Social Security in Ghana

MPSM609

Lecture 3

By Stephen A. Yeboah

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 Objectives of a pension system 
The primary objective of a pension system is to provide income security in old age. That objective has at least four
elements.

1. Consumption smoothing
 Old-age pensions should enable a person to transfer consumption from the young age to the old age, thus
allowing one to improve the time path of consumption over working and retired life.
 The extent to which a pension provides such smoothing is reflected in the replacement rate, which measures the
size of a person’s pension relative to previous earnings.

2. Insurance
 A pension based on individual saving means that an individual either risks outliving his or her retirement savings,
or consumes very little throughout old age to prevent that from happening.
 Insurance, i.e. pooling risks, offers individuals protection against the life expectancy risk. This is the essence of
annuities.
 Consumption smoothing and insurance are relevant not only to individuals but also to the family. People are
concerned about their children and their partners.
 Pension systems commonly include life insurance benefits for workers with young children and the option or the
requirement of benefits for a surviving elderly spouse, commonly as an annuity.
 Pension systems can also insure against disability.
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 Objectives of a pension system 
The primary objective of a pension system is to provide income security in old age. That objective has at least four
elements.

3. Poverty relief
Programmes which provide poverty relief can target all the elderly or can concentrate on those who have
contributed to the pension system. Many countries have both types of arrangement.

4. Redistribution
 Pension systems can redistribute incomes on a lifetime basis, complementing the role of progressive taxes on
annual income.
 Lifetime redistribution can be achieved by paying pensions to low earners that are a higher percentage of their
previous earnings (i.e. a higher replacement rate),thus subsidizing the consumption smoothing of people who are
less well-off, but not necessarily poor.
 There can also be redistribution towards families, for example paying a higher pension to a married couple than
to a single person, even though both households have paid the same contributions.
 Pension systems can also redistribute across generations.
For example, a government may reduce the contribution rate or increase the benefits of the present generation.
Such a policy requires future generations to pay higher contributions or to have lower pensions, 74thus
redistributing from those later generations to the earlier elderly generation.
Social Protection in Ghana

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 Social Protection in Ghana
Brief chronology of Social Protection in Ghana

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 Other Programmes on Social Protection in Ghana

− Social Welfare Programmes

− Supplementary Feeding Programme

− Capitation Grant

− National Youth Employment Programme

− Integrated Agricultural Support Programme

− Microfinance Schemes

− Emergency Management Schemes

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History of Pensions in Ghana

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 1 - Background
In pre-independence Ghana, there was neither a national nor a uniform Social Security Scheme in the country. However, there were
public and private schemes, which catered for the income security of various categories of workers in the formal sector.

 In 1950, a public sector pension scheme popularly known as CAP 30 emerged as a colonial legacy drawing its
authority from the Pensions Ordinance 42 of 1950 appeared as Chapter 30 of the 1950 British Colonial
Ordinance, hence, the name CAP (for Chapter) 30. The Pension Ordinance 42 was promulgated in 1950 but took
retroactive effect from January 1, 1946 for officers in the public service of the then government of the Gold Coast.
 CAP 30 is a non-contributory pension scheme established for workers categorized as African Senior Civil
Servants

 The CAP 30 Pension Scheme was intended to be a reward from the Colonial Government to Civil Servants after a
minimum of 10 years of loyal service at the voluntary age of 40 years or on the attainment of the compulsory retirement
age of 50 years.
 It was not until 1955 that, with the promulgation of the Teachers’ Pension Ordinance that certified teachers were
included as African Civil Servants under the Pension Ordinance. Senior members or lecturing staff of the country’s
premier University, then the University of the Gold Coast, also had a Private Superannuation Scheme run by the
University.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 2 - Establishment of Social Security Fund ‐ 1965 (Social Security Act, 1965, Act 279)
In 1965, Parliament passed the Social Security Act, 1965, Act 279 to establish a social security fund.

 Contributions
 Contribution rate was 7.5% and 15.0% by the worker and employer respectively; Total Contribution was 22.5%
 Self-employed – 15.0%
 Benefits provided:
 Superannuation- a lump sum paid out to qualifying retirees
 Survivors and life insurance benefit- paid to the nominated beneficiaries of a deceased member
 Invalidity Benefit – when a member of the fund is rendered permanently invalid
 Sickness Benefit – when the member is unable to earn an income due to sickness
 Emigration Benefit – when the contributor emigrates permanently from Ghana

 Interim superannuation benefit for members aged 50 and 45 for men and women respectively
 Terminal benefits at the point of disengagement at age 60.

