As part of efforts to establish a universal, equitable and sustainable pensions scheme for workers in Ghana, a nine-member Presidential Commission on Pensions was set up by His Excellency Mr. John Agyekum Kufour in 2004 and tasked to examine existing pension schemes in Ghana and in countries of comparable economies to recommend a sustainable scheme that would ensure retirement income security for the Ghanaian worker, especially the public sector worker. The commission set out to address the broad issues listed below:
- Inadequacy of wages and retirement benefits
- Supplementary pension schemes
- Retirement age
- Pensions increase policy
- Sustainability of existing public sector pension schemes
- Monopoly, inequity in coverage and eligibility
- Basis for benefit computation
- Management and administration
- Legal and regulatory framework
- Pension schemes for the informal sector
The end product is the three tier pensions scheme under the National Pensions Act 2008, (Act 766). No two pensions schemes are the same across the world since a pensions structure must take into consideration the uniqueness of a country’s economy and dynamics of the labour force. In my opinion, the Ghanaian structure is one of the best in the world but its implementation has had its challenges, and this is the conversation for this article.
The implementation challenges for this conversation are with respect to Unification, Annuity, Informal Sector, Tax Gaps and Regulation of SSNIT. I intend to consider each of these challenges and attempt to give the way forward to addressing them.
Under Section 111 of Act 766, a contributor is entitled to use a percentage of accrued benefits to purchase an annuity for life payable monthly or quarterly from a life insurance company licensed by the National Insurance Commission.
Under Regulations 126 of L.I. 1990, seventy-five percent (75 percent) of accrued benefits shall be utilised to purchase an annuity for life guaranteed for fifteen (15) years and payable monthly from a life insurance company licensed by the National Insurance Commission.
The insurance companies have not been able to take advantage of this business under Act 766 that allows the pension funds to automatically flow into the insurance industry. This automatic flow is mandatory with the use of the word ‘shall’ in the Act. Since 2020 the accrued benefits have all been paid as lump sum instead of the mandatory twenty-five percent (25 percent) that is to be paid as the lump sum with the seventy-five percent (75 percent) as annuity.
From the legal perspective, technically any Corporate Trustee who has made hundred percent (100 percent) accrued benefits as a lump sum payment is in breach of the law, but I doubt if the Regulator can sanction. Workers/beneficiaries are not complaining, labour unions are not complaining, the pension industry players are not complaining, the government is not complaining and the insurance industry too is not complaining. As they say the law is relevant only when there is a disagreement but in this case we have all agreed by practice to breach the law. I guess where everyone – including the Regulator – is in breach of the law, and we are all in acquiescence, then the breach becomes the law.
The way forward is for the Regulator to seek an amendment to section 111 of Act 766 so the mandatory ‘shall’ is changed to ‘may’, else there is the possibility for a beneficiary to sue after taking the lump sum and misappropriating it and then saying the Corporate Trustee and the Regulator did not protect him/her in the spirit of the law. Whether or not it will be successful is another issue but there is a legal issue to answer that needs to be avoided.
Under Section 213 of Act 766 (Transitional Provisions), certain schemes in the public sector that were deemed unsustainable and certain pension-related enactments that ought to have been phased were given a transitional period of four (4) years to cease to be in force, and the Regulator was within five (5) years to ensure that pension schemes, with the exception of the Ghana Armed Forces Pension Scheme, are unified under the three tier pension scheme.
- The Pensions Ordinance No. 42 of 1950 (CAP 30) as amended;
- Teachers’ Pension Ordinance 1955 as amended;
- Ghana Universities Staff Superannuation Scheme (GUSSS);
- Ghana Police Pensions Act, 1985 (P.N.D.C.L. 126.);
- Public Legal Officers’ Pensions Amendment Act 1986 (P.N.D.C.L. 165.); (f) Immigration Service Pensions Act 1986 (P.N.D.C.L. 226);
- Prisons Services Pensions Act 1987 (P.N.D.C.L. 168);
- Section 34 of the Security and Intelligence Agencies Act 1996 (Act 526) and
- Section 27 of the National Fire Service Act, 2000 (Act 537).
From the above provisions of the Act, by January 01, 2014, all the parallel schemes should have been phased out; but the law-maker, Parliament, has somehow made it difficult for the Regulator to implement the unification aspect of Act 766. Parliament passed the Police Service Regulations, 2012(C.I. 76), Audit Service Regulation, 2011 (C.I. 70) and Legislative Instrument (L.I 2222) exempting the Police Service, the Audit Service and the Bureau of National Investigations (BNI) now NIB from Act 766.
