Chapter society that is highly migratory, and the institution


Chapter 2: Literature Review

2.1. Introduction

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The chapter reviews relevant literature on Pension
Schemes in Ghana. First, it examines the evolution of pension schemes in
Ghana, the challenges of the various pension schemes, the structure of the New
Tier 3 Pension Scheme and the benefits of the New Tier 3 Scheme.

2.2. Evolution of Pension Schemes in Ghana


Before the establishment of a formal pension
scheme as a means of providing social and financial security to the aged in
Ghana, the extended family system has the responsibility of taking care of the
aged in the community (Dei, 2001). However, the coming
into being of modern society that is highly migratory, and the institution of Social
Security has interrupted this traditional extended family system  (Dei, 2001). Ghana as a country
has gone through various evolution of pension schemes through various Acts and
establishments. The details of the revolution of pension schemes are described
in the subsequent sub-sections.

2.2.1. Pre-Independence Social Security


Ghana’s independence, there was neither a national nor a uniform Social
Security Scheme in the country (SSNIT, 2004). There were public
and private schemes which catered for the security of various categories of
workers. For example, in 1940, the adoption of the International
Labour Organisation’s (ILO) Convention on Workers, made cash benefits payable
to workers who suffered work injury.

Prior to the
establishment of a Social Security Scheme in Ghana in 1965, private schemes had
been established to develop for the urban wage-earners. In 1946, Pension
Ordinance, a non-contributory Pension Scheme was established for workers
categorized as African Senior Civil Servants which extended in a limited extent
to their widows and orphans. In 1955, Teachers’ Pension Ordinance which was to
provide security for certified teachers were made coverable under the Ordinance
of 1946. The senior members or lecturing staff of the country’s premier
University – then the University of the Gold Coast – also had a Private
Superannuation Scheme (SSNIT, 2004).

Meanwhile, some
organisations in the private sector, especially the major foreign trading and
commercial firms were operating Superannuation, Pension and Provident Fund
Schemes under which benefits were paid out at the time of retirement of their
African Senior employees. Further, ex-gratia awards were available for some
workers who were not coverable under any of the above-named Schemes. These
Schemes also had limited contingencies (Kpessa, 2011).


2.2.2. The CAP 30 Pension Scheme


The CAP 30 (a name derived from chapter 30 of the
Pension Ordinance of 1946) was a non-contributory scheme designed especially
for civil servants. It was introduced by British authorities in 1950 (SSNIT, 2004).  The non-contributive feature of this scheme
meant that civil servants were not required to make contributions into the
scheme but received regular monthly benefits often financed from general tax
revenues (Gockel, 1996). Because of benefit,
there was a general preference for the CAP 30 scheme over the SSNIT scheme  (Gockel &
Kumado, 2003).
Kpessa (2010) argues that the Cap 30 pension scheme was to serve as reward
system for members of the civil service. It was designed “as a means of
encouraging loyalty and efficiency within the colonial civil service” (Kpessa
2010: p93). Therefore, being a reward, “it was non-contributory and provided
benefits for individuals who were deemed to have provided loyal service in the
colonial administration for at least ten years” (Kpessa 2010: p 93)..

Under the CAP 30 scheme, contributors were entitled to
their lump sum payments after working for a period of 10 years as against a
period of 20 years under the SSNIT pension scheme. Additionally, under the CAP
30, a pensioner’s lump sum payment constituted 70% of the individual’s final
salary as compared to 50% of the average of three highest years’ salaries of an
individual under the SSNIT scheme. CAP 30 pension payments were also indexed
annually to current salary scales. Kpessa in 2011, also supports this fact in
his article, A comparative analysis of pension reforms and challenges in Ghana
and Nigeria, that workers covered by the CAP 30 scheme “enjoyed flexible
retirement income conditions, a more generous benefit computation formula, and
a lower voluntary retirement age” (Kpessa 2011). Challenges of CAP 30 Pension Scheme


CAP 30 Pension scheme was done away with when it was
obviously offering more to beneficiaries than the SSNIT scheme because of some
challenges. The underlying detriment of the CAP 30 pension scheme stemmed from
the fact that it was an unfunded or a non-contributory scheme (Kpessa 2011).
The benefits under the CAP 30 scheme were therefore funded by the government
often through its tax revenues. Stewart &
Yermo (2009) emphasize the advantages of funded pension systems in their
OECD working paper. According to them, developing funded pension systems
alleviates government costs by reducing government expenditure levels. This
there by releases government funds to other key policy challenges and
initiatives. Another shortfall of the CAP 30 pension scheme that eventually
resulted in the establishment of the SSNIT pension scheme was that it was not
open to all Ghanaians under employment. Unlike the current SSNIT scheme which
is open and mandatory for all employees, the CAP 30 scheme 16 was only open to
employees in the civil service such as the armed forces, the police and the
prisons services (Gockel & Kumado, 2003). Therefore, the
benefits of the CAP 30 scheme which according to Gockel and Kumado (2003) far
outweighed that of the current SSNIT scheme was enjoyed by only civil servants
and not by the employees in Ghana at large. Kpessa (2003) contradicts his
earlier claim by concluding that the CAP 30 scheme was limited in scope due
mainly to the financial burdens inherent in it. Perhaps, he like Stewart and
Yermo (2009) agree that running a non-funded scheme puts a burden on the
government’s revenue figures as well as on a country’s population.


