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THE LAW

Examination of the Regulatory Environment of Pensions in Ghana: The Good, the Bad and the Ugly

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The Pension Scheme of Ghana as in many African nations originates as far back 1950 in the colonial times. The legislation regulating the Pension Scheme at that time was the Pensions Ordinance Number 42 (Cap 30).

The United Kingdoms retirement plan for the countys working class involved the set-up of a number of provident funds, which were subsequently transferred into a basic social security scheme in 1965.

The growth of the pension sector necessitated greater control and monitoring. This led to the establishment of the Social Security and National Insurance Trust (SSNIT) in 1972, to administer the Social Security Scheme. It was later identified that the existing SSNIT pension was not providing adequate security for retirees.

The phenomenon led to the then President to establish a commission to deal with the matter. The Presidential Commission on Pensions in 2004 was put into place to address these concerns, and its recommendations led to the passing of the National Pensions Act 2008 (Act 766). However, the legislation was only implemented in 2010.

The Act had one significant change to the pension industry. The CAP 30 scheme was set aside. Two defined contributions pillars (2nd and 3rd pillars) would join the SSNIT structured benefit social insurance program, establishing the three-tier retirement system.

The main objectives of the act are, to regulate pensions through effective policy direction to secure income for the retired and the aged in Ghana; and to monitor the operations of the scheme and ensure effective administration of pensions in the country.

Act 766 and the three-pillar system

Similarly, many countries under the Organisation of Economic Cooperation and Development (OECD), from 2008 Ghana also adopted the three-pillar pension scheme to deal with major problems in the pension sector.

The First Pillar of the Scheme was implemented as a national mandatory basic pay-as-you-go scheme and is levied on all workers in the formal sector. It provides monthly payments to retirees, beneficiaries and the disabled. With the National Pensions Regulatory Authority (NPRA) as a regulatory body, the scheme is managed by SSNIT.

The Second Pillar is described as the Occupational Pension Scheme. It is also employment and earnings related. It is completely covered by contributions from employer and employees. Remittances under this Pillar can take the form of monthly payments or a lump sum. Retirement programs are administered by private retirement schemes with the NPRA as the sole regulator of the Second Pillar.

The Third Pillar of the Scheme provides voluntary private old-age schemes such as a provident fund scheme and personal retirement programs to all citizens.

It is based on tax-deductible individual contributions. Any benefits are completely funded and based on determined contribution. The pillar is mandated to offer additional benefits and cultivates a culture of saving among informal sector workers.

Some Regulations

Act 766 has provided for offences in the Act. It states that an approved trustee who fails to comply with a requirement or duty imposed on approved trustees under regulation 57 or 58 commits an offence and is liable on summary conviction to a fine of not less than one thousand, two hundred and fifty penalty units and not more than two thousand, five hundred and fifty penalty units or to a term of imprisonment not more than five years or to both”.

Also, conflict of interest issues have been dealt with by the Act in Section 36. It indicates that an approved trustee or pension fund manager shall not invest pension fund assets in instruments that are subject to any type of prohibitions or limitations on the sale or purchase of such instruments.

Furthermore, provisions on tax exemption have been provided in the Act. It states that tax is not payable by an employer or employee in respect of contribution towards retirement or pension schemes and tax is not payable on the benefits received under this Act.
While Act 766 has brought many benefits to citizens, implementation has not gone as planned.

The 2nd pillar system was set up before fund managers had been established to receive funds. This led to 5% of salaried workers wages being transferred into a central bank account, the Temporary Pension Fund Account. The necessary institutions were established in 2012-13, yet the funds remain held in the TPFA.

The good side of the Regulation (act 766)

Act 766 captures employers who fail to remit employees contributions in a timely fashion may face prosecution. Failure to transfer contributions to pension funds within 14 days after the end of each month will face prosecution.
Another advantage of Act 766 is tax exemptions.

Contributions up to specified limit are tax exempted and the total exemptions for contributions into all the pension schemes under the three-tier pension system would not exceed 35%. The tax exemption is on the total contributions by both employers and workers.

Contributors under Act 766 have the advantage of withdrawing from their retirement savings as compared to the Cap 30.
Act 766 prohibits personal interest on the funds of contributors. This secures the funds of contributors without any fear of unnecessary deductions.

There is an increased rate of contribution. Tier Two lump sum benefits are much higher than the previous SSNIT lump sum benefits, and depending on ones age, higher than Cap 30 lump sum benefit.

Payment of benefit to non Ghanaian members is another merit of the Act. It entitles citizens who are or have emigrated permanently from the country with their lump sum benefits.

The Act highlights permanent emigration as a key condition for granting retirement benefits to non-Ghanaians who might not meet the requirements for accessing pension benefits under both first and second tier Schemes.

The bad side of the Regulation (act 766)

Improper structure of the tier 2 pillar system is one of the challenges associated with Act 766. The management of the tier-two by a private firm is not the problem. The main issue is the availability of the funds at the time required for the contributors to accrue their contributions.

Sometimes, Pensioners and other contributors find it difficult to accrue their lump sum due to the structure of the Scheme.

There is a very low coverage, since only the formal sector is covered by the first and second tiers. Meanwhile, the informal sector covers about 80%-85% of the workforce. This is therefore difficult for workers to get into the Scheme because they are not in the formal sector.

The bureaucratic institutional design of the new pensions system is another problem of the act. Each layer is not only complex but every separate institution is expected to finance its staffing costs and administrative operations from fees and other charges.

The ugly side of the Regulation (act 766)

Section 9, subsection 5 of Act 766 as it stands mean the President can revoke the appointment of even representatives of Organised Labour on the Board of National Pensions Regulatory Authority. This provision is a hindrance to effective delivery of the mandates of the Authority because the representatives of Organised Labour on the Board of NPRA may be compelled to dance to the music of the government. This can compromise their duties.

