It has been in the news lately that about 94% of tier 2 private pension funds will be affected by an imminent debt restructuring by the government. If done, this would amount to bad faith by the Government and eventually will kill the goose, private pension funds, the patient long term capital, that is supposed to lay the golden eggs for economic development of the country.
First, the government compulsorily paid the Temporary Pension Funds Account (TPFA) funds in government securities instead of cash to the Corporate Trustees, then reviews the private pensions investment guidelines to allow Government to off take 100% of all the funds. Now Government goes on to make the treasury bills and other government securities attractive with good yields above other investment instruments. This then naturally attracts the pension funds since they are deemed to be risk free. All of a sudden boom, a “haircut” and this will be bad faith. It is like luring a cat with fish into a cage and killing it. Let me explain this further.
TEMPORARY PENSION FUNDS ACCOUNT (TPFA) FUNDS
During the implementation of the three tier pensions scheme in 2010, the Corporate Trustees that were supposed to receive and manage the tier-2 contributions from employers were not yet in place. The National Pensions Act, 2010 (Act 766) therefore under section 218, transitional provisions, set up an account at the Bank of Ghana to “temporarily” hold the tier-2 contributions hence the Temporary Pension Funds Account (TPFA). The Regulator, the National Pensions Regulatory Authority (NPRA) was therefore mandated to again temporarily manage the funds to be off loaded to the Corporate Trustees once they were ready to receive the funds. These funds were invested in 91-day treasury bills with automatic rollovers to take advantage of interest compounding and also due to the fact that they were temporary in nature and the Regulator had no business in making any other investment decisions.
In November 2015, the NPRA started releasing the funds to the Corporate Trustees on monthly basis after Corporate Trustees on application were made to make claims on behalf of their clients who had their contributions in the TPFA. The NPRA paid cash for all such claims so the Corporate Trustees with their Fund Managers could decide on how best to invest and manage the funds.
For some reason, later, the TPFA funds were invested in longer dated Government of Ghana (GOG) securities and off loaded to the Corporate Trustees, with some still running. The effect of this mandatory transfer of GOG securities by the Government to the Corporate Trustees was twofold. First, they immediately breached the Investment Guidelines allocation to GOG securities and secondly, they were locked up with relatively longer dated securities which they might not have opted to invest in if they were to take the investment decision by themselves.
Now, my position is this. If the NPRA had released the TPFA funds as cash, then any investment in GOG securities would have been the decision of the Corporate Trustees. They can then be held responsible for any excess investment beyond the Investment Guidelines limits in GOG securities, at the time and for putting the funds at unnecessary risk should there be a haircut by the Government. Fortunately for the Corporate Trustees, Government has ratified the breach in excess of their holdings in government securities by a new Investment Guideline.
THE NEW INVESTEMENT GUIDELINE
A new Investment Guideline gazetted on September 14, 2021 by the Regulator has made it possible for the Corporate Trustees to be automatically complaint within the law after they were mandatorily off loaded with GOG securities. It technically allowed private pension funds to allocate 100% of the funds to Government.
There is therefore no way the Regulator can hold any Corporate Trustee responsible for haircut losses due to over concentration risk in government securities. The Contributors cannot also hold Corporate Trustees to their fiduciary duty to them.
The whole haircut issue should it materialise will be bad faith by Government and with the current Investment Guidelines on Private Pensions, we could have a “Robert Maxwell” episode in Ghana. I will explain in another conversation should the haircut take place. A case of luring the cat with fish to the cage and killing it for the mice to play.
I hope this haircut on tier-2 pension funds does not materialise. The intended consequences will be devastating to the private pensions industry with systemic effect on the financial sector as a whole.
IMPACT ON TIER 3 PENSIONS
Tier-3, especially the provident fund and formal private pension space has more potential for growth than the tier-2 due to the percentage of tax allowance allowed by law. Any haircut on tier-2 funds would see a sharp decline in tier-3 funds as well and the growth of private pension funds. You do not need rocket science to figure this out.
