LECTURE DELIVERED TO

PROFESSIONAL AND MANAGEMENT STAFF MEMBERS OF

UNION OF INDUSTRY, COMMERCE AND FINANCE WORKERS AT
AILSA HOTEL, ACCRA ON FRIDAY, 19 TH SEPTEMBER, 2008

THE NATIONAL PENSION REFORM AND ITS

BENEFITS TO THE GHANAIAN WORKER

Presented by
Daniel Aidoo Mensah
Project Consultant- Pension Reform Implementation Committee

September, 2008
PENSION REFORM IN GHANA
Background
In 1950, the Pensions Ordinance No. 42 (Cap 30), established a
pension scheme for public servants in the Gold Coast which later
became popularly known as Cap 30 scheme.

In 1965, a Social Security Act 1965, (Act 279) was enacted to create a
contributory Social Security Fund for payment of superannuation,
invalidity, survivors, and other benefits for workers in every
establishment employing not less than five workers in the private
sector and other non pensionable workers in the public service.

In 1972, the Social Security Decree, (NRCD 127) repealed Act 279 of
1965, and established the Social Security and National Insurance
Trust (SSNIT) to administer a social security fund for all workers in
the country.

In 1991, the Social Security Act 1991, (PNDC Law 247) was
promulgated to transform the 1972 scheme from a provident fund to
a full pension scheme.

In effect, since 1965, the country has been operating two major public
pension schemes, that is the Cap 30 and the SSNIT schemes.
 Over the years, the disparity between the two schemes became more
pronounced, leading to agitation and protest by some public sector
workers on the SSNIT scheme demanding to be placed on the Cap 30
scheme which was considered more favourable, particularly the
lump sum element.

Presidential Commission on Pensions

In July, 2004 His Excellency President John Agyekum Kufuor found it
necessary to appoint a nine member Presidential Commission on
Pensions, chaired by Mr.T.A.Bediako, to examine existing pension
schemes in Ghana and recommend sustainable pension scheme(s)
that will ensure retirement income security for Ghanaian workers.
The Bediako Commission submitted its final report to Government in
March 2006.
Government accepted almost all the recommendations in the report
and issued a White Paper in July, 2006.

The main recommendation of the Commission is the creation of a new

Contributory three-tier pension system for Ghana comprising two
mandatory schemes and a voluntary scheme.

Other recommendations accepted in the White Paper include:

• Restructuring of SSNIT which should involve an overhaul of the

governance, management and administrative structures.
 • Review of the SSNIT Law

• Establishment of a National Pensions Regulatory Authority to

regulate both public and private pension schemes in the country. ;

• Pension Coverage for the Informal Sector

• Unification of Pensions
The proposed Pension Regulatory Authority should, within five
years after coming into effect of the new pension system, achieve
unification of all pension schemes in the country.

Pension Reform Implementation Committee

In October, 2006, the Government, appointed an 8 member Pension Reform
Implementation Committee and a Consultant to implement the
recommendations of the Presidential Commission on Pensions approved
by Government in its White Paper No. 1/2006 of July 2006.

The Pension Reform Implementation Committee commenced work in

November, 2006 and as part of its mandate submitted proposals for
National Pension Reform Bill to Government in August, 2007.
Cabinet approved the Bill and presented it to Parliament for passage
into law.

This Bill is based on the final report of the Presidential Commission on

Pensions and the accepted recommendations contained in the Government
White Paper of July, 2006.
THE NATIONAL PENSIONS BILL,2008
The Pension Bill caters for the establishment of a new contributory three-
tier pension scheme with a National Pension Regulatory Authority to
regulate and oversee the efficient administration of the composite pension
scheme.

