Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
fund. It is estimated that about 50-60% of SSNIT’s recurrent expenditurewas used to support field
operations for the collection of contributions. In 2005, approximately 11% of contribution income was
spent on just the collection of the contributions. This improved to about 6.6% of contribution income in
2008.On average between 1991 and 2008 expense to contribution ratio was about 21%. Staff cost
amounted to about 45% of total expense on average between 1997- 2004. This is highly undesirable since
non-compliance rate (ratio of actual contribution to expected contribution) remained about 18% on
average between 1997- 2008. As at December 2008, SSNIT contributions in default wereabout 3.2% of
the scheme’s net assets (SSNIT Annual Reports, 1991-2008).
Ghana’s 3-Tier Pension Model
The 2008 Pensions Act established a 3-Tier pension system to replace all existing parallel systems. To
harmonize public and private provident funds, provide tax incentives and establish a National Pension
Regulatory Authority (NPRA).NPRA has three major responsibilities: to oversee the administration and
management of registered pension schemes and trustees; to restructure the SSNIT; to manage the basic
national social security for the 1st tier. Tier 1 is a defined benefit (DB) scheme. Membership of the Tier 1
is mandatory and provides a basic national (not universal) social security scheme. Tier 2 is compulsory
fully funded and privately managed occupational pension scheme, for all employees and employers. Tier
2 is defined contribution (DC) with financial contributions fixed at 5% on gross salary. A lump sum
benefit is payable, benefits will be largely determined by the returns on the pension funds. Tier 3 is a
voluntary contributory fully funded program. A privately managed scheme that combines a provident
fund and personal pension plans. Tier 3 is designed for both the formal (private and public sector
employees with a defined remuneration structure) and informal sector. There is no guarantee on nominal
pensions and there is no indication to link pensions to price index for Tier 2 and Tier 3. Tier 1 can be
linked to a wage index or other rate determined by the regulatory board. Each employer and employee
must contribute 13.5% and 5% respectively of the employee’s basic salary. (National Pensions Act, 2008)
Evidence Supporting the 3-Tier Pension Model
In this section we establish the case for the 3-Tier Ghanaian pension system. The new scheme is a good
representation of the World Bank’s three pillar model popularized in their 1994 policy research report
titled (World Bank, 1994). Ghana’s Tier 1 is not a universal system and therefore misses many of the
elderly who worked in the informal sector. Therefore, a minimum standard of living for the retired has not
been guaranteed. The minimum pension payment under Tier 1 is based on 50% of the average annual
salary for the three best years of a member’s working life. Section 80 of the Act makes provision for an
annual review of the pension payment to be linked to wage inflation rates. Therefore pension payment
may offer real guarantees for the pensioners; so long as real wage inflation can be guaranteed.
Like the Ghanaian Tier 2, the Second Pillar consists of compulsory saving rather than taxation, in that it is
financed on a PAYG basis and is public; the contributions of workers and their employers are sometimes
described as “payroll taxes.” Internationally, pillar 2 has been public and PAYG traditionally, but is
increasingly becoming private and prefunded in part or in whole as in the Ghanaian Tier 2. The World
Bank encourages governments to shift management of this pillar to the private sector to minimize their
fiscal risk. In general, governments appropriate contributions to a public Tier 2 for the purpose of
redistributing income and alleviating poverty. The World Bank (2000), recommended that in a State
mandatory Tier 2, participants be required to purchase a minimum indexed annuity with adequate
survivor’s provision, with flexibility for any retirement savings except a member does not qualify for the
basic mandatory social security under Tier 1 ( Pension Act, 2008 Section 63(9) & 111).
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