The Civil and Local Government Staff Association of Ghana (CLOGSAG) had hinted during the inauguration of what it called the Public Services Pensioners Association (PSPA) that, it will soon seek an amendment to the National Pensions Act (Act 766) to enable workers to opt out of the SSNIT Scheme after contributing up to the minimum or mandatory 180 months.
The Executive Secretary of CLOGSAG, Dr. Isaac Bampoe Addo indicated that the CLOGSAG is proposing reforms that seek to enable members to opt out of the public pay-as-you-go defined benefit (SSNIT) scheme after the worker qualifies for pension (having made the minimum 180 months) such that the remaining contributions could be used for other pension products.’ He argued that the rationale behind the proposal had to do with the adequacy of retirement benefits under the SSNIT Scheme.
The Africa Centre for Retirement Research (ACRR), whose mission is to effectively guide the social security policy debate by scientifically and fairly refereeing some of the dissenting views among stakeholders, has reacted to the CLOSAG’s proposal even before it hits the corridors of Parliament.
The Policy Research Centre has analyzed the proposal and its implications for the overall social security policy agenda and therefore wishes to contribute to the CLOGSAG’s proposition as follows;
- Firstly, it is important to note that Social Security practices are guided by the International Labour Organization’s (ILO) standards that are backed by the relevant international human rights instruments. The ILO Minimum Standards provide concrete guidance to countries for giving effect to the right of older persons to social security. The relevant conventions (102 and 128) and recommendations have detailed the Minimum Standards with regards to what should be covered (contingency), who should be covered, what should be the benefit, how long the benefit should be paid, the prescribed qualifying conditions for entitlement to a benefit, etc. For context, and specifically on the number of months of contributions for pension, the ILO Minimum Standard prescribes 30 years (360 months) of contribution to schemes, and a reduced/adjusted minimum benefit for those who have contributed for at least 15 years (180 months).
- Secondly, Ghana is running a 3-Tier pension system with the First Tier (SSNIT) mandated to provide continuous income (pensions) to members to maintain their standard of living after retirement. The First Tier represents the fundamental components of any social security pension system and is largely seen as the most important pillar of the system. For its importance, governments are encouraged to implement sound financial governance strategies, conduct regular actuarial valuations, and undertake the necessary parametric and legislative reforms to ensure its sustainability. As stakeholders, let us be informed that more than 80% of active members aged 55 and above have accrued the minimum number of 180 months of contribution required to obtain an old-age pension (according to the last actuarial valuation report).
Workers’ benefit (monthly pension) is directly related to the number of months the worker has contributed (pension right). The pension right is the proportion of the worker’s final salaries (average of the best three years’ salaries) that is replaced in retirement. Data simulations of the contributing pattern of members of the scheme show that a provision such as being suggested by CLOGSAG will reduce prospective retirees’ monthly pension by significant proportions and expose them to an unacceptable level of risk (given that the scheme replaces just 37.5% of workers’ final salaries for 180 months of contributions and a maximum of 60% for 420 months of contributions). This simply illustrates the depth of risk such a provision will pose to both the sustainability of the most important component of the social security structure and the adequacy of benefits.
(a) The provision will reduce adequacy of benefit because upon opting out after 180 months, the member does not receive any benefit until the other condition of age is satisfied, this will affect the best three years average salary which invariably is the last three years average salary.
(b) Sustainability of SSNIT scheme will suffer because by design, contributions are to continue until a member retires, dies, or becomes invalid and if this is curtailed after contributing for 180 months, the design of the scheme would be flawed and create sustainability issues.
- Thirdly, the CLOGSAG proposition has suggested that members should be given the opportunity to opt-out of the SSNIT Scheme, after obtaining a minimum of 180 months, such that the remaining contributions could be invested in other pension products. Two issues here, the proposal appears to be a deliberate attempt to weaken the SSNIT (public defined benefits) scheme in favor of the private, defined contribution schemes, and the position about SSNIT being responsible for inadequate benefits to pensioners was not backed by any substantive analysis. It should be noted that SSNIT is the only tier that is required by law to conduct external actuarial valuations, thus, the status of the scheme is available. For the other tiers, there is no requirement for actuarial valuations and so everything is hidden unless the Regulator tells the public about what is going on with adequacy of benefits, etc.
- Fourthly, it is important to note that, based on a detailed analysis and comparison of performance measurement indicators to the pension reform objectives, the conclusion is that the objectives of the 2008 pension reforms are largely unrealized – a significant proportion of workers retiring under Act 766 continue to suffer benefits shortfalls, attributable mainly to inadequate investment income to contributors by private Tier2 Schemes. Survivors’ benefits are not sufficiently and efficiently paid under Tier2 Schemes, and transparency in benefits administration under private occupational pension schemes is a major concern. According to a paper published by ILO in 2018, nearly two-thirds of the countries that had privatized pensions reversed the process leading to a return to or a strengthening of their public pension schemes. Expectations were high when pension privatization models were introduced, and countries hoped to improve the socio-economic wellbeing of workers and the overall efficiency of their pension systems. In practice, however, pension privatization did not deliver the expected results. The quantum of pension benefits deteriorated and made reforms very unpopular. Issues that have dominated the debate with regard to social security pension privatization and its reversals have been returns on investments, adequacy of benefits, and transparency.
On the flip side, the SSNIT Scheme is able to replace up to half (49.63%) of workers’ last salaries, on average. This compares favourably with ILO minimum standard of 40% for 30 years of contributions.
- Fifthly, the pension industry of Ghana is at a point where the Ghanaian public (as stakeholders) must clearly identify and separate the mandate of operators under the respective Tiers (SSNIT under Tier1 and privately managed schemes under Tier2), and begin to assess each accordingly, based on clearly defined targets and performance indicators. In addition, all stakeholders including Civil Society Organizations, and the media must show interest in the overall efficiency of the pension system as we strive to improve the socio-economic wellbeing of the aged.
- Sixthly, it would be useful if CLOGSAG’s future suggestions on the retirement policy are based on substantive and rigorous analysis of trends or indicators and guided by provisions of the social security Act and its regulations, and best practices around the world. The CLOGSAG could adopt the advocacy model of other worker unions within and outside Ghana. A workable and effective advocacy model considers an impartial evidence-based analysis of the retirement income policy. The Trade Union Congress in Ghana and The Senior Citizens League (TSCL) in the United States are good examples to point at. The association could build research partnerships to help guide and improve its overall advocacy strategy and contributions to public policy.
In conclusion, the suggestion to open the door for members to exit to other schemes after contributing the minimum of 15 years is not in conformity with best practices and will pose a serious danger to the broader social security principles and policy objectives. There is a large body of evidence showing that retirement income for Ghanaian retirees is insufficient to maintain a respectable consumption profile or standard of living. The solution does not lie in reducing contributions to SSNIT but rather concerns focusing on measures to control benefit losses to members, and address obvious regulatory, administrative, legislative, and transitional lapses under the 3-tier pension system.
By Abdallah Mashud
The writer is the Executive Director of ACCR