Pension funds in Ghana's market

High expectations for the impact of pension reforms on the performance of equity markets and bonds have been deflated after the funding issues and technical glitches slowed the flow of investments from the second tier of the revised pension system. Hundreds of millions of cedis had been expected to be invested annually as 5% of wages were directed towards privately managed funds, but so far the market has been underwhelmed. “It has not kick started the market as expected,” Bubune Kofi Sorkpor, CEO of Weston Capital, told OBG.

Pension Reform

Pension reform began in 2006 when a report was published calling for the establishment of a three-tiered system. The new pension law came into effect as of 2010. As a result of the programme, total contributions were increased by 1 percentage point (equally shared by the employer and the employee). In total the employer pays 13% and the employee 5.5%. From that 18.5%, 13.5% goes to the Social Security and National Insurance Trust (2.5% to the National Health Insurance scheme and the rest to the tier-one pension provision). The remaining 5% is directed into a privately managed second-tier programme. An optional third tier is also available, and individuals are allowed to invest, in total, 35% of their income into the three tax-advantaged tiers.

The reform was expected to benefit the markets in a number of ways. It would direct income towards the markets directly, increase awareness of the stock market among the public, bring more business to the sector and allow trustees, custodians and fund managers to profit from the collection, holding and management of the funds. Furthermore, the best-practice structures demanded by the law, with segregated funds and licensed service providers, would ensure that assets are protected and net-asset values are being properly reported, thus increasing confidence in the markets. To a certain degree, some of the anticipated outcomes were realised. The number of service providers expanded rapidly after the passing of the new law. As of February 2015, the country had 25 corporate trustees, 62 pension fund managers and 16 pension fund custodians, according to the National Pensions Regulatory Authority (NPRA).

Glitches

However, the programme has not gone completely as planned. The biggest problem has been in moving tier-two pension contributions to the service providers. The tier-two pension system was set up before fund managers had been established to receive the funds. Thus, 5% of salaried workers’ wages needed to be deposited into an account at the central bank – the Temporary Pension Fund Account. The necessary institutions were established in 2012-13, yet the funds remain held.

The public and the financial firms in question have said that these funds, estimated to be over GHS1bn ($277.5m), have been held back. They also note that, while at the central bank, the funds earned returns far lower than market rates. It was already acknowledged that the boom in the sector had resulted in too many players, some with no experience in the industry that were bound to be pushed out by those that were stronger and more experienced. However, the hold up in disbursements made it especially difficult for many to survive, as they had to pay salaries and rent but did not yet have funds to manage. “Volumes are not coming, so they are recapitalising,” Aseye Akotia, vice-president of All-Time Capital, a Ghanaian investment management firm, told OBG.

Access to capital has also significantly limited the ability of the NPRA to fully execute its mandate. According to the finance department of the NPRA, in 2014 the government only remitted 39.8% of what it had promised to the authority for its work and activities. This has prevented the NPRA from doing as much as had been planned in terms of promotion and educating the public about the pension reforms.