Mr. Wilson Tei, Managing Director of Provident Life Assurance

Until January 2010, only workers in the Ghanaian formal sector could count on the state’s paternalistic role of assuring them of a retirement income.

Under the new pension regime, Ghanaian farmers, carpenters, taxi drivers and many other self-employed people operating in the informal sector, just like their formal sector counterparts, can look forward to a more secure retirement in view of the multiple sources of potential retirement income the new pension law offers. Unlike previously when retirees received both a lump sum payment and monthly pension payments from the state pension fund manager, Social Security and National Insurance Trust (SSNIT), the new pension law (National Pensions Act 766) now provides for a separation of these payments to the retiree between SSNIT and other institutions.

“Previously all the funds (workers’ monthly contributions) went to SSNIT and generally people have been dissatisfied with the performance of SSNIT. The attempt now is to ensure that part of the money goes out to other fund managers to attempt to grow the money better,” says Mr. Wilson Tei, Managing Director of Provident Life Assurance, in an exclusive interview with GB&F.

Consequently, based on the new law, out of the total contribution of 18.5% of the basic salary that is supposed to be paid by employers on behalf of their employees to SSNIT, 5% is expected to be transferred by SSNIT to approved trustees for management on the behalf of scheme members. The approved trustees, who will compete for these funds, are subsequently required to manage these contributions and pay lump sum benefits to workers upon attainment of the retirement age, in addition to the monthly pensions to be paid by SSNIT to the pensioner.

Furthermore, the new pension law also encourages workers to subscribe to voluntary privately managed third-tier pension schemes in addition to both the mandatory first-tier scheme
managed solely by SSNIT and the second-tier schemes managed by private fund managers. The third-tier schemes will mainly make provision for privately managed provident funds and
personal pension schemes that enables self-employed artisans, traders, farmers and others operating in the informal economy to also prepare for a dignified retirement.

“The new pension law also provides that up to 35% of a worker’s income, which is saved in pension schemes, not be subject to taxation,” said Dr. Francis Sapara-Grant, MD of SSNIT Informal Sector Fund, in an exclusive interview with GB&F. He explains further: “In view of the tax incentives provided by the new pension law, it is expected that workers will be motivated to subscribe to the three-tier pension scheme in order to reap its benefits fully. In the process, billions of cedis are expected to be mobilised that can be invested in the long term.”

Based on the prospects of huge sums of long-term funds, some analysts say the new pension regime would do a lot more for Ghana’s economy than the new oil and gas industry.
“By its nature, pension funds are long-term funds that would keep accumulating as long as contribution mobilisations exceed benefit payments. Thus, where such savings are invested primarily in the country, they become an ever-increasing source of development capital for the nation,” said Dr. Sapara-Grant.

Pension House


“On the contrary, oil and gas as natural resources are known to be finite commodities and will therefore get exhausted with time.
It is therefore only reasonable to assume that much more attention will be accorded to a more perpetual source of development capital,” he added.

Ghana’s new pension law shares similar flexibility and attractiveness with tax incentives with North America’s 401K retirement savings plans which over the years, are said to have mobilised enormous amounts of domestic savings for American stock markets, the major medium for investing such funds.

According to Dr. Sapara-Grant, in 2006, it was estimated that there were 70 million participants in US 401K plans with more than
US$3 trillion in assets.

“Ghana has some lessons to learn from the American experience. With time, the pension industry in the country will also become more innovative and attract higher savings mobilisation for national development as Ghanaian workers become more aware of the
opportunities for improving their financial wealth through pension provision,” said Dr. Sapara-Grant.

“The only snag here is the attitude of workers in the informal economy of the country to long-term financial plans. Due to the generally low level of financial literacy, most workers in the informal economy shy away from long-term savings,” he added. And the formal economy too has its own challenges as many corporations still refuse to do public offerings on the Ghana Stock Exchange.

Mr. Tei explains: “We have to shake ourselves off, in this country, of the way we understand corporate business. A lot of people do not go on the stock market because they do not want to let go of the mindset that “the company is mine”.
Good corporate governance requires that, the board is properly segregated from management and management is charged with performance and delivery and held accountable by the board. The board, in turn, is held accountable by shareholders.”

According to Mr. Tei, most businesses in Ghana are not ready to list on the stock market and comply with its rules because even appointment to company boards is influenced by issues such as one’s personal relationship with the biggest shareholder.

So where will all the billions of cedis expected to be mobilised under the new pension law be invested?

“People talk about all the money going to private fund managers. All private fund managers and all insurance companies ultimately empty these monies into their bank accounts,” Mr. Tei said.

He added: “The question is whether that is going to make money cheaper for the private sector to borrow? The cost of borrowing is not affected only by the inflow of money. It’s rather affected by how much money the banks are holding. It’s affected also by the psyche of the Ghanaian.”

“The typical Ghanaian still sees the banks as government owned. We still have that mentality that when you take money from the bank you need not pay back. If you talk to the banks you will find that one of the major reasons why the cost of borrowing is high is the high default rates,” he said.

The Bank of Ghana has started work on the challenge of high loan defaults. The central bank has granted licenses to some credit bureaus. But there is still the outstanding issue of national
identity. Mr. Tei said until the country can identify every single Ghanaian, so that when he goes to borrow from bank ‘A’, his details gets into the national database to prevent him from running away to borrow from bank ‘B’ the banks will still have a lot of work to do because people will continue to default.

“I refuse to accept that people are different in Ghana than say in the UK, US or wherever. The difference is regulation and its enforcement. People know that if you borrow in the US, for instance, and you don’t pay back, your name goes into the books. It’s attached to your social security number, your national ID number and it is seen everywhere. You may not even be able to open a bank account. That is the reason why people honour their obligations. It is that fear which we don’t have here in Ghana,” said Mr. Tei.

Still, more structures need to be built to make the new pension law fully operational. More than a year after the implementation of the new law, Ghana’s parliament is yet to work out the modalities to empower the National Pensions Regulatory Authority to roll-out the second tier pension schemes. Meantime, the 5% income contributions from workers which is expected to be transferred by SSNIT to approved trustees for management on behalf of scheme members, is currently deposited with the Bank of Ghana.

“I think the drafters of the law in my opinion have made a grievous error in not finalizing that second tier. The ultimate objective of this new pension law is to provide retirement income security and to provide adequate funds for retirees at the end of the day.”

“Where you tie these monies with the central bank, which traditionally does not pay interest, it compels it to pay interest on these monies. In other words, we have compelled the central bank to find a way of trading with the money otherwise it will not be able to pay interest on it. We are talking about building a second tier pension scheme not just the accumulation of funds for capital. The second tier will go into providing annuities that will supplement the pensions that retirees are going to be receiving besides what they will be paid by SSNIT.”

Annuities are written only by insurance companies and according to Mr. Tei, no insurance company will be interested in receiving monies at the point of payment. Rather, insurance
companies are interested in trading with workers monthly contributions as they funnel in. “What should be done is for the new pension authority to sit back and reflect, be impassionate about the work they are doing. Ultimately, their work must benefit the worker. What they are doing now is going to create fund managers, trustees and others. And for every new creation, there is a fee for the administration of the pension,” said Mr. Tei.

“Every fee takes away some of the investible funds that the worker should benefit from. We have to be careful that we do not create a situation where workers pension money goes to build or support another government bureaucracy,” he added.