The government of Ghana has asked Switzerland to support the country in the strengthening of the pension supervisor, the National Pensions Regulatory Authority (NPRA)
The growing attention for pensions in Africa
Due to the economic developments on the African continent, the attention attributed to the establishment of old-age savings arrangements in African countries has grown over the last decade.1 This growing interest is supported by international organisations like the World Bank and International Labour Organisation (ILO) as well as by bilateral development partners like Germany, the Netherlands and Switzerland.2 Reform of pensions systems in African countries has resulted in publications describing, comparing and evaluating these political actions.3 Also the private sector is getting more active, with the setting up of investment funds, conferences and publications that focus on the development of a pensions sector in Africa.4
Reasons to support the development of old-age arrangements in Africa
There are good reasons to focus on the establishment of a well-functioning pensions sector in developing countries.
One reason is to prevent old-age poverty and reduce the obligation of children to support their parents. This allows the younger generations to invest more time in their education. Currently, many youngsters in Africa need to find a job directly after the first level of education to support their families.5
Another reason is that a pensions system needs a well-functioning financial market. Experience with pension reform in Latin America6 shows that the creation of a multi-pillar system and thus an institutional structure that encourages private savings has had a positive influence on the development of a financial services industry and on the economy as a whole.7
The development of Ghana's pension sector
Old-age provisions in Ghana up to 2008
As a colonial power in Ghana, the UK started an old-age provision for the Ghanaian workers in the colonial administration in the 1950s. The scheme was funded out of public funds. From the mid 70s on, this programme - called CAP 30 - was funded by contributions from employers and employees. In the years after independence in 1957, a number of provident funds had been set up and these were transferred in 1965 into a basic social security scheme in Ghana. In 1972, the Social Security & National Insurance Trust (SSNIT) was established to administer this Social Security Scheme.
The concerns and agitations of public sector workers with regard to their pension allowances led to the establishment of a Presidential Commission on Pensions in 2004. Its recommendations led to the passing of the National Pensions Act 2008 (Act 766), whose implementation began in 2010.
The Act represented a major reform to the pensions sector. The CAP 30 programme was dismantled and two defined contribution pillars (2nd and 3rd pillars) were added on top of the SSNIT defined benefit social insurance scheme, thus creating a three-pillar pensions system.
The Ghanaian Pensions Act 2008 and the three-pillar system
From 2008, the pensions system in Ghana became based on the three-pillar concept that is known in many OECD-countries.
(1) The first pillar can be classified as a national and mandatory basic PAYG-scheme. It is levied by all workers in the formal labour market and provides monthly payments to retirees, survivors and the disabled in case of a minimum level of contribution years. There is a fund to match between levies and benefits. The scheme is managed by SSNIT with the newly established National Pensions Regulatory Authority (NPRA) as regulatory body.
(2) The second pillar, the occupational pensions scheme, is also employment and earnings-related and compulsory for all workers in the formal labour market. It is fully funded by contributions of employer and employees. The benefits are defined contribution and are lump-sum only. The pensions arrangements are managed by private pensions schemes (and thus by Trustees, Pensions Fund Managers & Pension Fund Custodians) with the NPRA as regulator and supervisor.
(3) The third pillar is offering private pensions schemes in the form of Provident Fund Schemes and Personal Pension Schemes. It is voluntary for all citizens, and based on individual contributions that are tax-deductible. Benefits are fully funded and based on defined contribution. The objective of this pillar is to offer supplementary benefits and to foster savings among informal sector workers. Like the second pillar, the administration is carried out by trustees, pensions fund managers and custodians. Like the two other pillars the third pillar is supervised by the NPRA.
The central role of the NPRA
Act 766 places the NPRA at the centre of the implementation of the pension reform. The NPRA is not only the stimulator and main regulator but also the supervisor in the new three-pillar system. As defined by the Act, the NPRA has to create public awareness and to implement and push forward the three-pillar system as a whole. It also regulates all pensions-related activities, is responsible for the licensing of operators and receives and investigates complaints and pensions-related conflicts.
After its establishment in late summer of 2009, the NPRA needed time to become operational - the first years were characterised by the recruitment of staff, acquisition of needed infrastructure and office accommodation. More recently, it has approved and published the documents for licensing of trusts and trustees, as well as pensions fund managers and custodians. In late 2013, 215 scheme registration applications were received, with 114 approved and 87 provisionally approved. 66% of schemes are from single employers (most in public and semi-public sector, some multinational companies), 30% of applications are from service providers in form of master trust pension schemes, and only 4% are for pensions schemes for individual employees. At the end of 2013, 16 companies were licensed to act as corporate trustees, 15 banks have been approved and registered to operate as pension fund custodians and 36 companies have been licensed to operate as Pension Fund Manager.
NPRA is also supervising SSNIT. Like the NPRA, the Board of Directors of SSNIT is tri-partite with representatives from government and the social partners.