The Supreme Court ruled in ‘Brown vs. Attorney-General’ (Audit Service Case) that “Payment of pensions and gratuities of retired officers and employees of the Audit Service are included in the administrative expenses of the service and as such, are a charge on the Consolidated Fund under Article 187 (14) and that “the payment of pensions and gratuities of retired officers and employees of the Audit Service under the Social Security Fund instead of the Consolidated Fund as provided for by the 1992 Constitution is unconstitutional”.
The C.I.70, C.I 76, L.I. 2222 and the Supreme Court ruling in the Audit Service Case has caused a lot of challenges to the unification process, and I doubt if any government will have the political will to undertake this process.
The way forward is for the institutions affected and explicitly mentioned in section 213 to be advised to place all new entrants/recruits from a specified date under Act 766 so the old schemes will overtime be progressively phased out. Of course a new entrant/recruit will have to abide by the conditions of service that have been signed for. Parliament must stick with the passage of legislative instruments exempting more institutions from the unification. Also, the government must communicate its firm commitment on the unsustainable nature of non-contributory pension schemes and stand by its decision to unify all pensions to prevent the inequities that presently exist, and for which the Presidential Commission was set up. Finally, the Regulator must seek an amendment of section 213 of Act 766 since the implementation of the provision, as it stands, is not practically enforceable though there is a breach.
Informal sector challenges
Currently, unlike formal sector workers who enjoy tax incentive in participating in the three-tier pension scheme, there is no incentive for workers in the informal sector to actively participate. Basically, what they save is what they get together with an accrued investment income.
The main advantage of pension contribution for the formal sector is the pre-tax benefit of a maximum of 35 percent of basic salary that can be made toward the three-tier pension scheme. The informal sector workers who are self-employed – such as small-scale farmers, street vendors, small traders, porters, casual labourers and artisans – and are not in an employer-employee relationship do not run a PAYE system for the tax benefit to be enjoyed at source.
Under the third tier of the pension scheme, the informal sector worker can make voluntary contributions with a minimum vesting period of 5 years which is required to be split into two accounts as follows:
- The Retirement Account: Percentage of the contributions to be credited to the contributors’ accounts. On retirement, the accrued benefits are supposed to be used to purchase an annuity from a licensed insurance company.
- The Personal Savings Account: Percentage of the contributions to be credited to the contributors’ personal savings accounts. After 5 years, the contributor may withdraw the funds in the personal account.
The challenge with the informal sector is that the tax incentive of 35 percent of basic salary for the formal sector under the current pension scheme is of no practical benefit to the informal sector workers to nudge them to defer present consumption into participating in the pension scheme.
The following are ways that can be used to increase coverage:
- Matching concept: Considering the fact that the 3rd tier scheme is a voluntary scheme, there is the need to find an equivalent incentive to mirror the tax benefit enjoyed by the contributors from the formal sector by way of a matching concept by government. The informal worker must continue making regular contributions (daily, weekly, monthly and annually) for a minimum vesting period of five years into a personal pension plan (PPP) without withdrawal. At the end of the vesting period of five years and thereafter, every five years, government matches contributions by a percentage equivalent to the tax incentive that the formal sector worker would have enjoyed upfront.
- Cash collateral: Allow the amount in the Personal Savings Account to be used as cash collateral for priority access to financing through Micro Finance Institutions (MFIs) and Savings & Loans Companies (SLCs). It is hoped that if MFIs and SLCs are to give priority to contributors of the informal sector pensions scheme in obtaining loans, it will encourage more informal workers to contribute since their businesses can be supported as well.
- NHIS registration: Informal sector workers contributing to a pension scheme should automatically be registered and assured healthcare under the National Health Insurance Scheme.
It is hoped that the matching concept, cash collateral for loans and assured healthcare will not only nudge workers in the informal sector to take up personal pension plans, but also encourage the habit of long-term savings for economic development.
Challenge with regulating SSNIT
SSNIT was established in 1972 under NRCD 127 to administer the National Social Security Scheme. Its functions were enhanced by PNDC Law 247 to provide Old Age Pension, Invalidity Pension and Death, as well as Survivors Lump Sum benefit; and in 2010, was mandated to operate the Basic Social Security Scheme which is the 1st tier of the three tier pensions scheme under Act 766. This shows that SSNIT, as a Trust, has been in existence for about 50 years. Prior to Act 766, SSNIT was basically a lord on itself by way of self-regulation, but is now being required to be regulated by the National Pensions Regulatory Authority (NPRA). This will, naturally and understandably so, comes with resistance to change; more so when it comes with loss of contributions to private Corporate Trustees. This has not gone down well, and regulating such a ‘titan’ was not going to come easy and it has not.
