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Pension Reform in Ghana: Special Pension Scheme for the Informal Sector


May 4, 2009 




Over the years, no formal arrangement has been put in place to cater for retirement needs of workers in the informal sector which form about 80% of the working population in Ghana. 

This became more apparent during the work of the Presidential Commission on Pensions set up by His Excellency President Agyekum Kufuor in July 2004 to carry out a major reform of the pension system in Ghana. 

The Commission held discussions with a cross section of the informal sector, including the Ghana Cocoa, Coffee and Sheanut Farmers Association, representatives of the Ghana Private Road Transport Union of TUC (GPRTU), the Greater Accra Markets Associations (GAMA) and the Ghana National Association of Garages, to solicit their views on a retirement scheme for that sector.

The Commission also noticed that the absence of a formalized arrangement that provides retirement income security for the informal sector was inconsistent with the provisions of Article 37(6) (a) of the 1992 Constitution which enjoins the State to: "ensure that contributory schemes are instituted and maintained that will guarantee economic security for self-employed and other citizens of Ghana.”

The SSNIT Pension Scheme allows for voluntary contributions. However, awareness of the scheme has been very poor while the administrative arrangements for membership are cumbersome and burdensome. 

Additionally, the benefit to the individual contributor is considered to be unattractive as it presents no special incentives to attract persons in this sector. For example, Funds were not easily accessible to meet specific short-term needs of these contributors. 

During the Commission's interactions with representatives of informal groups, they were enthusiastic about participating in any form of retirement savings scheme that would meet their retirement income needs and would welcome the establishment of such a Scheme. 

Needs of informal sector workers after retirement or in their old age

The needs of workers after retirement include the following:

Food, Shelter, Clothing, Transportation, Healthcare, other household expenses, Funeral Donations, Family Commitments, Entertainment and other social activities, such as community work, out-dooring, etc.

Unfortunately, the traditional and customary ways of helping the aged to meet the above needs have broken down. Support for children and relatives are no longer more reliable and forthcoming.

The General Need for Pension
Everyone needs money to live on when they retire or can no longer work but few people spend enough time thinking about long-term savings. 

Because more people are living longer, your retirement could make us as much as a quarter of your life. 

So when you do retire or can no longer work, you will still need to pay bills and to have money for meeting your financial and social needs as mentioned above.

In recognition of the need for reforms to ensure a universal pension scheme for all employees in the country, and to further address concerns of Ghanaian workers, including workers in the informal sector (which constitute about 80% of the working population,, His Excellency President J. A. Kufuor, set up the Presidential Commission on Pensions (PCP) in July 2004, chaired by Mr. T. A. Bediako. 

The Commission was tasked to examine current pension schemes and recommend sustainable Pension scheme(s) that will ensure retirement income security for Ghanaian workers, including those in the informal sector.

The PCP submitted its recommendations to the Government in March 2006, and following Government"s acceptance of the recommendations and issuance of a white paper to that effect, a Bill on a new pension scheme has been passed by Parliament is awaiting Presidential assent.

In a previous feature article on the Pension reform in Ghana, the writer looked at the benefits and safeguards of the new three-tier pension scheme. One of the major benefits mentioned was the provision of a special pension scheme for the informal sector in the third-tier voluntary personal pension scheme.

This feature takes a look at the special scheme for the informal sector, what it seeks to offer them and how they can participate.

Recommendations of the PCP
The main recommendation of the PCP is the creation of a new Contributory three-tier pension system comprising two mandatory schemes and a voluntary scheme. 

Other recommendations accepted by government are the phasing out of the CAP 30 scheme on grounds of its unsustainability, decentralization of public sector pension management and the restructuring of SSNIT by overhauling its governance, management and administrative structures. 

The Commission also recommended the 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 and the unification of pensions within 5 years of the coming into effect of the Authority.

An eight-member Pension Reform Implementation Committee (PRIC) and a project consultant appointed by government in October 2006, made proposals for a National Pension Reform Bill to Government in August, 2007. 

Parliament has approved of the new Pension Bill and is awaiting Presidential assent. The Pension Act should be in place by January 2009.

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 new scheme will comprise two mandatory schemes and a voluntary scheme as follows: 

first tier basic national social security scheme, which will incorporate an improved system of SSNIT benefits and shall be mandatory for all employees in both the private and public sectors; (payment of only monthly pensions and related benefits such as survivors benefit)

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 

third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives to provide additional funds for workers who want to make voluntary contributions to enhance their pension benefits as well as workers in the informal sector.

The first tier basic national social security scheme will be managed by a restructured SSNIT. The second tier and the voluntary third 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. 

The pension fund managers and custodians will first be licenced by the Securities and Exchange Commission and thereafter registered by the Authority.

Provision has been made in the third tier voluntary Personal Pension Scheme to cater for the peculiar needs of workers in the informal sector of the economy which covers about 80% of the working population.

The informal sector workers will elect to contribute any amount they can afford on monthly or regular basis. 

I must, however, add that the benefits that will accrue will depend on how much contributions they make. The more they contribute the bigger their pension benefits. 

Informal sector contributors will have two accounts: (a) the retirement account (to provide benefits on retirement) and

a personal savings account with rules for withdrawals before retirement (e.g. for education and business enhancement)

While contributors can access benefits before retirement from personal savings account, the proceeds of the retirement account shall only be paid on the retirement of the contributor as monthly or quarterly pensions. 

In this way, workers in the informal sector, just like their counterpart in the formal sector (on the First and Second Tier schemes) will also receive monthly pensions (from the retirement account) as well as a lump sum (from their personal savings account) to begin retirement.

How to participate in the special informal sector scheme.

The informal sector workers can participate as organized groups (Group Personal Pension Scheme) or as individual in a Personal Pension Scheme.

For example, Cocoa farmers or makola market women or koforidua barbers or hohoe drivers or Moree fishermen………can come together to form, say, Hohoe Drivers Pension Scheme. 

There will be companies, such as Corporate Trustee companies and insurance companies that will establish personal pension schemes or groups pensions schemes.

The Groups can also set up their own schemes and seek technical advice or outsource administration and other technical work to third party administrators. 

All the Pension Fund and assets will be kept by a custodian, which is mainly a bank or financial institution registered by the Pension Regulatory Authority. But the choice of custodians lies with the group. 

The Pension Reform Committee and later the Pensions Regulatory authority can provide guidance when contacted.

It is envisaged that the inclusion of workers in the informal sector in the new three-tier pension scheme will enable them to save towards their retirement or old age. 

This will improve their living standards and guarantee income security in their old age. It will also reduce anxiety, self exclusion, dependency, and other hardships associated with unplanned retirement. 

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