The pension market in Ghana traces its roots to the post-independence Compulsory Savings Scheme of the early 1960s, which was the country’s first nationwide pension scheme. Following several amendments to the system, a 1972 decree created the Social Security and National Insurance Trust (SSNIT), which was charged with the administration of the system.
In the beginning, funds were held exclusively in government bonds, earning the risk-free rate of 6%, half of which was used to cover administrative costs. The remaining 3% that went to pay benefits proved to be inadequate in providing meaningful financial support to pensioners. In 1991 the government allowed SSNIT to invest funds in riskier, higher-yielding vehicles, such as the capital markets and real estate.
Pension reform began in 2006 when a report published by the Presidential Commission on Pensions, which was created following a series of workers protests, proposed the establishment of a three-tiered system to provide retirement income security for Ghanaian workers. This proposal was then made a reality in 2008 by the National Pensions Act.
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The act made contributions mandatory for all workers in the formal sector and optional for the self-employed and those in the informal sector. The 2008 law also, for the first time, ended the monopoly of SSNIT in managing the country’s pension funds. Through the creation of a three-tier system, the pension law opened the door for private fund managers to administer a portion of the funds. The first, and largest, tier of pension funds continues to be mandatory and is run exclusively by SSNIT. The second tier is also mandatory, but is managed privately. The third tier, which is also operated privately, is optional and contributions are encouraged through a system of tax incentives. All businesses are required to contribute to the first and second tiers regardless of the number of employees they have, or whether the firm contributes to any other pension schemes.
The arrival of the tiered pension framework gave an expanded role to the private sector and also paved the way for an increase in capital markets activity. “The 2008 reform was a brilliant idea because from that we have helped the private sector access longer-term and cheaper funds to expand,” Richard Amegashiti, head of brokerage services at Liberty Capital Holdings, told OBG. However, the results have not quite met expectations.
Following the passage of the law, the National Pensions Regulatory Authority (NPRA) released guidelines on the maximum allowable asset allocations for pension fund investments. The NPRA capped investment in listed equities at 10% of total assets, and issued rules which further restricted eligible equity investments, such as a two-year history of dividend payments. Investment in mutual funds was limited to 5%, while government securities and money market securities were capped at 75% and 35%, respectively. The low ceiling on equity and mutual fund investments significantly reduced the level of new capital that would be available for long-term financing for the private sector through equity markets.
In some cases, even with higher limits, the additional pool of available capital has not stimulated an increase in actual activity. For example, the NPRA caps investment in corporate debt securities at 30% of total assets, but corporate debt issuances have not yet seen a significant spike in activity.
Despite these limits, the SSNIT is the dominant player in Ghana’s capital markets, serving as the single-largest institutional investor on the Ghana Stock Exchange (GSE). According to SSNIT data, by the end of December 2015, the trust was invested in more than three-fifths of the companies listed on the exchange and controlled 3.1% of the GSE’s total market capitalisation. As of December 2013, the latest year for which data is available, SSNIT’s investment portfolio had reached a total of GHS5.17bn ($1.3bn).
Despite investment restrictions placed on it by the NPRA, SSNIT is still able to provide a foundation of support for the capital markets due to the sheer volume of funds it has under management. “Because many local institutional investors may not have the financial muscle to ride out some of these storms, this tends to create quite some volatility for your stock. SSNIT is the exception to that,” Dzifa Amegashie, head of investor relations at CAL Bank, which is one of the most actively traded firms on the GSE, told OBG. “It is our biggest shareholder and the trust has invested in many of the listed financial institutions in Ghana.”
Despite the restrictions, a growing number of companies have expressed interest in being designated as private pension fund managers. In 2015 alone the NPRA registered 16 new managers, bringing the total to 66 as of mid-2015, though only 44 had pension assets under management. Seth Obiri, managing director of United Pension Trustees, told OBG, “In general, within Ghana, pensions, with their long-term structure, should be used effectively for creating infrastructure and development, which will help translate into a stronger economy.”
Pension funds totalling GHS1.8bn ($464m) are under private management. Together, the 10 largest fund managers held 81.6% of all privately managed pension funds. Although tier-2 contributions are mandatory, they have not substantially outpaced contributions to the optional, tax-advantaged third tier. Tier-2 assets under management totalled GHS956m ($246.6m), or 53.7% of the total privately managed pension assets in June 2015, compared to GHS823.6m ($212.5m) worth of tier-3 assets.
Whereas the informal sector has no means to contribute to the first two tiers of the pension scheme, the third tier has features specifically designed to encourage participation by informal workers. Employees are able to determine the level and frequency of their contribution, and there are no minimums. The contributor will have access to two accounts: a retirement account and a restricted savings account, which can be accessed for certain, predefined purposes.
One aspect that is unique to tier-3 is that workers have the option to pool contributions through the creation of their own defined organisation or grouping in a feature entitled the group personal pension scheme. This option is intended for existing labour groupings, such as vendors at a particular market or drivers of an informal tro tro (minibus) service, and serves two primary purposes. First, it provides a communal social safety net to those who previously had access to none. Second, it chips away at Ghana’s high level of unbanked residents, which, according to the World Bank, account for more than 60% of the population. Aaron Issa Anafure, the CEO of SIC Life, told OBG, “The public sector and its ministries should lead the initiative for comprehensive group coverage, as limited liability companies’ unions have been very vocal about receiving this type of life insurance.”