Mr Kenneth A. Donkor-Hyiaman, the Managing Partner of MeTis Brokers, has asserted that the country did not learn the primary and most critical lessons from the pension reforms in the country.
Mr Donkor-Hyiaman explained that he arrived at this conclusion by analyzing the applicability of the ‘Pensions Irrelevance Theorem’ through a review of the history of the pension industry in Ghana. According to him, the New National Pension Act of Ghana, 2008 (ACT 766) requires retrofitting, or its effectiveness cannot be traced in the sands of time to come.
“The Pension terrain in Ghana has undergone several developments from pre-independence to post-independence. The first pension program- a non-contributory pension scheme was introduced by the Government in 1946 to cater for the retirement benefits of workers of the Colonial Administration offices.
“The first obvious lesson is the issue of increasing coverage of pension schemes that replaced old schemes. For instance, prior to the coming existence of the SSNIT in 1972, which extended its pension scheme to private sector workers, only public sector employees were covered by some form of retirement scheme.”
Mr Kenneth A. Donkor-Hyiaman
The Managing Partner of MeTis Brokers noted that the two major issues confronting the sector is investment problem. He stated that the limited availability of investment conduits and mandatory investment of contributions in low-yielding government bonds in the face of high inflation is a typical one. Thus, he said created diversification, risk reduction, and return maximization problems for the schemes. “The fact that pension contributions constitute a source of cheap funds to governments contributes to the pension inadequacy problem”.
“Despite these reforms, pensions in Ghana are still inadequate and largely unrealizable – that is the pension reality effect. In my candid opinion, these reforms are good but materially insignificant in maximizing the welfare of contributors, especially when the scheme is compulsory – the counterfactual could have been better. There appears to be a holding back in the choice to make the right decisions about the designs of pension schemes in Ghana; perhaps, deliberately from the government end or designers and managers have either lost touch with the pension reality or are not skillful enough.
“The very problem of pension inadequacy which has necessitated these reforms is still persistent and unlikely to be resolved by the new three-tier pension scheme. More serious, is the existence of the Retirement Planning Puzzle and the Pension Irrelevance Theorem. Pension scheme coverage is increasing but many either do not live to enjoy their pensions or demise very shortly upon reaching retirement age because of low life expectancies and the drastic fall in their standards of living during the retirement period.”
Mr Kenneth A. Donkor-Hyiaman
The New Three-Tier Scheme
Mr Donkor-Hyiaman noted that although the new three-tier scheme blends the benefits and characteristics of DB and DC plans, the concentration of a chunk of contributions (11.5% out of 18.5%) in the first tier DB plan could be the avoidable risk. Traditionally, the first tier is just like the 1972 Social Security Pension Scheme which invested in low risk low-yielding long-term government bonds, which are inevitably susceptible to the depreciation effect of high inflation.
“In effect, higher returns on pension investments are compromised for certainty (low risk). It appears to me that the desire to satisfy government needs is to blame; yet, historically funds have been wasted mostly in unproductive and unviable investments. Therefore, K.B. Asante ‘maintained that SSNIT money was not government money but contributions by workers and would have accrued to workers if the SSNIT law did not exist’. Reports reveal that SSNIT spends about 40% of members’ contributions on administrative expenditures. Lately in 2012, the Director-General of SSNIT admitted that some of its investments in some companies had gone bad.”
Mr Kenneth A. Donkor-Hyiaman
Mr Donkor-Hyiaman concluded that the life-changing root lessons from the triggers of pension reforms have not completely been learned. He noted that the reasons informing the design of the new pension scheme is sidelined and symptomatic in nature. “Unless dealt with through robust pension scheme design, contributors would not benefit maximally, others including pension administrators, trustees, managers, and custodians would”.
