Yes, Employees Are Entitled To Make Pension Investment Decisions In DC Schemes

Pension fund management in Ghana has undergone numerous reforms, yet the basic lessons are neglected to the detriment of pensioners. Given the long history of meagre pension pay-outs, the new National Pension Act, 2008 (Act 766) was enacted to provide the impetus for another reform intended to maximize the pensions of contributors.

Whiles this is laudable, a number of ambiguities and uncertainties in the Act could perhaps be the reason for the impending public sector strike action. My PhD research work borders largely on the 2nd tier mandatory occupational pension scheme, but concentrates on Section 103 (2) of the new Pension Act, which enables contributors to borrow to acquire a primary mortgage against their 2nd tier benefits as security. In this regard, I am motivated to make another contribution to the ongoing debate on pension fund management in Ghana.

In this brief article, I seek to discuss one of the uncertainties in the new Act in an attempt to provide a lead on whether the government is justified in appointing a pension trustee to manage the 2nd tier pension contributions. My opinion is largely underscored by the theoretical and international empirical evidence about the operation of Defined Contribution Schemes, which the 2nd tier is a typical example.

The conclusion reached after a critical examination of the theoretical and empirical evidence is that, employees are entitled to make the decision as to which trustee manages its contributions. Government as an employers has no right in this regard to appoint the so-called Pension-Alliance Trust Limited to manage employees' contributions.

Pension Schemes, Contributors' Rights and Risks

A fair understanding of pension plans is perfect for understanding the arguments raised in this article. In spite of the varying terms, three basic designs (types) of pension schemes are common globally including defined benefit (DB) plans, defined contribution (DC) plans or both. DC plans by nature specifies contributions as a predetermined fraction of salary without certainty of benefits upon retirement unlike DB plans. DC by nature specifies contributions as a predetermined fraction of salary without certainty of benefits upon retirement unlike DB plans. The latter is a promise by a sponsor bearing responsibility to pay a fixed life annuity; sometimes inflation-adjusted and benefits are a function of both years of service and wage history. With DC schemes, benefit levels depend entirely on the total contributions and investment earnings of the accumulated contributions (primarily market-based and independent of retirement-period).

Whereas member contributions are ring-fenced and individually invested in a DC model, DB enables the pooling and group management of funds. Individual loans to members reduce the investment pool and can compromise the funds DB commitment upon borrower defaults; defeating its traditional guarantee of pensions. Trading off flexibility and a right to determine investment preferences with performance tracking possibility, contributors in a DC plan bears all the investment risk mainly including interest rate risk in unpredictable inflationary economies like Ghana; unlike a DB plan (Bodie, et al., 1988).

Investment risk is emergent at two levels; investment performance uncertainty and the real value of income streams or lump sum generated at retirement. Therefore, DB plans offer superior risk-sharing properties that are not captured by DC models. Hence, whereas the DC framework focuses on the value of the assets currently endowing a retirement account, the DB plan focuses on the flow of benefits which the individual will receive upon retirement. In Ghana, the 1st and 2nd tiers pensions are DB and DC schemes respectively.

The new National Pensions Act, 2008 (Act 766) establishes a contributory three-tier pension system which requires employers to contribute 13% and workers 5.5% of gross income, making a total contribution of 18.5%. This is as distributed below as:

a. First tier basic national defined benefit (DB) social security scheme (13% out of total contributions); which is managed by the SSNIT is mandatory for all employees in both the private and public sectors. 2.5% out of 13% is a levy for the National Health Insurance scheme;

b. Second tier mandatory occupational (or work-based) “defined contribution” (DC) pension scheme (5% out of total contribution) is “fully funded” by employees and privately-managed by approved Trustees assisted by Pension Fund Managers and Custodians. It is designed primarily to give contributors lump sum benefits. This tier is the bone of contention between government and public sector workers.

c. Third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives for workers in the informal (blue collar) and formal sectors (white collar).