Yes, the announcement gaining grounds is that only tier-2 funds will be affected but behavioural finance will tell us that there will be unintended consequences on tier-3 funds. The rational economic being will stop any voluntary contributions to any tier-3 private pensions with the anticipation that the system cannot be trusted. There will be a run on withdrawal of provident funds and other tier-3 investments, formal and informal personal pension plans, without thinking of any long term impact on retirement income. A natural emotional response.
Government may be targeting tier-2 funds because they are mandatory and enshrined in law and the Contributor has no choice but to accept. Tier-3 funds which is voluntary and where the consumer, Contributor, being an economic being is likely to respond has not been mentioned to be affected. Theoretically this makes sense so these funds will remain intact but practically this will not be the case since the financial system is based on trust and once that is broken, consumers will react by withdrawing their existing voluntary contributions hence creating a run on the Corporate Trustees.
Future tier-3 contributions will suffer because the value proposition in selling voluntary private pensions especially to the informal sector is that the funds are safe as compared to bank deposits taking into consideration the recent compulsory collapse of banks and other financial institutions. How can the Corporate Trustees sell this product going forward? Developing informal sector private pensions will be a mirage and the financial inclusion agenda with respect to pensions would suffer a jolt.
IMPACT ON CORPORATE TRUSTEE BUSINESS
There will be a negative effect on the business of Corporate Trustees. The Assets under Management (AUM) will be affected by the haircut, fee income will dwindle and some will virtually be on the verge of collapse. Those holding huge portfolios in provident funds and concentrating on the informal sector will be hit hardest wdue to panic withdrawals.
All the gains made in the pensions business especially the informal sector and technology investment will come to nothing.
IMPACT ON BANKING SYSTEM
Haircuts on private pension funds will not have a direct impact on the banking sector but eventually will. Individuals not knowing when the next decision will be since Government seems to working in a “black box” with no one knowing where the next axe will fall may, rightly or wrongly, have to second guess the intent of Government. Those with treasury bills purchased through the banks would want to disinvest. Upon disinvestment, if successful, depositors will not keep the money with the banks. “Aban mpo nie nna bank”.
The natural asset for the store of value will be the dollar or gold which will worsen the depreciation of the cedi and possibly fuel demand for galamsey gold. Another wave of panic withdrawals in the banking system cannot be ruled out.
WAYFORWARD
- Exclude Private Pension Funds
Any domestic debt restructuring should exclude pension funds invested in government securities both public funds held by SSNIT and private funds held by the Corporate Trustees. We should not forget that SSNIT is Government owned so excluding Investments by SSNIT and giving haircut to that held by Corporate Trustees is discriminatory and bad faith. This means Government is protecting its own investment and putting that of private funds at risk. Where is the engine of growth?
- Chamber of Corporate Trustees and Board of Trustees
Corporate Trustees and Board of Trustees of private pension funds must speak up. This is the time for the Chamber of Corporate Trustees to stand up against the decision to give a haircut to their funds.
The Chamber of Corporate Trustees is supposed to be an independent pressure group to protect private pension funds. Speak up and let your voice be heard.
Board of Trustees, owe a fiduciary duty to speak up for their members once there is a risk to their funds. Make a statement. Corporate Trustees, you also owe a fiduciary duty to the Contributors and do not think your business, livelihood will not be affected. Speak up.
Those holding private pension funds in trust, this is the time to defend your fund, which is under threat, to give confidence to your members that you have their back. Business will boom, thereafter, if you are able to do this.
- The Regulator and Ministry of Labour & Employment
The Regulator, an independent body must stand up to the vision statement of “Ensuring Retirement Income Security” and the Ministry of Employment & Labour Relations must speak up to defend the workers. Currently the Regulator has dual reporting lines to both the Ministry of Employment & Labour Relations and the Ministry of Finance. It is not rocket science to know where the balance of power tilts to and even for corporate governance purposes reporting to two ministries will have its own challenges.
