Until the recent pensions reform, one of the major challenges that had confronted employees, both in the formal and informal sector, had to do with the low benefits and growth of their pension contributions as they near or go on retirement.
Interestingly, a lot of well-meaning people working today forget that they would also go on retirement someday; hence the need to put in place robust retirement plans whiles in active service.
It was therefore good and necessary that the Pension Act of 2008 introduced two new tiers, namely tier 2 and tier 3, to supplement the original Social Security and National Insurance Trust (SSNIT) pension scheme.
Since the inception of the two-tier pension system about 10 years ago, the initiative has provided the Ghanaian worker with some great benefits, comfort and confidence. On the high level, tier 2 scheme is perceived as a mandatory defined contribution to which every employee is required to contribute 5% of their monthly income based on their gross salary.
The tier 3 is also a defined contribution scheme, the difference being that it is voluntary. The decision lies with the employee and the employer to determine how much of the monthly income should be deducted as a contribution to the tier 3 scheme.
Operationalization of Tier 2 and Tier 3 Pension Funds
Unlike the traditional tier 1 scheme managed by SSNIT, investment decisions on tier 2 and tier 3 rather have a lot of stakeholders in the decision process; layers added to ensure private and public schemes are carefully managed and streamlined.
Thankfully, the National Pension Regulatory Authority (NPRA) put in place some additional measures on the operationalization of these funds. For example, every administered/registered pension scheme must have stakeholders such as Fund Administrators, Corporate Trustees, Fund Managers, Fund Custodian and Client (Employer in the formal sector).
The role of each party is spelt out and there is no ambiguity of the functions each of them is expected to perform. As outlined in the process shared below*, every investment decision must be in line with the approved directives stipulated in the NPRA guidelines.
For example, a scheme`s Fund Manager cannot invest funds without the explicit approval from the Pension Trustee. We can boast of 33 corporate trustees and over 70 fund management firms. All these firms are licensed and regulated by either NPRA and/or Securities and Exchange Commission (SEC). Figure 1, Participants ensuring the safety of your pension funds