Kofi Anokye OWUSU-DARKO(Dr)
There are two press releases circulating on Informal Sector Pensions dated 26/08/2024 and 30/08/2024 issued by the National Pensions Regulatory Authority (NPRA), bringing to the attention of the general public that informal sector pensions already exist. In the 30/08/2024 press release, the NPRA directly linked informal sector workers to self-employed persons, stating:
“…the new Pensions law has offered opportunities for self-employed persons (informal sector workers) to voluntarily contribute towards their pensions.”
Additionally, the NPRA associated Personal Pension Schemes with the informal sector, highlighting that:
“as at the end of the second quarter of 2024, a total of twenty-six (26) Tier 3 Group Personal Pension Schemes and Personal Pension Schemes have been registered by the NPRA, targeted mainly at informal sector workers and are managed by licensed trustees.”
Furthermore, the NPRA linked the SSNIT Self-Employed Enrolment Drive (SEED) to the informal sector by stating:
“The public is also informed that the Social Security and National Insurance Trust (SSNIT), in accordance with section 58(c) of Act 766, launched the Self-Employed Enrolment Drive (SEED) last year, to extend social security coverage to workers in the informal sector.”
It is crucial to examine how this classification aligns with the intent of the pension laws since it has significant implications for policy implementation.
The NPRA’s classification, which combines Personal Pension Plans and SSNIT’s self-employed coverage (SEED) under the informal sector umbrella, undermines the intent and spirit of informal sector coverage per the pension laws that it is meant to uphold.
The pension laws were crafted to distinguish between different categories of workers, and the broad classification used by the NPRA risks conflating the regulated, formal self-employed such as lawyers, accountants and consultants with the unregulated, financially unsophisticated self-employed such as the coconut seller and female porter (Kayayo).
It is important to note that while all Group Personal Pension Schemes are designed as informal sector pensions, not all Personal Pension Plans are stricto sensu informal sector.
For instance, if the CEO of NPRA decides to contribute to a Personal Pension Plan under Tier 3, he should not be classified as an informal sector contributor for the purpose of financial inclusion.
The target of the informal sector pensions for financial inclusion purposes, as per the National Pensions Act, 2008 (Act 766) and the related Legislative Instruments 1989 (Tier 1) and 1990 (Tier 2 and 3), are not professionals like lawyers, accountants, consultants, or workers in the formal sector who voluntarily contribute to personal pensions.
These professionals, although they may opt into Tier 3 Personal Pension Plans or the SSNIT SEED, should be treated as distinct from informal sector workers such as the plantain and koko seller. The law clearly intends to differentiate between these groups, particularly when discussing initiatives aimed at promoting financial inclusion within the informal sector.
This article will use provisions of the National Pensions Act, 2008 (Act 766) and the related Legislative Instruments (L.I.1989 for Tier-1) and (L.I. 1990 for Tiers-2 and 3) to demonstrate that the intent of coverage for informal sector pensions, particularly concerning financial inclusion, is meant for unregulated workers.
It will also distinguish between the formalized, regulated financially sophisticated self-employed, who are more structured in their enterprise to plan their retirement and the informal, unregulated, financially unsophisticated self-employed, who are the true focus of pensions inclusion efforts.
The article will argue that conflating these distinct groups within the informal sector basket is against the spirit of the law and could lead to ineffective pension policy implementation. Additionally, recommendations will be provided on how to better align pension policies with the unique needs of both formal self-employed professionals and the targeted informal sector workers.
GENERAL UNDERSTANDING OF THE INFORMAL SECTOR AND THE SELF-EMPLOYED
There are various approaches to categorizing the informal sector, but for the purposes of this article, I will use the “Enterprise Approach” and the “Labour Approach.”
- Enterprise Approach: This approach focuses on the characteristics of the production units, size of enterprises, and the place of work where activities take place, typically referred to as “employment in the informal sector.” Examples include structure of the enterprise, sole proprietorship or partnerships. These are often small-scale enterprises with limited formal structure.
- Labour Approach: This approach focuses on the characteristics of the persons involved or their jobs, distinguished as “informal employment.” It considers the nature of the employment relationship and the extent of protections associated with the job of the worker. Examples include masons, carpenters, and labourers.
The International Labour Conference (ILC) in 2002 used the term ‘informal economy’ to refer to “all economic activities by workers and economic units that are – in law or in practice – not covered or insufficiently covered by formal arrangements.” According to Hart (1973), the informal sector refers to “unregulated economic enterprises or activities.”
Self-employed on the other hand, refers to individuals who work for themselves rather than being employed by a company or another person. They typically run their own businesses, operate as freelancers, or engage in trades or professions where they are responsible for generating their income. Self-employed individuals manage their own business operations, make their own decisions, and are directly accountable for their profits or losses.
In legal and tax contexts, being self-employed means that the individual must report their income, handle their own taxes. Self-employed individuals may also have more flexibility and control over their work but do not usually have the benefits provided to employees, such as health insurance, retirement plans, or paid leave.
From the above, can it be said that the lawyer running her own chamber is self-employed? and what about the plantain and koko seller? Can it also be said that both the lawyer and plantain seller are both in the informal sector? Now for the purposes of Ghana’s pension space, this is the faint distinction that has to be made to appreciate the focus of informal sector pensions inclusion within the complexities in categorizing different types of work within legal and social frameworks for the purposes of financial inclusion policy formulation.
