Curb high rate of withdrawals from 3rd Tier pensions

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Analysts in the pensions industry are recommending guidelines from the regulator to check the rate of withdrawals from Tier 3 pensions.

Analysts in the pensions industry are recommending guidelines from the regulator to check the rate of withdrawals from Tier 3 pensions.

Tier 3 pensions are an optional contributory scheme with monthly contributions of up to 16.5 percent of an employee’s basic salary and includes informal sector workers. Tier 3 is also a defined contribution scheme, privately managed by National Pensions Regulatory Authority (NPRA) licenced service providers.

After 10 years, most contributors to Tier 3 schemes are now qualified to withdraw their benefits tax-free. Consequently, this has manifested in an uptick of withdrawals over the last 2 years.



Speaking at the 2022 Pension Conference, Andrews Agblobi – a pension and investment expert – raised concerns about the risk of withdrawals if current conditions prevail till 2023, 2024 and 2025 when most schemes will have to reach their 10th anniversary for tax purposes.

“How do we handle such a wave? The risk of mass withdrawal is looming from 2023, 2024 or 2025 when most of the Tier3 schemes will be reaching their 10th anniversary – whereupon the tax incentive will be expired for many schemes,” he said.

Unfortunately, the current Pensions Act does not make room for resetting the base year after the initial 10 years.

The effect of this trend, if not checked by the regulator, will result in high redemptions to pay while reducing investible funds available to the Tier 3 funds, as well as poor returns. This, to a large extent, will lead to stagnant growth.

Mr. Agblobi suggested that the withdrawal issue with Tier 3 can be addressed by capping the amount to withdraw while limiting the frequency of withdrawal. However, exceptional clauses such as medical care can be included but with clear rules.

Informal Pension

In the last 10 years the country has made good progress with pensions, but a lot remains to be done in the area of coverage for the informal sector. Per the National Pension Regulatory Authority (NPRA), the 3rd Tier scheme at the end of 2020 had about 559,155 contributors, with 315,980 coming from the informal sector.

As much as government or private-sector pension programmes exist in the formal sector and urban areas, the informal rural areas focus on traditional means by relying on family members and the community for social support in times of need, including old age.

In the next five years, the NPRA is targetting about 25 percent coverage for the informal sector. The target will be achieved through the Cocoa Farmers Pension Scheme and other similar initiatives for identifiable and organised informal sector groups.

The 3rd tier provident fund scheme, with a contribution rate of 5 to 10 percent, is expected to yield 20 to 40 percent of the contributor’s income just before retirement.

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