 Membership
 Applicable to every employer of an establishment employing not less than five workers and to every worker
employed therein.
 A self-employed person may, at his own written request be enrolled as a member.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 2 - Establishment of Social Security Fund ‐ 1965 (Social Security Act, 1965, Act 279)

 The scheme was managed by the then Department of Pensions and National Insurance.

 Exemption from Tax: No income tax was payable on any benefits by any member.
 Existing Schemes
The existence of a pension, provident fund or gratuity scheme in respect of workers to whom the Act applied shall not
exempt the employer of such worker or workers from the Act.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 3 – Social Security Decree, 1972, NRCD 127
In 1972, the new government, the National Redemption Council (NRC) passed the NRCD 127 to establish a body
corporate, i.e. the Social Security and National Insurance Trust (SSNIT) to administer the Fund.

The Social Security Fund established in 1965 was made to continue but was subjected to the provisions in the NRCD 127.

Provisions in the NRCD 127 were as follows:

 Establishment of a body corporate known as Social Security and National Insurance Trust (“the Trust”) to be
responsible for the general administration of the Decree, administration & investment of the Fund and any regulations
made.
 Contributions
 Contribution rate was 5% and 12.5% by the worker and employer respectively; Total Contribution was 17.5%
 Self-employed – 12.5%
 Establishment of Board of Directors
A 10-member governing body called the Board of Directors was established under the Decree.
 Membership
 Applicable to every employer of an establishment employing not less than five workers and to every worker
employed therein , and also to every other employer and worker to whom the Social Security, 1965, Act 279 applied
 A self-employed person may, at his own written request be enrolled as a member.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 3 – Social Security Decree, 1972, NRCD 127
 Categories that were exempt were:
 Members of the Armed Forces
 Members of the Police Service
 Members of the Prison Service
 Members of the National Fire service
 Foreigners in the Diplomatic Missions
 Senior members of the Universities and Research Institutes.
 Benefits provided:
 Superannuation
 Invalidity
 Survivors
 Emigration
 Sickness
 Unemployment (The required conditions for the administration of the benefit per NRCD 127, Section (40) (1)
(f) was never prescribed.
 Interim superannuation benefit for members aged 50 and 45 for men and women respectively
 Terminal benefits at the point of disengagement at age 60.
 The Scheme was administered as a Provident Fund.
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 HISTORY OF PENSIONS IN GHANA
MILESTONE 3 – Social Security Decree, 1972, NRCD 127
 Exemption from Tax
No income tax was payable on any benefits received by any member, his nominee or heir.
 Existing Schemes
 The existence of a pension, provident fund or gratuity scheme in respect of workers to whom the Act applied
shall not exempt the employer of such worker or workers from the Act.
 In 1975 Pensions and Social Security (Amendment) Decree, 1975, SMCD 8 offered members of the Social
Security who held pensionable office in the public service or police service the option to either continue with
the Social Security Fund or opt out to have their pensions determined in accordance with any law relating to
pensions applicable to them.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 4 – Social Security Law, 1991, PNDCL 247

In 1991, the Social Security Decree, 1972 NRCD 127 was reformed to convert the then provident scheme into a pension scheme
under Social Security Law, 1991, PNDCL 247:
 Contributions
 Contribution rate was 5% and 12.5% by the worker and employer respectively; Total Contribution was 17.5%
 Self-employed – 17.5%.
 Board of Directors
Membership of the Board of Directors was increased to 14.
 Membership
 Every employer of an establishment and to every worker employed therein;
 Every other employer and worker to whom the Social Security Decree, 1972 (NRCD 127) applied immediately before the
commencement of this Law, and;
 All self-employed persons, who opt to join the Scheme.
 Officers and men of the Armed Forces and such other officers were exempted
 Contributions
 Contribution rate was 5% and 12.5% by the worker and employer respectively; Total Contribution was 17.5%
 Self-employed – 17.5%.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 4 – Social Security Law, 1991, PNDCL 247
 Benefits provided:
 Superannuation pension
 Old-age lump sum
 Invalidity pension
 Survivors lump sum
 Emigration benefit
 Early retirement pension (reduced pension) for members aged between 55 and 60 years.
 Persons working in hazardous employment were allowed to retire at age 55 with full pension.
 The law provided pension payments to members who met the eligibility conditions on retirement and also provided
members the opportunity to opt for 25% of their lifetime guaranteed monthly pension payments called the 25%
lump sum on retirement.