2.2.3. Social Security
Scheme Of 1965

After independence, the then president of Ghana, Dr. Kwame Nkrumah
announced that there was going to be establishment of National pensions and
Insurance fund to manage the pension and provident fund of all workers
irrespective of their employers. On 17th February, 1965, the
parliament of the First Republic passed a Bill known as The Social Security Act
1965, Act 279 to establish a Social Security Fund to provide for contributors,
benefits under Superannuation, Invalidity, Survivors, among others. The Social
Security Scheme of 1965 was a Provident Fund (PF) Scheme under which lump sums
were paid to qualified members. Contribution to the scheme was at the rate of
7.5% by the worker and 15% by the employer from 25th May, 1965 to July 31,
1966. From 1st August, 1966, the contribution rates were reduced to 5% and
12.5% by the worker and employer respectively, after an outcry of high contribution
rates. The Scheme was intended to operate as a Provident Fund for a five-year
period (1965 to 1970) and thereafter be converted into a Pension Scheme for
periodic monthly payments.The Provident Fund system was very popular with the
workers because inflation was very low. Successive governments also found the
Fund a ready source of capital for budget deficit financing.

November 1972, NRCD 127 was passed to rectify some of the shortcomings of the
1965 Parliamentary Act 279. NRCD 127 established a body corporate, the Social
Security and National Insurance Trust (SSNIT) as an independent body to
administer social security schemes in Ghana. The social security scheme that
emerged with SSNIT was essentially a Provident Fund Scheme under which lump sum
benefits were paid to beneficiaries. In terms of coverage, Act 279 of 1965 and
as amended by NRCD 127 of 1972 provided for compulsory coverage for workers in
establishments that employ at least five workers. An establishment with less
than five employees had the option to join the scheme, but there was no
compulsion. However, the following categories of workers, although they
employed more than five persons, were exempt by law from joining the scheme;

of the Armed Forces, the Police Service and the Prison Service;

foreigners in the diplomatic missions; and

c). senior members of the
universities and research institutions.

The Provident Fund was therefore, continued by this Decree and no
consideration was given to its conversion to a Pension Scheme until the late
1980’s when real value of benefits were obviously eroded by the considerably
high rate of inflation, that the issue was seriously taken up




2.2.4. The
Thrust of the Social Security Law, 1991: PNDC Law 247


February 1991, the PNDC Government repealed NRCD 127, and replaced it with PNDC

captioned “Social Security Law, 1991” (SSNIT, 2004). PNDC Law 247 was an
attempt to redress some of the major defects of the defunct Provident Fund
Scheme. In this respect, the main thrust of Law 247 is that the social security
system in Ghana has been converted from the payment of lump sum benefits into a
pension scheme under which periodic monthly payments are to be made to members
until their death (Gockel &
Kumado, 2003).
Unlike its antecedent scheme1, the 1991 Social
Security Scheme is founded on insurance principles by which there is an element
of social solidarity with pooling of resources to meet certain contingencies (Kpessa, 2011). It also involves
inter-generational transfer of resources.

Law 247, coverage is more encompassing than obtained under the NRCD 127. Law
247 provides that the scheme is open to all classes of employees, both in the
formal and informal sectors of the economy. Unlike provisions in NRCD 127,
which exempted enterprises with less than 5 employees from coverage, the scheme
under Law 247 covers even the “self-employed persons, who opt to join the
scheme”. Workers and employers who were members of the defunct Provident
Fund Scheme became automatic members of the 1991 Social Security Scheme. Similarly,
beneficiaries below 60 years who received lump sum amounts under the Provident Fund
Scheme were also given the option to pay back these amounts plus some interest
to qualify for benefits under the new pension scheme.


scheme does not, however, cover “officers and men of the Armed Forces and
other officers as are expressly exempted by Law”. As we will see later,
these categories are provided for under the 1946 Pensions Ordinance, popularly
known as CAP 30. Others have equally been exempted as per the Police Service
Pension Law 1985(PNDCL 126); the Legal Service Public Officer Pensions
Amendment Law 1986 (PNDCL 165) and Prisons Service Pension Law, 1987 (PNDCL
168). To these categories of public sector workers, pension is non-contributory
with defined benefits under CAP 30. The Social Security Scheme under PNDC Law 247
is to be self-financing and self-sustaining through the contributions of
members. The rates of contribution remained as was under the defunct scheme,
i.e., employee and employer contributing 5% and 12.5% respectively of the
employee’s basic monthly salary. In the case of a self-employed person, such a
member must contribute 17.5% of his or her monthly earnings.



