It is the dream of every Ghanaian worker to have financial peace during retirement. While this dream tends to influence the decisions of many workers to save more during their working lives, others, unfortunately, appear to spend their lives under a rather strange assumption that their retirement incomes have already been covered under Tier 1 and 2 of Ghana’s 3-Tier pension system, hence there is no real cause to save more.
Although all Ghanaian formal sector workers are mandatorily required to contribute to Tiers 1 and 2, the benefit envisaged under these tiers are expected to provide the basic income (safety net) required during the workers’ retirement lives to alleviate poverty in old age. This is consistent with the fact that, mandatory pension schemes, by their nature, are not designed to overburden workers and employers in terms of the contribution rates applicable. It is for this reason that contributions, to such schemes across the world, are mostly limited to a very small percentage of basic salaries to essentially provide the basic income required on retirement.
In Ghana, formal sector workers under the National Pensions Act, 2008 (Act 766) are required to contribute only 5.5% of their basic salary to the two mandatory pension schemes namely; Tier 1 and Tier 2. This is complemented with a mandatory 13% of basic salary contribution from their employers to make up a total contribution of 18.5% payable to the two mandatory pension schemes. Out of the 18.5%, 13.5% is remitted to the Basic National Social Security Scheme (BNSSS) managed by the state through the Social Security and National Insurance Trust (SSNIT) as the Tier 1: to provide monthly pension benefits for up to 15 years of the worker’s retirement life (though the worker continues to receive payments if he or she lives beyond age 75). The remaining 5% is remitted to a privately managed registered pension scheme, as the Tier 2, to provide a one-off lump sum benefit at retirement.
As noted from the above, it is apparent that adequacy of retirement income will be of a concern to those workers who have strangely misunderstood the benefit envisaged under Tiers 1 and 2. Interestingly, the Tier 1 replaces between 37.5% and 60% of the worker’s basic salary on retirement depending on the number of years of work. This, obviously, leaves a shortfall in basic salary that needs to be addressed by the worker to maintain his or her level of earning prior to retirement. Even though the Tier 2 benefit is available on retirement, it partially addresses the shortfall through the payment of a one-off lump sum on retirement. Of a much greater concern to a worker on retirement is the fact that he or she will not be entitled to allowances and the medical coverage enjoyed during his or her working life and this, coupled with the shortfall in retirement income, will certainly heighten his or her anxiety during retirement.
In anticipation of the potential shortfall in retirement income and its impact during retirement, Act 766 created a third tier to allow workers to make additional contribution of up to 16.5% of their earnings to privately managed voluntary pension schemes to assist them save more towards their retirement income. Unfortunately, only few formal sector workers, as available data suggest, have taken advantage of Tier 3 in confirmation of the misunderstanding as explained above.
In recent times, workers who have, unfortunately, retired with this misunderstanding have, out of frustration, accused the state and other relevant agencies for providing them with the basic pension benefit in denial of the fact that their benefits were determined on the basis of what they contributed during their working lives. A worker who retired recently was heard with the expression; “I worked over forty years but I only received a meagre sum as pension benefit”. Now the question I ask here is: “na who cause am”?
It is instructive to note that the 5.5% mandatory contribution from a formal sector worker applies only to his or her basic salary and not earnings such as allowances and bonuses. Impliedly, a formal sector worker, earning allowances and bonuses, has the financial capacity to contribute to Tier 3. Contributing to Tier 3 will not only improve retirement income in the future but will also provide a tax relief for current consumption considering the fact that contributions to Tier 3, together with those made to Tiers 1 and 2, grant a total tax relief of 35% to both the worker and his or her employer.
Beware! Retirement is real and it is only a few years away. Take advantage of Tier 3 now and have a better retirement life.
By: Hayford Amankwah (Hayford.Amankwah@npra.gov.gh)
Senior Manager, Standards & Compliance, National Pensions Regulatory Authority