Ghana’s drive to modernise its pensions sector

Ghana is currently seeing an overhaul of its pensions system. Pensions Alliance Trust is poised to take the lead in the sector, as its CEO explains how and why this change is being carried out


As with many emerging markets, Ghana’s current economic development has led it to modernise and standardise a number of important sectors of its economy in recent years. A key area that has been subject to much change is the country’s pension industry. The introduction of a three-tier pension system in 2008 replaced the quasi-state-owned pensions provider.

Another key area of change has been the increasing involvement of private pension providers in the sector. World Finance spoke to Philip Delali Zumanu, the CEO of Pensions Alliance Trust, about these changes, the reasons they have come about, why they are so important and how they are taking shape. Zumanu also explained his own firm’s strategy within the market, what we can expect from the future of Ghana’s pension industry and the leading role Pensions Alliance Trust will take.

How has risk management in Ghana’s pension sector changed in recent years?
Until 2008, pensions in Ghana were managed by a single, quasi-government organisation called Social Security and National Insurance Trust (SSNIT). They administered both a defined benefit and a defined contribution scheme. There was no independent regulator and it was heavily under the influence of the political authority of the government in power. This structure exposed the monopolistic pensions sector to a lot of risks concerning investments, governance, operations, financial, regulatory and funding.

The introduction of the three-tier pension’s scheme in 2008 via the National Pensions Act, 2008 (Act 766) brought a new perspective to the risk horizon of Ghana’s pension sector. It has introduced changes in the structure, management and control, which has impacted heavily on the risk and returns of pensions funds.

About 80 percent of Ghana’s informal sector workers were excluded from pension schemes, yet they needed them the most, the social protection that pension schemes are designed
to provide

It is worth noting that the independence of the regulator, the removal of the monopoly, the involvement of the privately owned corporate trustees, custodians and fund managers has all created a new paradigm for risk management in the Ghanaian pension sector. The provision of Act 766 ensures good governance, higher returns and reduces the incidence of risk. Unlike in the past, this time around the regulator has guidelines concerning how and in which asset classes pension funds can be invested. This is done so that the funds will be safe and able to return fairly on the amounts invested.

What prompted these changes to take place?
The pensions sector had long operated without an independent regulator to oversee the operations of the companies, or serve as an arbitrator for individuals and organisations when they had a case with the provider of the pension’s service. There were no service standards and regulatory sanctions for the breaches of the law.

When the private sector was excluded from the pension industry, a monopoly was created. As a result, the private sector was crowded out from accessing part of the huge pensions fund for economic development. There is strong evidence of how the economies of other countries have benefited immensely from private participation in pensions fund management, and the possibility of the private sector experiencing a turnaround of its fortunes.

Different groups operated different pension schemes. The security agencies had their own pension scheme, a section of the public sector workers were still enjoying CAP 30, and university lecturers were under a superannuation scheme. The judges and other senior public servants had also special unfunded arrangements for their retirements. These made it difficult for the administration of pensions to be fair, and in addition put a lot of financial burden on the state because many of these schemes were unfunded.

About 80 percent of Ghana’s informal sector workers were excluded from pension schemes, yet they needed them the most, the social protection that pension schemes are designed to provide. Over the years, concerns had been raised and agitations made by public servants over the manner in which the pensions body, SSNIT invested the funds of the scheme at the back of the inadequate retirement benefits. As a result of the low pensions payments, there was a strong call by some sections of organised labour for the government to bring back the then-colonial pensions scheme dubbed CAP 30, which, though unfunded, paid better benefits than the SSNIT scheme that was funded both by the employer and the employee. All of this set the tone for a major reform in the pension sector, to ensure a universal pension scheme for all employees in the country.

Why are more private companies getting involved in managing pension contribution schemes?
Act 766 became the game changer. The act gave legal backing to the sweeping reforms in the pension sector. In the heart of the reform is the management of defined contribution schemes through private participation. Many people have yearned to have a say in the way their pensions are managed. The need for choice that promotes good customer service and drives fees down also ac­counted for the involvement of the private sector.

The growing involvement of private companies is to ensure, among other things, a healthy competition and better returns on the member contributions. Defined contribution systems depend heavily on the efficient investment of funds that result in higher returns, and the private company that generates adequate returns for its mem­bers will continue to enjoy their patronage. The portability option, which the law provides, is also an incentive for these private companies.

It is a strong proposition that, when the private sector is involved, it will get access to some of the pension funds which will help the economy grow. There has been evidence of this as millions of pension funds are invested in the private sector, which has increased the opportunity of the private sector to have access to long-term funds for business activities.

What strategy does Pensions Alliance Trust have in place to minimise these risks?
Risks in governance and operations are very significant, and can create problems for pension schemes. As a result, Pensions Alliance Trust has taken the pain to select and properly train members of the trust board with the requisite knowledge and understanding of the relevant provisions in the law. We also make sure to follow all the investment policies and operational guidelines set by the company and the regulator.

With seasoned investment and fund management professionals, Pensions Alliance Trust is able to minimise these risks through portfolio diversification by asset class and security type. This minimises the overall portfolio risk. Seasoned fund managers are also appointed to advise on the investment and reinvestment of funds. Pensions Alliance Trust also ensures compliance with regulatory set limits, asset classes and securities. Investments are selected to provide a wide range of financial opportunities in different asset classes, to allowing for greater diversification, control over administrative and management costs, provide returns that can be compared to similar investment options, and to maximise returns within calculated levels of risk. We also monitor the performance of the fund managers, and have regular interactions with them.

What further developments can be expected in Ghana’s pension sector in the coming years?
The new pension sector is young, but it is growing at a fast rate. It is expected to grow in volume and structure. We are expecting the regulator to review its investment guidelines and allow the pension funds to venture into more exciting and high-yielding investment instruments. We are also looking forward to a future where trustees can collaborate and fund huge projects that are secured, and will return higher and better on investments.

Policies are expected to evolve to address challenges that occur, strengthening the sector and increasing the confidence of the public. As the funds also grow, the financial and security industry will expand through the start of new financial products, like the issuance of corporate bonds recently.

What does the future hold for Pensions Alliance Trust?
The company is poised to become the leading pension provider in Ghana. We have the right people, strategy and attitude to excite our clients. For us, our clients are the focus of our business and our business model is about them. The future is bright for Pensions Alliance Trust. Our assets under management are growing at a fast rate as a result of our efficient management of the pension funds, and our unique business model. With how promising the future looks, the company will continue to pursue excellence within this increasingly vibrant sector.