• The Contributory three-tier pension scheme will comprise two

mandatory schemes and a voluntary scheme as follows:

(a) first tier mandatory basic national social security scheme which will
incorporate an improved system of SSNIT benefits, mandatory for all
employees in both the private and public sectors; ( no lump sum
payment, only monthly pensions and related benefits such as
survivors benefit)

(b) second tier occupational (or work-based) pension scheme, mandatory

for all employees but privately managed, and designed primarily to
give contributors higher lump sum benefits than presently available
under the SSNIT or Cap 30 pension schemes; and

(c) third tier voluntary provident fund and personal pension schemes,
supported by tax benefit incentives to provide additional funds for
worker who want to make voluntary contributions to enhance their
pension benefits.
It is pertinent to note that provision has been made in the 3rd Tier voluntary
Personal Pension Scheme to cater for the peculiar needs of workers in the
informal
sector of the economy which covers about 80% to 85% of the working
population.
New Contribution Rates
There is an additional contribution rate of 1% to be shared equally by the
employer and employee. This additional contribution is almost cost
neutral, but the additional benefits are much higher and more rewarding.

The employer will now pay 13% (instead of the current 12.5%) and the
worker will now pay 5.5% (instead of the current 5%) making a total
contribution of 18.5% (instead of the current 17.5%).
Remittances
Out of the total contribution of 18.5%
• 13.5% will be remitted to SSNIT(restructured) for the mandatory 1st
tier: to provide monthly pensions and related benefits (2.5% NHIS
Levy; 11%for pensions)

• 5% will be remitted to the mandatory 2nd tier privately managed for

lump sum benefits.

The Minimum Contribution for the mandatory schemes will be based on

daily minimum wage.
 There will be Maximum Contribution to check abuse of the first tier
basic national social security scheme (that is to check gaming)

New Tax Incentives on Pension Contributions

 Contributions up to 35% is tax exempt

- 1st tier (mandatory) - 13.5%

- 2nd tier (mandatory) - 5.0%
- Third tier (voluntary) - 16.5%
 Investment income is tax exempt ; and

 Retirement (Pension) benefit is tax exempt

Age Exemption (Cut-Off Age)

• When the new pension law is passed, all workers currently on the
SSNIT Scheme and below 55 years will automatically join the new
scheme.
• Workers aged 55 years and above will be exempted but have the
option to join the new scheme.

SOME OF THE GENERAL BENEFITS OF THE NEW PENSION

SCHEME.

• Improved qualifying conditions and survivors benefits under the 1st

tier social security scheme.
 - 15 Years to qualify for SSNIT benefits instead of 20 years
- Survivors benefits period increased from 12 years to 15 years

• Balanced representation of all stakeholders on the Board of Trustees

of SSNIT with chairmanship on rotational basis ( from among the
Government, Employers, and Organised labour)

• Improved 2nd tier Lump sum benefits higher than existing Cap 30
lump sum and much higher than existing SSNIT Lump sum. For
example, projections indicate that a worker aged 35 years will receive
2nd tier lump sum one and half times higher than Cap 30 lump sum
benefit and four and half times higher than SSNIT lump sum benefit.

• Using future lump sum pension benefits to secure mortgages. This

means that workers can obtain their own houses before retirement by
using their pension benefits as collateral.

• Workers will have better control over their pension benefits under
the second and third tier schemes, which are to be privately-
managed.
Member involvement in the running of their scheme helps promote a
sense of ownership, and help create confidence that the scheme is
being run properly.

• Private scheme (2nd tier) is equitable to all members as amount of

accrued benefit is directly related to the contributions made and
returns on investment.
 • Will also serve as a positive incentive for scheme members to make
additional voluntary contribution in 3rd tier so as to accrue more
benefits for their retirement.

• Special Pension for the informal sector which has been neglected all
this time.
• Cost-effective: the 2nd and 3rd tier schemes are privately managed
under a free competition environment. Competition tends to increase
efficiency and reduce costs, which will benefit scheme members
ultimately

• Suitable for Ghanaian worker’s need: The 3-tier scheme takes into
consideration our social- cultural environment which expects retirees
to maintain their life style whilst taking on additional social
responsibilities. A privately managed retirement scheme which
provides tax incentives and under prudential regulation and
supervision is the most effective and secure way to offer retirement
protection to the workforce.

GOVERNANCE
Pensions Regulator
A National Pensions Regulatory Authority is to be established to
regulate both public and private pension schemes in the country. The
Authority will approve, regulate and monitor Trustees, Pension Fund
Managers, Custodians and other institutions relating to pension
matters.