 Exemption from Tax

No income tax was payable on any benefits received by any member, and his nominee.
 Existing Schemes
The existence of a private or company pension, provident fund, superannuation scheme or gratuity scheme in respect
of workers to whom this Law applies shall not exempt the employer of such worker or such workers from the provisions
of the Law.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 4 – Social Security Law, 1991, PNDCL 247
 Periodic Review of Pensions
The Trust shall annually review the pension payment based on adjustment in salaries and wages of members.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 5 – National Pensions Act, 2008, Act 766

 The National Pensions Act, 2008, Act 766 established a contributory three-tier pension scheme consisting of the following:
 A mandatory basic national social security scheme (called Tier-1).
 A mandatory fully funded and privately managed occupational pension scheme (called Tier-2).
 A voluntary fully funded and privately managed provident fund and personal pension scheme (called Tier-3).
 The basic national social security scheme operates under the Social Security and National Insurance Trust.
 The occupational pension scheme, provident fund scheme, personal pension scheme and other privately managed pension
schemes are managed by trustees.

 Contributions
 Employee - (5.5%) of employee’s basic salary; Employer - (13%) based on employee’s basic salary; Total Contribution is 18.5%
 The total of 18.5% is distributed as:
• Tier-1 Mandatory Basic Social Security Scheme (SSNIT) – 13.5% with 2.5% going to the NHIS.
• Tier-2 Second-Tier Mandatory Occupational Scheme – 5%

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 5 – National Pensions Act, 2008, Act 766

 Tax Relief
 Contributions up to 35% of payroll is tax exempt.
Tax exemption is distributed as follows:
 Tier-1 mandatory – 13.5% Tier-2 (mandatory) – 5.0% Tier-3 (voluntary) 16.5% (employer/employee)
 Investment income is tax exempt.
 Retirement (Pension) benefit is tax exempt.

 Key Features of the Three-Tier Pension Scheme

Pensions Regulator
Establishment of a National Pensions Regulatory Authority to regulate both Public and Private Pension Schemes in the
country.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 5 – National Pensions Act, 2008, Act 766

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 5 – National Pensions Act, 2008, Act 766

Special Pension Scheme for the Informal Sector (section 109)

Provision has been made in the 3rd Tier voluntary Personal Pension Scheme to cater for the peculiar needs of
workers in the informal sector of the economy in terms of how much they can contribute and also the
benefits are structured to meet their short term and retirement needs.

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 HISTORY OF PENSIONS IN GHANA
MILESTONE 5 – National Pensions Act, 2008, Act 766

2nd and 3rd Tier Private Pensions

 Improved 2nd tier lump sum benefits;

 The privately managed schemes (2nd and 3rd tiers) allow the use of future lump sum pension benefits to secure
mortgages (sections 103 and 114). This means that workers can acquire their own houses before retirement using
their pension benefits as collateral.

Tax Relief

 Contributions up to 35% of Payroll is tax exempt.

 Investment income is tax exempt.
 Retirement (Pension) benefit is tax exempt.

Note: Contributions by workers are treated as deductible income and granted upfront.

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The Basic National Pension Scheme (Tier-1)
SSNIT Scheme

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 The Basic National Pension Scheme (Tier-1)

Scheme Design
The Pension Scheme is a social insurance scheme based on the principles of:
• risk pooling,
• intergenerational transfer and;
• solidarity.
Financing Method
The scheme is partially funded and it adapts the scaled premium method of financing.

Governance
 Board of Directors under PNDCL 247 was replaced with Board of Trustees.
 The membership of the Board of Trustees was reduced to 13.

Membership
 Membership is mandatory for all employees with employer-employee relationship with identified employer.
 Expanded to include the Universities, Research Institutions, Police Service, Fire Service, Judges.
 Membership of the self-employed is voluntary.
 The only persons expressly exempted by law are the Military.
 The minimum age at which a person may join the social security scheme is fifteen years and the maximum age is forty-five years.

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 The Basic National Pension Scheme (Tier-1)

Age Exemption
Members who were aged 55 years and above on implementation date of Act 766, (the age was reduced to 50 years and above
under the National Pension Amendment Act, 2014, Act 883) were exempted and therefore made to receive benefits under
PNDCL 247, unless they opted otherwise.

Contributions
 Under the National Pensions Act, 2008 (Act 766), a total worker-employer contribution rate of 18.5% is paid on
behalf of the worker;
• The worker contributes 5.5%
• The employer pays 13% of the worker’s wages

 The total contribution rate of 18.5% is distributed as follows:

• 2.5% for the NHIS
• 5% to the Second Tier (Pillar Two) Schemes, and
• 11% for the operations of the SSNIT

 Maximum ceiling for contributions

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 The Basic National Pension Scheme (Tier-1)

Benefits
A member of the Scheme is guaranteed the following core benefits
 Superannuation Pension
 Invalidity Pension
 Old-Age lump sum
 Survivors lump sum
 Emigration benefit

Periodic Review of Pensions

The Trust shall annually review the pension payment which shall be indexed to wage inflation rates of active members or another
rate determined by the Trust in consultation with the Board of the Authority.

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END

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