The central role of the NPRA however creates risks. The organisation is young and still characterised by weak capacities, which complicates the smooth and timely implementation of the reform. Leadership of NPRA is struggling with internal and external discussions on basic organisational issues like housing, staffing, training, communication and funding. Discussions on material issues - such as interpretation of the new law and the development and implementation of detailed decrees and ordinances on internal governance issues and on the cooperation with other organisations in the public and private sector - need to take place. Procedures, templates and software for daily business of the supervisor need to be developed.
However, not everything needs to be developed from scratch. The three-pillar model for pension arrangements has already been introduced and installed successfully in other countries, with well-documented experiences. Because of its historic connections with other English-speaking countries, Ghana is in a good position to learn quickly from these experiences abroad. It is the expectation that experienced people from pension regulators and supervisors in other English-speaking countries might be interested to support the NPRA in its growing up.
An assessment of the current system in Ghana
Ghana was the first country in Africa to declare its independence from the British colonialists in 1957. Since then, the country has become a stable democracy. In the last decade Ghana has had an economic rise with average annual growth rates of 7% to 9% due to dynamic developments in the natural resources sector (gold, diamonds, bauxite), timber and agriculture (cocoa, coffee, pineapples etc.) and the production of electricity with the Akosombo Dam in Lake Volta, the biggest artificial lake in the world. The exploration of oil since 2010 and the development of the services sector (transport, communication and tourism) have led to a further push in the Ghanaian economy. This growth period has resulted in Ghana's graduation to middle income country status.
Based on figures in 2012, Ghana has a total population of 25 million people and a labour force of 12 million, with only one fifth working in the formal sector. The GDP per capita is 1 300 USD. The life expectancy at birth for men is 57 and for women 59 years. The statutory pensionable age for men and women is both 60. Like many other African countries Ghana has a very high dependency ratio, since around half of the population is younger than 16 years. Only four per cent of the population is aged 60 or older.
The Ghanaian labour market: Formal versus informal sector
Approximately 20% of the Ghanaian labour force works in the formal sector (with an employer and with a formal labour agreement) whereas 80% remain in the informal part of the economy. The employees in the formal sector have mandatory cover in the first pillar and, since 2010, also in the second pillar. Since the end of 2013, some 200 trusts have been registered to act as pension scheme for workers in the formal sector.
To meet the demand for retirement savings schemes for informal workers, SSNIT established the Informal Sector Fund (SISF) in 2008. The SISF is a voluntary contributory pension scheme with no fixed rate contributions. Contributions are credited in equal parts to two individual member sub-accounts: a) to the Occupational Scheme Account (OSA) and (b) to the Retirement Account (RA). Members may make periodic withdrawals from the OSA after they have made five months of initial contributions, provided that the account has a credit balance. The RA funds are only accessible in the event of old age, disability, or death. The SISF, in partnership with a bank and a microfinance institution, offers retirement savings options to informal workers as well as financial services. The SISF had 91 000 members by late 2011 and already 2 million members in 2013.
The formal labour market: Large versus small employers
In the formal labour market a couple of hundred enterprises may have the size to establish and manage their own pensions trust. At the end of 2013 two-thirds (some 140) of registered schemes are from single employers, most in the public and semi-public sector and some multi-national companies (MNCs). Many of these MNCs are part of a global enterprise (finance and financial services, food, oil/ dwelling/commodities, etc). However, the majority of companies in Ghana are too small and might not be interested in setting up their own pensions trust. To meet the requirements of the Pensions Act they need to affiliate to one of the many multi-employer funds that are set up and managed by external service providers like banks and professional service providers.
Role of the insurance sector
By nature, and as can be observed in many countries, the insurance sector in general is an important driver for the development of arrangements for old-age provisions. However, the Ghanaian second pillar offers no pensions benefits in terms of annuities - at retirement the capital is paid out as a lump-sum. The system has no insurance character and therefore the involvement of actuaries is not needed. This should make the system easier to understand and to manage than for example most pensions systems in OECD-countries. The Ghanaian second pillar has no problems with a lifetime pension promise, parameters like conversion rate and technical interest or with the issues caused by longevity and falling investment returns. For the reason mentioned before, the 2nd pillar itself in Ghana is primarily of interest for banks and less for insurance companies. On the other hand, the risks of death and disability are not yet covered by the pension funds. Coverage of these risks is offered only by the first pillar.
Investment climate and asset management in Ghana
The development of a funded old-age system (second pillar) has created an attractive investment climate. A major challenge for the Ghanaian government and for the NPRA will be the creation of a stable, secure and trusted investment climate for the pension trusts. However, investment banking, as well as commercial real estate and stock markets, are still in an early stage of development. In the last decade, SSNIT as the responsible institution for the social security has been the largest investor in the country. Contributions into the second pillar Occupational Pension Scheme, prior to the registration of these as approved schemes by the NPRA, have been invested into Government Treasury Bills at the Bank of Ghana where they are still invested at the moment. It has been announced by the NPRA8 that by the end of Q1 2014, all contributions that have been paid and assets that are still with the Bank of Ghana, will be transferred to the licensed pension trusts and their custodians. For the investment management of the funds there are clear Investment Guidelines that have already been issued by the NPRA.
