Transforming the system: A new pension plan looks set to create opportunities

The implementation of a national pension scheme is expected to have a profound impact on several sectors of the Ghanaian economy. The new pensions law, the National Pensions Act, 2008 (Act 766) was enacted in December, 2008. It aims to make the system accessible to more people and encourage contributions.

INAUGURATION: The board of the National Pensions Regulatory Authority (NPRA), which was created to oversee the pension scheme, was inaugurated on August 31, 2009, followed by the launch of the scheme one month later by former President John Atta-Mills. Employees within five years of retirement were given the option to migrate to the new scheme or stay with the existing scheme. As of June 2012 there were 15 corporate trustees licensed, 13 pension-fund custodians on the register and 31 asset-management companies that had registered to become pension fund managers.

According to Diop Frimpong, the managing director of Metropolitan Insurance Pension Fund, “The new pension reform emphasises a focus on long-term savings and investments. This will give more foresight and planning to fund managers when investing.” NPRA officials were conducting familiarisation sessions with workers’ groups, which have been one of the biggest challenges. “Most of our time is spent on education,” said NPRA chairman Richard Kwame Asante.

PENSION CONTRIBUTIONS: Under the new scheme there are three tiers of contributions, the first and second being mandatory contributions to the system made by employers and employees in both the public and private sectors – 13.5% of salary is withheld and 11% redirected to the first tier, which is managed by the Social Security and National Insurance Trust (SSNIT). The other 2.5% goes to the National Health Insurance Scheme. The second tier receives 5% of the contributions. The third tier, which was developed to meet demand from informal sector employees, consists of voluntary employee and employer contributions, which will carry tax exemptions to encourage savings. This is also open to formal sector workers who want to participate in order to improve their pension. “The third tier of the pension’s reform was created in response to the demand from the informal economy for the opportunity to safely put money aside for long-term purposes,” said Kofi D Fynn, the managing director at Petra Trust, which provides trustee services. Accounts can be set up for a retirement endowment or for personal savings accounts. The proceeds of the retirement account shall be paid on the retirement of the contributor as monthly or quarterly pensions, while contributors can access benefits ahead of retirement from the savings account. The tax benefits are retained after five years of contributions.

“Tapping into the informal sector for the pension’s reform scheme can be very beneficial for the economy,” Afriyie Oware, the CEO of Axis Pension Trust, said.

AIMS: Though it seems unlikely that many workers in the informal economy will participate in a long-term savings scheme, the hope is that unions and trade associations will steer their members toward contributions. Another objective is to reduce the size of the informal economy, and registering people in the pension scheme could help. “Eventually it will be used to get people into the formal sector of the economy,” said Asante.

While the first-tier money will be managed by SSNIT, the other two are open to private sector participation. That means trustees, fund managers, insurers and other financial services firms can be involved in the system. Those who wish to market themselves as managers of the schemes must obtain licences from the NPRA, and register with the authority.

The overall goal, along with helping Ghanaians to save for their retirements, is a broadening and deepening of the country’s fledgling capital markets. The hope is that boosting the amount of institutional money and encouraging stock sales will provide more investment options and lower the cost of finance in Ghana.

“The government is coming up with investment instruments that will allow for the Ghanaian economy to fully benefit from this capital,” Kwaku Yeboah-Asuamah, the executive director of Enterprise Trustees, told OBG.