In continuation from the above, Section 64, subsection 2 of Act 766 is a defect to ensure proper accountability of penalties imposed on defaulters. In its current form, the Director General and the Board may decide to legally spend huge sums of monies collected as penalties but we should remember that the penalties were imposed because of the loss of investment returns due to the delay in payment. This makes the penalties imposed default interest rates on the contributions unpaid.

The structure of the First Tier has contributed to the gross mismanagement of pension funds over the years by SSNIT. It is not proper for Managers of SSNIT to waste pension funds through reckless investments and expect the tax payer to come and bail them out whiles they go scot free, maintain their jobs without even a query letter.

Amendment of act 766 to act 883

While (Act 766) worked to remedy many problems in the pension system, it became clear that it also came with flaws. Members who were aged 55 years old or above as at 1 January 2010, the effective date for the implementation of the act, were exempt from joining the new retirement fund scheme.
It was later identified that pension fund members due for retirement under Act 766 after 5 to 10 years of its implementation could not accrue adequate contributions in the Second Tier to guarantee them superior lump sum benefits.

A revision of the act then became necessary to lower the age of exemption threshold for that age group in order, to improve their retirement packages and to make provision for other related matters.
Act 766 stipulates that workers who were 55 years of age or more when the act was implemented are exempt from joining the new old-age program.

The National Pensions (Amendment) Act, 2014 (Act 883) corrects the challenge by reducing the age limit exemption to 50 years. Also exempt workers still have the option of opting to join the new pension scheme.

With the good side of Act 883, contributors in the First Tier system who meet the minimum retirement fund contribution period of an aggregate of 15 years are entitled to a minimum pension right of 35 percent under Act 883. The rate was 50 percent under Act 766.
Additionally, members working beyond the minimum retirement fund contribution period will enjoy a minimum pension right increase of 1.2 percent for every additional year worked.

The ugly side of the Regulation (Act 883)

This amendment of Section 77 of Act 766 in Act 883 will significantly reduce monthly pension pay.

The amendment of Section 77 of Act 766 in Act 883 has significantly affected the monthly pension pay. The percentage contribution to SSNIT in terms of financing Pensioners monthly pension has not changed under Act 766. SSNIT out of the previous 17.5% with which 2.5% went to the NHIA, used 4% (25% of the 15%) out of the remaining 15% to finance the lump sum payment and 11% to finance the monthly pension pay. Under Act 766, out of 18.5%, SSNIT still keeps 11% for the monthly pension pay to pensioners. Therefore the amendment of Section 77 is needless and has rather created a problem.

Secondly, the substitution of additional 1.5% for any extra 12 months worked with 1.125% up to a maximum of 60% is a disaster to pensioners by impoverishing them.

This is the worst part of the previous amendment. To qualify for minimum pension, one must have contributed for 180 months or 15 years instead of the 240 months/20 years. By the current arrangement, a worker who works for 30 years earns 77.5% pension right but by Act 883, same 30 years earns 54.375% as a pension right. This is criminal.

The average Ghanaian public sector worker works for 35 years before retirement. Such a worker should have earned 80% pension right which is equal to the current maximum limit of 80%. Therefore, all workers who work for 36 years and above already forfeit some percentage of their pension right. The amendment in the new Act to 60% is tantamount to impoverishing Ghanaian Pensioners.

Recommendations (Act 766)

Section 9, subsection 5 of Act 766 as it stands mean the President can revoke the appointment of even representatives of Organised Labour on the Board of NPRA. With this controversial provision, there is the need to amend Section 9(5) to read Despite the provision of subsection 5, the President shall not revoke the appointment of representatives of Organized Labour, Pensioners and Employers Association unless the groups they represent in writing informs the President of their intention to change their representatives.

This will help the various representatives to serve those they represent better and not become compromised by the government, especially looking at the provision at Section 26(1&2).

Furthermore, Section 64 (2) of Act 766 should be amended, to ensure that the Director General remit all penalty sums collected under subsection (1) together with the principal contributions to the Trust without any condition of may. In the current mode of this provision, the Director General and the Board may decide to legally spend huge sums of monies collected as penalties. However, penalties were imposed because of the loss of investment returns due to the delay in payment.

This makes the penalties imposed default interest rates on the contributions unpaid.
The amendment should read The Director General shall wholly remit all penalty sums collected under subsection (1) together with the principal contributions to the Trust.

Again, Section 63 (5) of Act 766 should be re-examined and if the need be, should be amended. In the current form of this provision, salaries are paid on or before the end of the month. The law allows 14 days within which the deducted contributions should be remitted. This means an Employer who deducts these contributions on or before the month ends can decide to hold on to it and invest it for at least 13 days and spend the interest without any problem. There should be some check and balances to avoid abuse of this section by Employers especially those in the Private sector.

Recommendations to Act 883

Section 55 Subsection 3 as amended in Act 883 should be removed and replaced with The Controller and Accountant General shall remit directly to the NHIA the two and a half per centum contribution of public sector workers as their health insurance premium. This will remove the so called Administrative expenses completely.

Similarly, the refund of contributions under the Second Tier to SSNIT should include the interest that has accrued on the contributions as well.

Another recommendation is that substitution of additional 1.5% for any extra 12 months worked with 1.125% should be up to a maximum of 80% instead of the 60% in the Act.
This is to help pensioners accrue a substantial amount of fund for livelihood.

What constitutes reasonable excuse should be defined in the law so that it is not left to the Director General to determine what reasonable excuse is or not, because it could lead to discrimination. Once it is defined, any excuse that falls short of what the law prescribes would fall flat.

By: Ayisi Saint

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