Everyone needs money to live on when they retire or can no longer work. The reality, however, appears to be that few people spend time thinking about long-term savings for their days of retirement.
Another striking reality is that because more people are living longer, the period of retirement could be as much as a quarter of one's life-span. When we retire or can no longer work, we will still need to pay bills and have money to meet financial and social obligations.
Looking at how a gloomy retirement without adequate income can be, there is always the need to put in place an appropriate pension scheme that will ensure brighter retirement period for workers in this country.
Pension schemes that have been operated in the country so far, have, besides their limitations, also failed to consider the plight of workers in the informal sector, who constitute the bulk of the working population in Ghana.
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, 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 schemes and recommend sustainable pension scheme(s) that will ensure retirement income security for Ghanaian workers, including those in the informal sector.
The commission recognised that over the years, no formal and co-ordinated arrangements have been put in place to cater for the retirement needs of workers in the informal sector. The need to cater for people in the informal sector who constitute about 80 per cent of the working population, therefore, became more apparent during the work of the PCP.
The PCP submitted its recommendations to the government in March 2006, and following government 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 and is awaiting presidential assent.
In a previous article on the pension reform in Ghana, the writer looked at the benefits and safeguards of the new Three-tier Pension Scheme which will be regulated by a National Pension Regulatory Authority in overseeing the efficient administration of the composite pension scheme. The three tiers were explained 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 licensed by the Securities and Exchange Commission and thereafter registered by the Authority.
It was observed in the first feature that one of the major benefits under the new scheme, was the provision of a special pension scheme for the informal sector in the third-tier of the scheme which is the Voluntary Personal Pension Scheme.
This article therefore takes a deeper look at the special scheme for the informal sector under the new scheme, pointing out what the scheme seeks to offer informal sector workers and how they can enroll in the scheme.
Meetings with informal sector representatives
To appropriately capture the concerns and needs of workers in the informal sector, the PCP held discussions with a cross-section of the informal sector, including representatives of the Ghana Cocoa, Coffee and Sheanut Farmers Association, 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.
Indeed, the commission also noticed that the absence of a formalised 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.”
There is an existing scheme for the informal sector being operated by SSNIT that 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 unattractive as it presents no special incentives to attract persons in the informal sector. For example, funds are not easily accessible to meet specific short-term needs of contributors.
During the commission's interactions with representatives of the 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.
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. Unfortunately, the traditional and customary ways of helping the aged to meet the above needs have broken down. Support from children and relatives are less reliable and forthcoming.
Special pension scheme for the Informal sector
Provision has been made in the third-tier voluntary Personal Pension Scheme of the new Three-tier Pension Scheme, to cater for the peculiar needs of workers in the informal sector of the economy who constitute the majority of workers in the country.
The informal sector workers will contribute any affordable amount on monthly or regular basis. It must be emphasised that the benefits that will accrue, will depend on how much contribution is made. The more the amount contributed, the bigger the benefits.
Informal sector contributors will have two accounts:
• 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 counterparts in the formal sector (on the First and Second Tiers of the new scheme ) 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 organised groups (Group Personal Pension Scheme) or as individuals 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 Corporate Trustee companies and insurance companies that will establish personal pension schemes or group pension 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 also 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. I trust that workers in the informal sector would see the reform as God-sent and start saving towards their retirement now!
• The author is the Project Consultant on the Pension Reform Implementation Committee.
Feature By Daniel Aidoo Mensah
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