The Authority will also

• sensitise the public on matters related to the various pension
schemes;

• receive and investigate complaints of impropriety in respect of the

management of pension schemes;

• receive, and investigate grievances from pensioners and provide

for redress;

• advise government on the general welfare of pensioners;

• advice government on the overall policy on pension matters in the

country;

MANAGEMENT OF THREE-TIER PENSION SCHEME

The components of the 3-tier scheme are managed under trust
arrangements and governed by the laws of the Republic of Ghana.
• The mandatory 1ST TIER basic national social security scheme will be
managed by SSNIT (undergoing restructuring supervised by Pension
Implementation Committee). Its governing body will be a Board of
Trustees whose chairmanship will be on rotational basis(employers,
workers and government)

• The mandatory 2nd tier and voluntary 3RD tier will be privately-
managed by approved Trustees licensed by the Pensions Regulatory
Authority with the assistance of pension fund managers and
custodians registered by the Authority.

Trustees are entrusted with the overall responsibilities for the

administration and management of the privately-managed 2nd and 3rd
tier schemes.

- Must be licensed by Authority to operate registered schemes

- May delegate administration to third party service providers.
- They will not have access to pension funds.

• The Trustees are responsible for appointing pension fund managers,

custodians (registered by the Authority) and other service providers
and ensuring their compliance with regulatory requirements.

• Pension fund manager will be responsible for achieving the best

possible returns on the funds within the specific investment
parameters set by the trustees. They will not have access to pension
funds.
 - They will first be licenced by the Securities and Exchange
Commission and thereafter registered by the Pensions Regulatory
Authority.
- They are independent of trustees and custodians.

Custodian is responsible for:

• the safe holding of assets of pension funds, separate from the trustee
and pension fund manager and the settlement of transactions
involving fund assets.
• They will first be licenced by the Securities and Exchange
Commission and thereafter registered by the Pensions Regulatory
Authority.
• The custodian is independent of pension fund manager.
M a n a g em en t o f P r i va te P en si o n s( 2 n d & 3 r d ti er s)

PENSIONS REGULATORY
AUTHORITY

TRUSTEES

Pension Fund
Scheme Administrator Custodian
Manager
• Scheme
Formulate
Administration Safekeeping of Assets
Investment Strategies
•Keeping Records
And Make Investment
Decisions
Investment of Private Pension Funds
Trustees or pension fund managers are required to invest pension funds in
permitted investments in order to obtain safe and fair returns on the
amount investment. In doing so, they are bound by the duties and powers
laid down in the law, the investment mandate of the fund and the list of
permissible investments prescribed in the regulations.
There are restrictions on the investment of funds as well as restrictions on
sale, purchase or disposal of privately- managed pension fund assets.

TRANSITIONAL ARRANGEMENTS

Temporary Pension Fund Accounts

Before the establishment of the Pensions Regulatory Authority ( which will
licence trustees and register pension fund managers and custodians ) the
following transitional arrangements have been put in place to ensure a
smooth transition from the existing to the new pension scheme.
• There is a provision for the Bank of Ghana to set up a Temporary
Pension Fund (TPF).
• Every employer will open a Pension Account with the Fund at the
Bank of Ghana.
• The 5% remittance to the second tier mandatory occupational
pension scheme on behalf of the employee will be lodged in TPF
Account pending the licensing of Trustees, Pension Fund Managers
and Custodians.
 • The Authority shall within ninety (90) days of licensing of Trustees,
Pension Fund Managers and Custodians compute and transfer all
contributions and returns thereof to the credit of the Pension Fund
Account opened with the chosen trustees approved by the Pensions
Regulatory Authority.

UNIFICATION OF PENSIONS
The ultimate aim of the pensions reform is that, the proposed
Pension Regulatory Authority will, within five years after coming into
effect of the
New pension system, achieve unification of all pension schemes in the
country

IMPLICATIONS FOR MEMBERS OF UNICOF AND THE WAY

FORWARD

TYPES OF SCHEMES
Employers of workers in the various industrial unions of the TUC may
chose to:
- set up single-employer scheme only for its employees, or

- participate in a master trust scheme (multiple-employer

scheme) open to employees of more than one employer.