Weaknesses of the current/anticipated pensions system in Ghana
The main weaknesses of the current system9 are:
(1) A very low coverage, since only the formal sector, is covered by the first and second pillars
(2) Inadequate investment returns, due to the fragility of national financial markets and the private sector. The absence of corporate bond markets means that banks in particular would exercise monopoly over their investments
(3) The bureaucratic institutional design of the new pensions system. 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
(4) A substantial slippage in real value of the pensions due to inflation, and
(5) A general lack of adequate knowledge about markets and financial instruments. In a country like Ghana where basic literacy still is at a low level, financial literacy might become a main problem due to consumer ignorance, insufficient consumer protection and information overload. Low acceptance in the market may be the result.
A project supported by the Swiss Government to improve the functioning of the NPRA
In 1972, Switzerland was one of the first countries in the world to introduce a three-pillar model for old-age arrangements. This model has been an example for other countries in the world and it has been described in many publications of international organisations and researchers.
Based on this reputation the Government of Ghana requested a study visit of the Presidential Reform Implementation Committee to Switzerland. Following a successful visit in 2009, the Government of Ghana invited the Swiss Government in 2011 to support the strengthening of the NPRA. To prepare a project with the NPRA, the Swiss State Secretariat for Economic Affairs (SECO) commissioned two analytical reports.
- The first report was an assessment of the Ghana pensions system by the benefit consultant Mercer, based on the methodology of the Melbourne Mercer Global Pensions Index.
- A second report was the compilation of a needs assessment carried out by PwC in 2012 with the goal to explore needs and to define projects that could be done to strengthen the oversight and regulatory function of NPRA.
Based on these two reports, the NPRA and SECO have defined a project for the period 2014 - 2016 with the following two objectives:
(1) to strengthen the NPRA's oversight and regulatory function, and
(2) to improve the internal functioning of the NPRA.
The project will post two advisors and a project manager inside the NPRA and implement a number of sub-projects.
Advisors to this project are currently being procured through a public open tender. This tender might be interesting for consulting companies and experienced individuals with interest in Sub-Saharan Africa. However, service providers, insurance companies and international firms might also be interested to get more information on the three-pillar model in Ghana. The tender documents are available at the official platform for public procurements of the Swiss Government www.simap.ch.
Dr Jaap van Dam works for HSP Consulting Ltd in Switzerland
1 See OECD, Stewart/Yermo (2009): Pensions in Africa, for a description of the pension systems in 15 African countries. The paper was designed to support a conference in 2008 in Kenya organised by the OECD to assist with the development of national pension systems. A World Bank Study in 2012 of formal contributory pension programs in a sample of 37 African countries found that a median of 4.8 percent of those aged between 15 to 19 already contributed to a mandatory pension scheme.
2 See the World Bank HDNSP pension database for a worldwide overview of facts and figures on publicly and privately managed pension systems. Two relevant publications are: Holzmann, Robert (2012): Global pension systems and their reform: worldwide drivers, trends, and challenges. Social Protection and labor discussion papers No. SP 1213. Washington, DC: World Bank. Kakwani, N. and Subbarao, K. (2005): Ageing and poverty in Africa and the role of social pensions. Published by: International Policy Centre for Inclusive Growth (IPC-IG). See also: "Alterssicherung in der Deutschen Entwicklungspolitik. Perspektiven, Ansätze, Erfahrungen" (GIZ, Eschborn, 2011).
3 A sample of publications will soon be published on PB Works ( www.ghanaianpensions.pbworks.com)
4 As for example the "Pension Fund Forum Africa", 26-27 Nov 2012, Johannesburg.
5 See for an overview: pension-watch.net; the website has a wide range of publications and country evidence to provide a global overview on social pensions, and their role in development.
6 OECD/Queisser (1999): Pension Reform: Lessons from Latin America; Brooks Institute/Barrientos et.al (2013): Growing Social Protection in Developing Countries: Lessons from Brazil and South Africa;
7 See Stewart/Yermo (2009), pp. 8-9 for a description of literature on the macro-economic benefits of prefunding pensions.
8 Announced by the CEO of NPRA on 16.1.2014, in: Graphic Business Ghana, 21.1.2014
9 Mentioned in OECD/Yermo (2009), P. 17. See also: Kpessa, M. (2011), Retirement income security under Ghana's three-tier pension model: Assessment of risks and options for reform, in: Pensions Vol. 16, 2, 127-136. An assessment of the Ghanaian pension system was made by Mercer in 2012. Based on the methodology of the Melbourne Mercer Global Pension Index the Ghanaian system has a score of 56.6 which represents a C-grade retirement income system. The system has a high integrity level, an average sustainability level and a low adequacy level. According to Mercer the overall index value could be improved by an improving of the coverage of the pension system, introducing a minimum pension for all residents above a certain age as well as an increasing of the preservation requirements in respect of the third tier pensions.