2.2.5. National Pensions Act, 2008 (Act 766): Tier Three Pension System


 The Pension reform in Ghana
was in response to agitations from organised labour and pensioners on the
inequalities in retirement benefits among public sector workers as well as inefficiencies
in the SSNIT system, the then sole quasi-state pension manager (Kpessa, 2011). The Government in
2004 established the Presidential Commission on Pensions (PCP) with a mandate
to submit a proposal for Pensions reform (SSNIT, 2004). Subsequently the
PCP’s white paper was accepted by government and a Pensions Reform
Implementation Committee (PRIC) was set up. The work of the PRIC resulted in
the promulgation of the new pensions law, the National Pensions Act, 2008 (Act
766) on December 12, 2008. The most significant highlights under the new
pension’s reform under Act 766 are the creation of a contributory three-tiered
scheme and the establishment of a Pension Regulatory Authority with the mandate
to license, supervise, regulate and monitor service providers


 The three-tier contributory
scheme, a hybrid of the defined benefit and defined contribution schemes, is
made up of the following:

Tier 1: A mandatory contributory scheme with monthly contributions
of 13.5% (11% towards monthly pensions and 2.5%
contribution to NHIS) on the basic salary of all employees. Tier 1 is a defined
benefit scheme and contributions are fully tax-exempt and are managed by SSNIT.
This scheme will pay monthly benefits to employees upon retirement.


Tier 2: A mandatory contributory
scheme with monthly contributions of 5% on the basic salary of all
employees. Tier 2 is a defined contribution scheme and contributions are fully
tax-exempt and are privately managed by National Pensions Regulatory Authority
(NPRA) licensed service providers. The scheme will pay out a lump-sum benefit
to individuals upon retirement, which is comprised of all contributions made
under the scheme plus all returns earned on their contributions. There are two
types of Tier 2 schemes: Employer Sponsored Scheme (ESS) and Master Trust
Scheme (MTS). If the membership of the scheme is limited to the employees of a
specific company, it is deemed to be an Employer Sponsored (ESS). On the other
hand, if membership of the scheme is opened to employees of different
companies, the scheme is referred to as a Master Trust Scheme (MTS).


An optional contributory scheme with monthly contributions of up to 16.5% of
the employee’s basic salary on the basic salary of all employees and informal
sector workers. Tier 3 is also a defined contribution scheme and is privately
managed by NPRA licensed service providers. The contributions for Tier 3 are
also tax exempt. If an individual has been in the scheme for 10 years or more,
he or she will receive all contributions made under the scheme in addition to
all returns earned on their contributions at the time of exit. In the event of
an exit prior to the contributor’s tenth anniversary, a marginal tax rate of
15% will be applied to the contributor’s total redemption amount.
Structures of the new Tier Three Pension


The change in the pension scheme was accompanied by a
change in the number of players managing pension systems in Ghana. The management of the three-tiered schemes has been entrusted to
different service providers with varied roles to ensure transparency and
efficiency in the management of the schemes. NPRA is the apex/regulatory body
and there are three main types of service providers:

ü  The Trustee

ü   The Pension Fund Manager

ü   The Custodian


National Pensions Regulatory
Authority (NPRA)

NPRA is the
regulatory body under the new Act. The object is to regulate all the operations
of the tiers as well as the authority to license, regulate and monitor
Trustees, Pension Fund Managers and Custodians, who are also players in the new
pension systems.