Implications of Government (Employee) Appointing Trustee

After a long history of pension systemfailure, mainly administered previously by the SSNIT to provide adequate incomes for pensioners, the new system was designed to give contributors more room to determine how their contributions are invested. Thus, the 2nd tier DC scheme was included in this regard to facilitate this intention. Aptly, the part of the 18.5% that is remitted to the 2nd tier is the 5.5% of employees' monthly income. This is just in line with the principle underlying the DC scheme. In other words, contributions remitted to the 2nd tier are employees' own money unlike the 1st tier DB social security scheme paid by employers (government) for these public sector workers.

The 2nd tier is therefore a sort of compulsory contractual savings scheme to help employees raise enough capital for their future.However, the new Pension Act has a “lacuna” which in my opinion is the cause of the current tensions regarding the management of the 2nd tier. The Act fails to explicitly confirm the right of investment choice decision making on employees as is principle and international evidence of DC schemes. This gap is what government is exploiting by arrogating to itself the right to appoint a trustee. This is a matter of law and in the event that no “consensus ad idem” is reach, the law courts remain the last hope for employees.

The implication of government (employer) making the decision of a choice of trustee is a breach of the principle of DC schemes, which could create adverse selection and moral hazards for contributors. This is already the case with SSNIT's management of the 1st tier scheme. Hence, employees would be bearing unjustifiable risks for which they have not contracted. In that case, the 2nd tier becomes just the DB 1st scheme which is solely managed by SSNIT without employees input. Employees make no input in the investment of the 1st tier social security because government “guarantees” the social security benefits of public sector workers.

This means that irrespective of the investments' performance, certain minimum pension pay-outs would be made to pensioners. Thus, government accounts for any shortfall in returns on investments. In a way, this is the reason for the government's excessive borrowing of pension funds from SSNIT for its activities. The 2ndtier however has “no government guarantee”, potential lump sum benefits are determined by the market. The history of government's pension guarantees in Ghana has however not improved pensioners' standard of living. Therefore, government's decision to appoint a trustee with the intention of guaranteeing the 2nd tier in my opinion cannot be trusted. In other words, it reveals that without the so-called intended guarantee by government, employees are entitled currently to make their pension investment decisions.

Secondly, the government's action represents bad leadership, in that, it could empower and signal private sector employers to act in a similar manner, which is likely to jeopardize the original intent of the 2nd tier scheme. Reports already points to the fact that some private sectors employers are not paying the basic social security of their workers. For which reason, George Agudey, the erstwhile CPP Presidential candidate was sentenced to imprisonment. On the international front, employees in DC schemes determine which trustees manage their contributions, not government or any employer.

As rightly opined by Charles OseiAkoto, CEO of Stallion Trust stated “When you think about the fact that 45 percent of the formal sector workers are from the public sector and government lumps all these people and give them to one corporate trustee - obviously that corporate trustee has a competitive advantage and that is what we are talking about”.Lets bear in mind that, the Pension Alliance Trust Limited is newly formed and may not have any track record, no evidence-based to support the reason for this favour, unless it for political expediency. So, the questions lingering on borders on how and why this trustee was selected. Stakeholders need to be informed.

Conclusion
The theoretical and empirical construct of the DC 2nd tier mandatory occupational pension scheme bequeaths employees rather than employers (i.e. government in the case of the public sector) the right to determine which pension trustee manages their 5.5% pension contributions. The governments persistence in claiming to having the right to appoint a trustee to manage the 2nd tier contributions of public sector workers is completely wrong and cannot even be cured by its intention to provide guarantee for the 2nd tier scheme like the 1st tier scheme, because of the distasteful performance of previous guaranteed schemes, such as the latter (1st tier DB social security scheme). Since the 2nd tier is not government's money, the government should rather be much more concerned about the 1st tier which is managed by its quasi institution, the SSNIT.

Going forward, the current agitation is good for aligning the risks and rights of employers and employees regarding issues of pension fund management in Ghana. Stakeholders should seize the opportunity to inform and educate the general populace especially contributors about the structure and nature of pension fund management in Ghana as provided by the new Pension Act, 2008 (Act 766). Enlightened people are better equipped to determine their future.

Kenneth A. Donkor-Hyiaman, MPhil (Cantab)
PhD Real Estate & Planning Candidate
Henley Business School
University of Reading, UK.
[email protected]