Frequently Asked Questions About The Three-Tier Pension Scheme
Q. What is the Pension Act of 2008?
A. The Pension Act of 2008 was an act passed by the Parliament of Ghana to improve retirement security and comfort for the average Ghanaian. Through the introduction of a mandatory, private sector-managed defined contribution tier (tier 2), the Act has ensured that formal sector employees have more say in how a portion of their contributions are managed. With prudent expert management by trustees, tier 2 schemes should provide a decent lump-sum on retirement, which employees can use at their discretion. This will enhance the payments they will be getting from SSNIT. In addition to tier 2, the Act has also introduced provident funds and personal pension schemes which are tax-advantaged retirement savings schemes designed to encourage savings by formal and informal sector employees.
Q. What are my responsibilities under the Pension Act of 2008?
A. Under the Pension Act the employer’s main responsibilities are to establish and monitor the performance of the mandatory tier 2 scheme and make regular contributions to it. Employers also have the option of setting up a tier 3 scheme for the benefit of their employees. Finally, all employers are also required to facilitate the payment of contributions to any tier 3 pension fund that its employees select.
In assuming all of these responsibilities, the law has placed the employer in the role of fiduciary to its employees.
Q. What do I have to do to set up a tier 2 scheme?
A. Setting up the scheme involves selecting either an internal trustee board or appointing a corporate trustee, and deciding on the rules that govern the operations of the scheme. For smaller companies, we recommend the use of a corporate trustee, who can ensure that the scheme design meets all the legal and fiduciary requirements for occupational pension schemes.
In addition to the initial requirement for scheme setup, the employer is also responsible for the ongoing monitoring of the performance of the trustee. To meet this responsibility, the employer needs to understand the role of the trustee and make a proper determination as to whether the trustee is performing its job satisfactorily.
Q. What do I have to do to set up a tier 3 scheme?
A. Although the general requirements for setting up a tier 3 scheme are the same as those for setting up a tier 2 scheme, the voluntary nature of tier 3 gives the employer more leeway in customizing the scheme to suit its needs. Specifically, the employer has full flexibility on whether and when they will make contributions, on whether these contributions will be to match the employees’ own, and on when the contributions made by the employer will vest.
Q. What does it mean to be a fiduciary to my employees?
A. By making you a fiduciary, the law has placed you in a position of trust in relation to your employees. Under law, the fiduciary role is the highest standard of care one person or institution can have for another. The expectations of this new role are as follows:
— You are not permitted to profit from the fiduciary position
— You owe undivided loyalty to the employee or pension scheme participant and must act prudently, responsibly, and honestly
— You must avoid conflicts of interest unless otherwise authorized by your employees after full disclosure
— You must act in the best interest of plan participants and not yourself; in fact you must put your employees’ interests above your own.
— You must act impartially, and must not discriminate amongst different classes of employees
In effect, you will be required to demonstrate that every action you take with regards to the pension scheme is for the benefit of all your employees.
Q. As part of my fiduciary responsibility I need to understand the role of the Trustee in order to properly monitor them. What is the Trustee’s role?
A. The trustee manages your tier 2 and tier 3 pension schemes and is responsible for executing the mandate given to it by the company through the trust deed and scheme rules. To do this, there are three main services that the trustee will provide to the scheme.
Investment Services: The trustee will be responsible for establishing the investment policy and establishing the strategic asset allocation for the scheme. This function is extremely important as when properly done contributes more than 90% of the scheme’s investment return.
Fund Manager Selection and Evaluation: The trustee is responsible for selecting the fund manager, providing them with an investment mandate, guidelines and restrictions and a performance benchmark and monitoring and evaluating their performance over time. To do this, the trustee needs to fully understand the entire fund management process and make proper determinations about the risk of giving a mandate to one fund manager over another. Where a fund manager’s investment process or investment prowess is deteriorating, the trustee needs to be able to identify this before it impacts fund performance and take remedial action.
Fund Administration: Managing pension schemes is extremely operationally intense and requires deep expertise in designing, automating and performing the processes of receiving and booking contributions, sending regular statements and returns to the employer, employees and regulators, processing transfers into and out of the scheme and paying out benefits.
Q. How should I select a corporate trustee given that they are all new companies?
A. Although all the trustee companies are new, there are certain criteria you can use to evaluate trustees in order to select the most appropriate one for your company. You should focus on selecting the right trustee because this decision is the most important decision you make to ensure that your employees have a comfortable retirement. Trustees need to be carefully selected because they are responsible for the asset allocation decision which typically accounts for about 95% of the investment return in a given portfolio. You should answer the following questions to help you in your selection of an appropriate trustee.
— Does the trustee have the relevant skills and knowledge to make strategic investment management decisions?
— Does the trustee have relevant expertise and industry experience to select the appropriate service providers?
— Are there procedures and systems in place to ensure effective scheme administration?
— Has the trustee adopted measures that ensure regulatory compliance?
— Does trustee have a sound governance system?
— Will the trustee act in the best interest of scheme members?