The process for bringing SSNIT under the regulation of NPRA, though at the time seemed the logical thing to do since capacity had to be built, hindsight brought more challenges. Staff were seconded from SSNIT to be the Regulator, and this was the governance challenge. A seconded general manager at SSNIT was to make sure the Director-General, the boss, worked according to the Act. The Board of SSNIT, in terms of personalities and ‘political’ influence, was more ‘powerful’ than that of NPRA.
It just seems we have not come to terms with the governance structure under Act 766, and we all still think in the past. To the authorities, SSNIT is still synonymous to pensions; so having a SSNIT Board is what first comes to mind, and later we realisef there is a Regulator. The effort that may go into getting a Board for NPRA now becomes a second thought. When there is a change of government, the SSNIT Board could be appointed and inaugurated but NPRA without a Board.
SSNIT and NPRA require representations from the following institutions and, most often, the top and most influential representatives would have already been appointed to the SSNIT Board making them more powerful:
- Chairperson appointed by the President of the Republic of Ghana
- Other nominees from the President of the Republic of Ghana
- Organised Labour
- Pensioners’ association
- Ministry of Finance
There have been situations where the deputy minister from a ministry was on the SSNIT Board with a deputy director from that same ministry on NPRA Board, the secretary-general of the TUC on SSNIT Board and his deputy on NPRA Board. How can NPRA regulate SSNIT? As they say: “Who born dog”?
Another challenge is that remuneration or benefits on serving on SSNIT Board is more attractive than the NPRA Board; so not surprisingly, the bosses of institutional representatives would naturally rather sit on the SSNIT Board. “Man for chop”!
The way forward is to make sure the Board of NPRA, in terms of the institutional representatives, has more senior personalities. When governments change, the NPRA Board needs to be inaugurated first, for the Board Chairperson and the CEO to be present in the inauguration of the SSNIT Board. Professionalism is by seniority and having for example a more senior lawyer as Board Chairperson of SSNIT as against that of NPRA may be problematic. You cannot make Kwesi Appiah the technical director over Jose Mourinho. Well, you can if you want to, but do not expect any cooperation. The governance structure itself will make the work of Kwesi Appiah difficult which is not his fault but that of the appointing authority.
Finally, to attract the requisite skill-set to have an effective NPRA Board, the remuneration must be attractive and comparable to that of SSNIT if not better. Being on Boards is no child’s play anymore, and those worth their salt will make sure the risk they take is commensurate with the reward. This may also reverse the trend of senior representatives of institutions opting for the SSNIT Board.
This governance structure of Act 766 as to who the regulatory authority is must be visible and evident. There should be a deliberate cautious effort in terms of governance structure starting at the Board level to empower NPRA to regulate SSNIT, else regulating SSNIT will be a mirage.
Tax gap challenge
Under Act 766, a worker, having retired or contributed to a registered Provident Fund (PF) for more than 10 years, can cash out his/her accrued benefit under that PF without incurring any tax. Act 766, however, mandates Ghana Revenue Authority (GRA) to apply a tax on the accrued benefits that are cashed out prior to the 10 years.
Currently, GRA applies a flat rate penalty of 15 percent on such early withdrawals. Therefore, with the coming into force of Income Tax (Amendment) (No2) ACT, 2021 (ACT 1071), we could potentially have a situation where a worker, earning in excess of GHS¢240,000 avoids paying tax at 30 percent with contribution to a PF, and then cashes out at a tax rate of 15 percent if he so desires, essentially reducing his tax burden by 15 percent. The flat rate may be to make the collection easier, but disadvantageous for the low tax payer who happens to also be the low income earner. The present arrangement is regressive and benefits the person whose tax rate is higher than 15 percent and makes an early withdrawal.
The way forward is for the penal tax rate to be the same as the tax rate of the contributor, which will basically mean a reversal of the tax incentive on the initial contributions to the PF should there be an early withdrawal from a PF.
No two pension schemes in the world are the same. The introduction of the three-tier pensions scheme by National Pensions Act, 2008 (Act 766) is no doubt one of the best structured innovative pensions schemes in the world, taking into consideration the dynamics of the Ghanaian labour force and its history.
The challenge is not with the ‘content’ of the Act per se but the implementation process. Once we collaboratively tackle the challenges relating to Unification, Annuity, Informal Sector, Tax Gaps and the political will to regulate SSNIT, we should be back on track.
The author, is a Chartered Banker and holds an LLB. He was the former CEO of National Pensions Regulatory Authority (NPRA). (Contact: [email protected])