By pooling together contributions from various employers and their

relevant employees , master trust schemes have a high degree of efficiency
in terms of scheme administration because of economies of scale.
EXISTING PROVIDENT FUND OR PENSION SCHEMES
- Modify scheme rules to comply with regulatory requirements. (Defined
Contribution, Trust arrangement, etc)
- Register scheme with Pensions Regulatory Authority when
established under third-tier.
- Will qualify for Tax exemption as a registered scheme.

Establishing New Provident Fund Schemes

- You can establish a Staff Provident Fund scheme now along the
lines of the 3rd- tier of the new pension sheme.
- The Board of Trustees can then register the scheme as a registered
scheme for tax exemptions when the Pensions Regulatory
Authority is established.

CHALLENGES
• The 2nd and 3rd tier privately-managed schemes are Defined
Contribution (DC) Schemes and members accrued benefits depends
on their contributions and returns on investments. DC schemes
succeed when investment returns are adequate.

• Therefore new pension law should address:

- How funds are invested
- Conditions under which investment policies are determined,
and
 - Supervisory and regulatory guidelines that are put in place to
safeguard these funds.
SAFEGUARDS:
To ensure that members’ interests are adequately protected, the Pension
Bill has in-built safeguards including:
- Stringent approval and registration criteria by the Pensions
Regulatory Authority.
- Separation of functions of Trustees, Fund managers and
Custodians
- On- going monitoring
- Pension assets held by a Custodian shall not be used to meet
the claim of any Custodian’s creditors in event of liquidation of
the Custodian
- Pension assets held by a Custodian shall not be seized or
subject to execution of judgment debt or stopped from transfer
to another Custodian
- Sale of pension assets, grant of loan or use as collateral is
prohibited.
- Maximum limits on fees for service providers (Trustees, Fund
Managers and Custodians).

- Professional Indemnity Insurance

To provide scheme members with additional layers of protection,

trustees licenced by the Authority are required to take out adequate
insurance to indemnify scheme members against any losses of
scheme assets caused by malfeasance or misconduct of the trustees or
their service providers.
EXPECTED SOCIO-ECONOMIC IMPACT OF THE REFORM INCLUDES:
• Improved living standards of the elderly;
• Secures financial autonomy and independence of retirees;
• Increases National Savings and long term funds
• Promotes growth and development of the capital, mortgage and
insurance markets

CONCLUSION
It is envisaged that the new three-tier pension scheme will enhance pension
Benefits and increase the retirement income security of workers both in the
formal and informal sectors. It will also make available much needed long
term funds for the development of the economy.

As professionals and management staff , you are expected to provide the

necessary leadership and educate workers on the on-going pensions
reform.

I trust that you are bracing yourselves for the challenges ahead and will
also take advantage of the benefits that will come from the reforms.
 DANIEL AIDOO MENSAH

Daniel Aidoo Mensah, is a seasoned Actuary and Pensions Expert. He

is an Associate Member of the Institute of Actuaries, U.K, and an
Associate Fellow of the Institute of Mathematics and its Applications,
U.K. He is also a graduate of UST, Kumasi with a Bachelor of Science
Degree in Mathematics.

He is the Managing Consultant & CEO of Tri-Star Consulting Actuaries.

From 1997 to 2003, he was the Chief Executive Officer of Metropolitan

Insurance Company Limited (MET), during which period he
revolutionalised the face of Life Insurance practice in Ghana,
introducing the concept of hybrid life insurance products that also
incorporates saving-type investment.

Prior to joining MET, Mr. Aidoo Mensah had performed several

actuarial functions for the Ghanaian financial services industry, and the
insurance industry in particular. He has also participated in other
actuarial consulting work for a number of clients in the sub region
involving pension scheme design and actuarial valuation of life and
pension funds.

He was a member of the Presidential Commission on Pensions (PCP),

which recommended the new contributory three-tier pension system for
Ghana. He is now the Project Consultant to the Pension Reform
Implementation Committee, which is tasked with the responsibility of
implementing the accepted recommendations of the PCP.