Seeking answers to these questions and ensuring that the trustee you select has the capabilities to effectively carry out their trustee duties will ensure that you have the best chance of providing your employees with a retirement package that gives them the peace of mind to concentrate on their work and deliver their best to you.
Q. The Trustee’s role sounds complicated. How can I monitor all that?
A. We agree that the trustee role is complicated and requires a high level of knowledge and expertise. For most companies in Ghana, the best choice is to hire a corporate trustee who is contracted to provide a certain level of service and who can be replaced if their offering is not effective or competitive. Monitoring compliance to a contract is much easier for the company and its board to manage.
Q. Can I continue to operate my existing provident fund in the same way I used to?
A. Before the passage of the Pension Act of 2008 each employer could provide a provident fund to its employees based on the terms and conditions agreed between the employer and the employees. There was no legal standard to which the employer needed to adhere. However, with the passage of the Pension Act, there is now a minimum standard that all workplace retirement schemes must meet. The most important changes introduced by the Act are:
— The employer is now in a fiduciary role and its first responsibility when it comes to provident funds is to the employees. For example, you might have been able to use provident fund monies to make up shortfalls in your operating cashflow in the past. As a fiduciary, taking this action will now be in breach of your fiduciary duty.
— There are now three statutory roles that have been created for the management of workplace retirement schemes. For every provident fund or occupational pension fund there needs to be a trustee who then appoints a custodian and fund managers for the fund. Your existing provident fund will need to be restructured to reflect this requirement.
— The assets of the pension scheme are kept in the custody of the custodian and are completely segregated from the company’s assets. Only the trustee can give instructions on the use of the scheme’s assets. The employer cannot instruct on the use of the scheme assets. This means you cannot borrow from the provident fund or use the contributed funds for any other purpose.
— The risk profile, asset allocation, fee schedules and reporting requirements of all workplace retirement schemes are now subject to the guidelines determined by the NPRA.
— All pension and provident funds are now under the Pension Act of 2008 and therefore have to be registered with the National Pensions Regulatory Authority (NPRA). This registration will have to be done by the scheme’s trustee.
Q. What if I decide not to register my old provident fund with the NPRA?
A. The arguments we have heard for the decision not to register with the NPRA typically fall under the following broad areas. We believe that the benefits of adhering to the Pensions Act and associated guidelines far outweigh any benefit that might be accrued from not registering.
Registering with the NPRA forces me to meet their maximum investment guideline limits. This constrains my provident fund scheme and does not allow me the flexibility to invest in the asset classes of my choice.
In general, broader investment limits give you more exposure to higher returning asset classes, and potentially increase the diversification in your scheme. However, in Ghana today there is a limit to the number of asset classes you can realistically invest in. Constraining you to equities, fixed income and real estate ACTUALLY does not limit your flexibility since those are the asset classes you will most likely invest in anyway. Also, the tax benefit derived from having an NPRA-registered scheme implies an immediate 30.5% return on your assets in the first year, a return which we doubt any asset class in Ghana can achieve.
The cost of meeting the regulation is too high in terms of the time it takes me to setup and manage a trustee board.
Corporate trustees like Petra Trust can provide the trustee service in an efficient, cost-effective and professional manner, saving you the time it takes for your internal staff to be properly trained, and for them to perform the trustee function. We agree that the trustee function is involved. However there is no need for you to perform it yourself.
The cost of meeting the regulation is too high in terms of the amount I have to pay the statutory service providers.
The role played by the statutory and other service providers is crucial to the proper operation of ANY collective investment scheme. The benefits of having them, in terms of investment performance, risk management, operational efficiency, governance and control far outweighs the associated costs. In general, the after-cost return of well-structured schemes will beat the after-cost returns of schemes without proper structures. Also, please remember that these costs are borne by the scheme and not you, the employer.
My employees do not want to be locked into a savings scheme for ten years. Some of them will need access to their funds in a few years if not months.
Although there is a minimum time limit of ten years when your employees invest in a registered provident fund scheme, this limit only applies to the tax benefit that they gain. Your employees may withdraw their money at any time before the ten years or before retirement and only have to pay the tax they would have paid anyway on their contributions and investment gains. In effect, there is no difference between withdrawing early from a registered fund and investing from an unregistered fund.
There is really no legal cost for not converting so why bother?
We are of the opinion that the passage of the law has set a minimum standard for all workplace-based retirement and savings schemes to meet. Even if you decide not to register your scheme with the NPRA, you will still be expected to have all the structures prescribed by the Pensions Act in place, particularly with regards to having Trustees, Custodians and Fund Managers, and completely segregating the assets of the scheme from the employer’s assets. Even then, you might still be at risk either legally, or reputationally, from the NPRA proceeding against your decision, or a disgruntled scheme member filing a lawsuit against you. Given how little it costs you to register your existing scheme, we highly recommend that you convert.
The IRS will never give me my tax credit anyway, so why bother?
Unfortunately the law sometimes takes time to be implemented in this country. We however have no doubt that in time, all the tax benefits due to the employer and the employees under the Pensions Act will be properly accounted for. In the meantime, you are no worse off by converting.
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