137 (3)(b)(i), the Corporate Trustee is to undertake to approve an application for membership of a master trust scheme and personal pension scheme made by or on behalf of a self-employed person who is fifteen years of age or above and below retirement age and engaged in the informal sector.
National Pensions Act, 2008 (Act 766) and the self employed
The Board, that is the Regulator, under section 208 (1) (f) may issue guidelines for the purpose of giving guidance to self-employed persons under the Act. This indicates that self-employed persons may be subjected to Act 766.
Self-employed according to section 211 , means a person who has no other employer but himself or herself and works on his or her own account or with others”.
This is referring to the characteristics of the person who is being classified as self-employed. It means the person is self-employed if he/she works for himself/herself or together with others, but on his/her own account. That person, in effect, does not work for another person. This follows the ‘Labour Approach’ of classifying the informal sector; so it seems to be referring to masons, plumbers, Uber drivers etc. Self-employed under section 211, can also be attributed to lawyers, consultants, private medical doctors who work for themselves.
I can, therefore, easily make a determination that a self-employed cuts across both the informal sector (masons, plumbers, Uber drivers, carpenters) and formal sector (consultants, lawyers, private medical doctors).
There are thirteen other provisions that mention ‘self-employed’ in Act 766, and I will take each mention, make meaning of it to determine how it relates to the role of either SSNIT under tier-1 or the Corporate Trustee under tier-3.
- Under section 58. (1) (c), “The social security scheme applies to self-employed persons, who opt to join the social security scheme” and that under section 30 (3), “Self-employed persons who opt to join the national social security scheme shall pay a monthly contribution to the social security scheme”.
This above provisions means self-employed persons may decide to join the SSNIT scheme by paying monthly contributions to the scheme. This seems to be referring more to self-employed persons who do not own businesses and join the SSNIT scheme voluntarily.
- Under section 27 (1) (a), “A person authorised by the Board may, for the purpose of ensuring compliance with the provisions of this Act between the hours of 8.00 a.m. and 5.00 p.m. enter any premises in which an employer or self-employed person operates business for the purpose of inspection and examination”.
This refers to the power of the Regulator to inspect the premises of self-employed persons operating a business. It implies that self-employed persons may operate businesses and if they do, then they are also subject to the Act. It does not, however, give any indication as to under which scheme the inspection is being made. Whether under tier-1, or tier-3, the self-employed running a business is subject to the Act 766.
- Under section 99 (b), “For the purpose of preserving accrued benefits in a scheme, an employee or self-employed person shall not have a right or entitlement to accrued benefits except in accordance with this Act”.
The above is giving an indication that there are conditions for the self-employed to be entitled to any accrued benefits in a scheme. This section, however, falls under part three of the Act which deals with occupational pensions schemes, provident and personal pension schemes. Therefore, section 99 is referring to the work of the Corporate Trustees and not SSNIT.
- Under section 101 (2), “Under the second tier, a member who has not attained retirement age, but has attained the age of fifty years and is not employed or self-employed is entitled to the entire accrued benefits in the scheme in a lump sum”.
The above does not allow a self-employed person who has not attained the age of sixty years to claim the lump-sum under the second tier. This implies that the self-employed person can make contributions to both tier-1 and tier-2 schemes and claim any accrued lump sum benefits under tier-2 at age fifty once the person ceases to be in employment.
- Under section 109 (1), “A self-employed person may join and pay contributions to a personal pension scheme if the person is more than the statutory retirement age or is exempted under this Act or is not more than fifteen years of age”.
Before the age of 15 years and above 45 years, Act 766 does not allow contributions into tier-1 and tier-3. However, section 109 (1) gives the self-employed the option to voluntarily join a personal pension scheme under tier-3 even after age 60 years or if below the minimum age of 15 years.
- Under section 109 (2), “Contributions by self-employed persons in the informal sector who are not covered under the mandatory scheme shall be credited to two separate individual sub-accounts, (a) the personal savings account, and (b) the retirement account”.
The above presumes that there can be self-employed persons in the informal sector who are not covered under the mandatory scheme (tier-1 and tier-2). The informal sector by the earlier definition per Act 766, refers to persons engaged in some form of enterprise but on a small-scale at a low organised level. This, however, is referring to the treatment of voluntary personal pension plans for the self-employed under tier-3.
- Under section 131 (3)(b)(i), any self-employed person who is fifteen years of age or above and below retirement age and engaged in the informal sector can be registered under a master trust scheme of Corporate Trustees under tier-3. A ‘master trust scheme’ under section 211 is a multiple-employer scheme by the Corporate Trustees whose membership is open to self-employed persons.
The challenge of SSNIT operating informal sector tier-1 scheme
The challenge with SSNIT is that under Act 766, they cannot run a stand-alone informal sector tier-1 scheme without it being linked to a contribution to tier-2. The two are mandatory for qualifying persons.
Due to the uncertainty in the job security of persons in the informal sector, it is most likely the informal sector worker, employed or self-employed, may not be able to complete the fifteen years qualifying period for full pension under SSNIT. How can SSNIT, under a Defined Benefit plan, cater for persons in the informal sector who have not met the minimum contribution years of fifteen years? SSNIT may end up paying reduced pension for this class of workers.