Though both ministries are Government ministries, they perform different roles in achieving government agenda. Having the Regulator reporting to the Ministry of Employment & Labour Relations brings balance of power between consumer protection and use of the funds in impacting the economy by the Ministry of Finance. The two ministries should never be in bed since their focus with respect to the use of the pension funds though complementary are different.
The role of the Ministry of Finance is to lobby the Ministry of Employment & Labour Relations and the Regulator to put in place an Investment Guideline that will support their agenda. In so doing the Regulator will make sure the funds by impacting on the economy are not put at unnecessary risk. This does not seem to have been the case in the crafting of the new Investment Guideline which has been a contributing factor in the concentration risk in government securities.
Private pensions belong to workers and its protection as well as supervising the investments for safe and fair returns is a labour relations issue and not a finance issue. It is for this reason that the supervising ministry for private pensions used to be the Ministry of Employment & Labour Relations and not the Ministry of Finance.
The only influence by the Ministry of Finance is to lobby in the development of Investment Guidelines and not control it but in the present environment, it does not take one to be a genius to know which ministry was directly in control of putting in place the new Investment Guidelines for Private Pensions.
I can empathise with the Regulator, NPRA, in the present situation but the bottom line is the buck stops with them as long as protecting retirement income is concerned. The Regulator must be made to revert to reporting to the Ministry of Employment & Labour Relations to protect the Contributor.
- Application of the Spirit of Section 209 of Act 766
Section 209 of Act 766 reads:
- Despite the provisions of any other enactment, pension funds or assets kept with a custodian under this Act shall not be used for the payment of claims of a custodian’s creditors in the event of liquidation of the custodian.
- In the case of winding up, liquidation or cessation of business of the custodian or any or all of its shareholders, the pension funds or assets in the custody of the custodian shall not be seized or be subject to execution of a judgment debt or from transfer to another custodian.
If you take the literal interpretation of the provisions of this section of the Act, you could safely say that it does not bar the Government from undertaking haircut on the pension funds.
If you however take into consideration the intent and spirit of the crafters of the law to protect, ring fence, the pension funds from any eventuality, be it liquidation, cessation of business, payment of judgment debt, seizure or payment of claims, a purposive interpretation will mean the pension funds were to be insulated from any such related events that will put the fund at risk which should include haircuts by government. Who would have envisaged that Government, a risk free borrower, who would by law want to protect pension funds from predators, turn around to be the predator herself? In any case I believe the spirit of section 209 of Act 766 should not allow haircut on private pension funds. This is the time for the Chamber of Corporate Trustees to test this in court to stop subsequent haircuts by any Government and to also protect their business. The serpent that was not killed in Genesis became a spitting fire dragon in Revelations.
CONCLUSION
After the banking crisis with short term funds being locked up, the financial system suffering from trust issues, it cannot afford a pensions crisis with the possibility of tier 3 voluntary long term funds being withdrawn and some Corporate Trustees struggling to survive and possibly laying off staff. Going ahead with this haircut on tier 2 pension funds will have dire consequences on the financial sector in general and would be bad faith by the Government.
The bad faith aspect by Government should the imminent haircut on tier-2 private pensions materialise is due to the fact that Government knows the tier-2 contributions are mandatory by law. The Government lured the funds with good yields, created the opportunity to absorb 100% of the funds with a new Investment Guideline and by so doing in law protected the Corporate Trustees as well as insulated the Regulator. The victim sadly will be the Contributor and the unintended consequence is that the Contributor as economic beings will respond by withdrawing their tier 3 funds. If banks cannot be trusted with deposits and the Government cannot also be trusted with investments, then the financial system which is based on TRUST and GOOD FAITH is finished.
Let us learn our lessons and not touch the financial system by this haircut on tier-2 pensions and exclude private pension funds from any debt restructuring for the untended consequence are dire.
The author is a Chartered Banker. Holds an LLB and a Post Graduate Diploma in Financial Management (ACCA). He was the former CEO of National Pensions Regulatory Authority (NPRA). (Contact: [email protected]
