Challenges in the Era of Globalization - iaabd

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
The second key principle for a sound pension systemis that it should be fair. A system which is fair and
importantly – is perceived to be fair will be more readily accepted by society than a system which is not
(Eich and Swarup, 2008). But fairness of a government policy can be defined across or within generations
and can be judged on a snapshot in time or over the lifetime of an individual or a cohort. Fairness can be
defined in terms of opportunities or outcomes. If a defined benefit scheme is heavily invested in equities
there can be unfair distribution of risk. Fairness can be measured by the level of benefits offered by the
pension schemes. There are also questions of fairness within similar pension schemes. This point is
consistent with the World Bank’s view that reforms must meet distributive concerns, there must be a
minimum level of proposed pension, indexation procedures should be in place, both periodic payment
annuities and phased withdrawal should exist, and the disability and survivor pensions should be available
(Holzmann, 2000).
St John and Gran (2001), underscore the need to consider women’s unique life cycle experiences and deemphasise
the link between paid work and income in retirement so that women are not disadvantaged.
The inherent risks in a pension system must be shared between sponsors and members equitably. The
protection offered to employees is, though,also a risk borne by the employer. Sweeting (2007), explains
that at least part of this risk isdiversifiable to employers, whilst remaining non-diversifiable to employees.
This is because for a firm, DB pension scheme investment risk is just one of many financial risks taken,
most of which are in the course of either running or funding the business. An equitable pension system
should ensure employee’s pensions are portable and stable.A scalable design that reaches the informal
sector (private individuals and the self-employed who do not have a formal salary structure or regular
income) and usually the larger mass of society is required for an equitable retirement system(Shah, 2006).
Economic Efficiency
Subordinate aspects of a sound pension system are the impact of the system on labour markets and on
capital markets. A pension system that can allow for greater economic efficiency, for example by
reducing labour market distortions or capital market risk, will help to generate increased economic
growth, which will itself provide resources for future pension incomes (Davis, 1998).
Analysis
The study utilizes data mainly from the annual reports of the SSNIT and the 2006 Pension Commission
report. These data are publicly available.In this section, we consider in turn a number of issues as
discussed in Section 3 to identify the major weaknesses of the pension system in Ghana. This
weaknessessupport the 2008 reform.
Sustainability
The 2006 Pensions Commission report submitted to parliament concluded that existing pension schemes
will not deliver benefits that allow for adequate and sustainable income security. All the pension schemes
mentioned were said to be unsustainable as they depended on the consolidated fund except the SSNIT
scheme which paid substantially low benefits. The SSNIT pensions are financed on a PAYG basis from
general revenue, largely from a graduated income tax with marginal rates that start from 10% and a broad
corporate tax of about 25%. Accrued actuarial liability at December 2004, for both pensioners and active
participants was estimated at GH¢1.54 Billion in 2004 terms, about 17% of 2005 GDP (Pension
Commission Report, 2006). Out of this, members of CAP 30’s accrued liability was 90% of the total
accrued liability, at GH¢1.39 Billion. The Pension Commission report indicates that the SSNIT scheme is
viable till the year 2036 with its current contribution rate of 17.5%, beyond which it will have to rely on
its reserves to pay benefits. The PAYG cost of the scheme will increase from 7.3% in 2002 to 22.2% in
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