The law does not give exceptions to the informal sector with respect to the minimum contribution years for tier-1. It rather gives exception to the withdrawal of lump-sum under tier-2 and tier-3 for the informal worker.
Unfortunately too, SSNIT, under Act 766, cannot dabble in the flexibility of Defined Contribution plans which is the sole preserve of Corporate Trustees under tier-2 and tier-3.
Yes, SSNIT is poised in extending pension coverage to the self-employed and informal sector, but how do they intend to operationalise the scheme under Act 766 without collaboration with the Corporate Trustees. The Act does not allow any person to contribute to the SSNIT scheme without contributing to the tier-2 scheme.
The challenge of Corporate Trustees operating informal sector tier-3 scheme
The relationship between the informal sector and the Corporate Trustee is a many-to-one relationship. This makes the cost of operating in that sector expensive with respect to collections of contributions and service delivery. The most efficient and effective way is with the use of Information & Communication Technologies (ICT) which does not come cheap if not done in a collaborative industry-wide approach. No one Corporate Trustee can reach out to this sector; so this calls for some form of ‘competilaboration’ – that is the Corporate Trustees collaborating while competing.
Way forward
The Regulator is to, under section 7 (i) of Act 766 “sensitise the public on matters related to the various pension schemes” and section (7) (k) of Act 766 to “promote and encourage the development of pension scheme industry in the country”. The awareness and education programmes being undertaken by SSNIT should rather be done by the Regulator; so SSNIT and the Corporate Trustees can onboard the persons in the informal sector and the self-employed; unless, of course, SSNIT has free funds to do nationwide what the Regulator is mandated to do.
Largely, the informal sector does not operate a PAYE system to conveniently take advantage of the tax reliefs under section 112 of Act 766; and this is the major disincentive to onboarding that sector. Practically, pensions to the informal sector is just long-term savings and it becomes difficult to sell the benefit of pensions when there are competing present day needs. There is, therefore, the need to provide a matching concept where the incentive is moved from the onboarding stage to the time of withdrawal, so the self-employed and persons in the informal sector can be nudged into retirement plans. The details of that can be for another conversation.
The cost of operating in the informal sector, especially with respect to contribution collections and service delivery, is high and requires investment in technology. The Corporate Trustees will have to be encouraged to separate the Assets Under Management (AUM) for the informal sector to be incentivised with higher fees in operating in the sector. This was once done by the Regulator, and needs to be encouraged going forward.
The Regulator must champion an industrywide digital platform that will allow the Corporate Trustees and SSNIT to plug-in, which will in itself plug into the national digital platform with its payment systems – including momo platforms. A strategic alliance with the Telcos is critical. This roadmap and vision must be embarked on immediately, and the envisaged topology shared so individual Corporate Trustees and even SSNIT do not decide to invest in proprietary ICT systems, only to see their investments become redundant after an industry system is put in place.
This happened to the banking system with respect to collection of retail payments, such as utility and school fees, as well as the introduction of ATMs. You could have as many as five banks all having ATMs located at the same place because there was no roadmap for interoperability of ATMs and even the use of Visa/Mastercards when ATMs were initially being deployed. The banks were using proprietary cards. Piecemeal changes came at a great cost to the banks. If there was an industry wide ATM deployment strategy, smaller banks could have collaborated to locate their ATMs to be shared by their customers.
Informal sector pensions in terms of volumes and effort it takes to reach out is not a profitable venture for a private Corporate Trustee. An industry-wide ICT strategic plan by the Regulator is therefore needed so the players do not waste resources trying to put in place individual systems just for the Regulator to pull a surprise.
Conclusion
Having gone through and analysed various provisions of Act 766 that deal with the informal sector and the self-employed, I conclude as follows:
- Self-employed in the formal sector falls under the mandatory schemes of tier-1 (SSNIT) and tier -2 (Occupational Pension schemes).
- Persons employed in informal sector, working for themselves, and not an employer that is self-employed -“Labour Approach” – fall under tier-3, personal pensions of Corporate Trustees unless, of course, they opt to contribute to tier-1 and tier-2.
- Persons employed in informal sector enterprises working for an employer and not self-employed, “Enterprise Approach”, fall under tier-1 (SSNIT) and tier-2 (Occupational Pension schemes). This is the target for SSNIT if they want to play in the informal sector. Even with this, tier-2 contributions must be paid; hence, there should be a collaboration with Corporate Trustees. They cannot contribute to SSNIT alone under tier-1.
- Under Act 766, pensions for the informal sector and the self-employed seem to be more favourably tailored to be operated under Defined Contribution personal pensions plans which is the sole preserve of Corporate Trustees than Defined Benefit plans under SSNIT.
In a nut shell, SSNIT’s target in collaboration with Corporate Trustees are those persons having ‘employment in the informal sector’ with the Corporate Trustees solely responsible for those in ‘informal employment’ unless they opt to contribute to tier-1 and tier-2.
Finally, the Regulator will, however, have to play a pivotal role in this quest to extend pension coverage to the informal sector and the self-employed in terms of education and awareness creation, as well as in facilitating a common digital platform so the two major players – SSNIT and Corporate Trustees – can plug in to do the onboarding.
The author is a Chartered Banker and holds an LLB. He was the former CEO of National Pensions Regulatory Authority (NPRA). (Contact: [email protected])