To achieve its
object the Authority shall:

(a) Be
responsible for ensuring compliance with the Act;

(b) Register
occupational pension schemes, provident funds and personal pension schemes;

(c) Issue
guidelines for the investment of pension funds;

(d) Approve,
regulate and monitor trustees, pension fund managers, custodians and other
institutions that deal with pensions as the Authority may determine;

(e) Establish
standards, rules and guidelines for the management of pension funds under this

(f) Regulate
the affairs and activities of approved trustees and ensure that the trustees
administer the registered schemes;

(g) Regulate
and monitor the implementation of the Basic National Social Security


(h) carry-out
research and ensure the maintenance of a national data bank on pension matters;

(i) sensitize
the public on matters related to the various pension schemes;

(j) Receive
and investigate complaints of impropriety in respect of the management of
pension schemes;

(k) Promote
and encourage the development of the pension scheme industry in thecountry;

(l) Receive,
and investigate grievances from pensioners and provide for redress;

(m) Advise
government on the general welfare of pensioners;

(n) Advise
government on the overall policy on pensions in the country;

(o) Request
information from any employer, trustee, pension fund manager or custodian, any
other person or institution on matters related to retirement benefit;

(p) Charge
and collect fees as the Authority may determine;

(q) Impose
administrative sanctions or fines; and

(r) Perform
any other functions that are ancillary to the object of the Authority.





Trustee can be a company or an individual licensed by the NPRA, with the
overall responsibility for the administration and management of Tier 2 and Tier
3 schemes. It is is separate from the Fund Manager and the Custodian. The
Trustee is an independent third-party, responsible for ensuring that the
investment objectives of the contributors are adhered to. They are mandated by
(Act, 766) to register pension schemes and appoint pension fund managers and
custodians who are responsible for the investment strategy and for the
management of investments of retirement assets (Kpessa, 2011). The Trustees as
part of their mandate is to ensure that proper accounting records of members?
registered are kept, Service providers conform to the regulatory requirements,
and that, transfer and payment, requests are processed. However, they do not
have access to pension funds.


Pension Fund Manager

Pension Fund Manager is licensed by the Securities and Exchange Commission
(SEC) and registered by the NPRA. He is independent of the Trustee and the
Custodian. The Fund Manager makes investment decisions as guided by the NPRA
and mandated by the Trustee. He maintains records and statements of account on
transactions related to the pension funds and assets and reports monthly to the
Trustee and quarterly to both the Trustee and the NPRA. The Fund Manager does
not have direct access to pension funds and assets (Databank, 2014).



Custodian is licensed by the Securities & Exchange Commission (SEC) and
registered by the NPRA like that of the Fund Managers. The Custodian receives
contributions of the scheme from Employers and is responsible for the safe
keeping of the pension fund and assets. Payments from the scheme’s account are
for the direct settlement of transactions and the payments of claims. The only
payment made directly from the Custodian to Trustees, Fund Managers, and other
service providers are for the payment of their fees. He is independent of the
Trustee and the Pension Fund Manager. They maintain records and statements of
account on transactions related to the pension funds and assets and report
monthly to the Trustee and quarterly to both the Trustee and the NPRA
(Databank, 2014).
Contributions under the Tier three Pension Scheme


The rates of contribution under
this new scheme have also been revised under the new National Pensions Act,
2008, Act 766. The contribution rates simply assist both the employer and
employees in figuring out the proportion of an employee’s salary that would be
paid out to his or her monthly contribution towards SSNIT. Therefore under the
new scheme, an employer shall deduct from the salary of every worker an amount
of 5.5% of the worker’s salary irrespective of whether the worker has been paid
or not. In addition an employer shall also pay a contribution of 13% of the
worker’s monthly salary which together make a total contribution of about 18.5%.
Now, 13.5% of this total shall paid to the first tier mandatory basic national
social security scheme and the remaining 5% shall be paid to the second tier
mandatory occupational pension scheme managed by registered pension fund
managers (National Pensions Act 2008) Benefits
of the New Scheme (3-Tier)

One of the underlying features of the new pension
scheme was the fact that, it was drafted with the socio- cultural environment
of Ghanaians at heart. For instance, the commission set up to create the new
scheme were cognizant of the fact that in Ghana, the needs of individuals
rather increase upon retirement due to demands placed on the aged such as
family engagements and other social responsibilities. In addition to being an
entirely new scheme, the new 3-tier scheme was in many ways better than the preexisting
CAP 30 and SSNIT pension schemes. Aidoo (2008) outlined some of these
distinguishing features which double as benefits of the new scheme; An
improvement in the entry/maximum age at which a person may join the social
security scheme. The new entry has been reduced from 20 years to 15 years while
the new maximum age is 45 years. An improvement in the second-tier lump sum
benefits or returns that are higher than the benefits under the CAP 30 scheme
and far higher than that of the SSNIT scheme. This is probably since this tier
is privately managed and as such will be invested in high yielding investments.
An opportunity to use future lump sum pension benefits to secure mortgages.
This gives a worker the opportunity to own his or her own house before retirement
by using their pension benefits as collateral. An opportunity for workers to
have better control over their pension benefits under the second and third tier
schemes which are both managed privately. An opportunity for funds to grow
since no arbitrary withdrawals is allowed.