LEGAL FRAMEWORK AND SSNIT’S ROLE IN SERVING THE SELF-EMPLOYED
The National Pensions Act, 2008 (Act 766), established a comprehensive three-tier pension system in Ghana, designed to provide retirement benefits for workers across various sectors. The first tier, managed by the Social Security and National Insurance Trust (SSNIT), is mandatory for all formal sector employees and provides basic social security benefits.
The second tier, managed by private trustees, is also mandatory and offers additional retirement income. The third tier, which is voluntary, is specifically designed to cater to informal sector workers and self-employed individuals, providing them with flexible options for retirement savings.
With this legal framework in place, the role of SSNIT becomes crucial, particularly in how it serves different categories of self-employed individuals under the pension scheme.
SSNIT’s primary mandate under Act 766 is to manage the first-tier basic national social security scheme, which operates on a defined benefit basis. The scheme is structured around regular contributions, with benefits calculated based on the worker’s contributions and the number of years they have contributed. This model is well-suited to formal sector employees who have consistent income and can adhere to the regular contribution schedule.
For self-employed individuals, particularly those under the “enterprise approach,” SSNIT offers an option to voluntarily join the scheme. Regulation 11 of L.I. 1989 outlines the obligations for these self-employed individuals regarding the payment of contributions:
- Payment Deadlines: Self-employed persons who opt to join the scheme must pay their contributions within fourteen days after the agreed period. This ensures regular and timely contributions, essential for the sustainability of the pension fund.
- Voluntary Contributions: Individuals who continue contributing after ceasing formal employment, or who are self-employed, must adhere to the same payment schedules. This provision allows professionals who start their own practice, such as lawyers or accountants, to maintain their pension contributions.
- Penalties and Arrears: Penalties apply for late payments, and the Trust will not accept arrears over twelve months from self-employed persons. This regulation emphasizes the expectation that self-employed professionals will manage their contributions responsibly.
Regulation 2.3 of L.I. 1989 further supports the focus on regulated self-employed individuals by requiring that any self-employed person who changes their business name, address, or location must notify the Director-General within ten days. This regulation clearly targets self-employed individuals with formal business structures—such as lawyers, accountants, or consultants—who operate under the “enterprise approach.” These individuals typically have a formal business name, physical address, and a structured operation, distinguishing them from informal workers like a coconut seller and Kayayo, who do not have such formalized business structures.
These regulations, along with SSNIT’s structured scheme, clearly indicate that SSNIT is better suited to serve self-employed individuals who follow the ‘enterprise approach.’ These are individuals with formalized businesses, consistent income, and the ability to manage regular contributions. These regulated, formal self-employed individuals align with the operational and regulatory expectations of SSNIT.
In contrast, the “labour approach” to self-employment—typified by informal workers engaged in unregulated economic activities with irregular income—does not align with SSNIT’s structured requirements. These workers are more appropriately served by Tier 3 pension schemes, which offer the necessary flexibility.
L.I. 1989 focuses on formal sector workers and self-employed individuals who choose to join the SSNIT scheme voluntarily, but it does not mention or specifically address the informal sector. This lack of explicit mention or tailored provisions makes the regulation less suitable for informal sector workers, who typically require more flexible contribution arrangements due to the nature of their work and income patterns. In effect, while SSNIT’s structured approach works well for regulated, formal self-employed individuals, the flexibility of Tier 3 scheme is better suited to the needs of the unregulated, informal workers.
THE ROLE OF L.I. 1990 IN SUPPORTING INFORMAL SECTOR PENSIONS
L.I. 1990 (Occupational and Personal Pensions Regulations) was specifically crafted to cater to the needs of informal sector pensions. It expands on the third-tier pension schemes, which are voluntary and designed to provide flexible options for individuals in the informal sector.
Key Reasons:
- Flexibility in Contributions: L.I. 1990 outlines provisions for flexible contribution schedules, which are essential for informal sector workers who often have irregular income patterns. This flexibility allows workers to contribute according to their financial ability without the rigid requirements of regular contributions found in the formal sector.
- Group Pension Schemes: The regulation allows for the creation of group pension schemes, which are well-suited for informal sector workers who might be part of associations or cooperatives. These group schemes provide a collective approach to retirement savings, making it easier for workers to participate.
- Personal Pension Schemes: L.I. 1990 also provides for personal pension schemes that can be tailored to individual needs, offering more control and adaptability for informal workers. These schemes allow for personalized retirement planning, which is crucial for those who do not have a formal employer.
In contrast:
L.I. 1989 (Basic National Social Security Regulations) governs the administration of the first-tier pension scheme managed by SSNIT, which is mandatory for formal sector workers. This regulation is more rigid and caters primarily to formal sector employees. While self-employed individuals can voluntarily participate in the first-tier scheme, L.I. 1989 does not impose mandatory participation on them. However, if the self-employed choose to join, they must adhere to the same rules as formal sector workers regarding registration, contributions, and benefits. The rigid structure of the contributions and strict regulations, such as penalties for late payments, make L.I. 1989 less suitable for informal sector workers who typically have irregular income patterns.
Therefore, L.I. 1990 is the regulation that was crafted with a focus on addressing the needs of the informal sector, providing the necessary flexibility and options to include these workers in Ghana’s pension system. This further supports the argument that SSNIT’s involvement in informal sector pensions should be limited, as their scheme does not provide the flexibility required for these workers.
NPRA’s CLASSIFICATION OF SEED AS INFORMAL SECTOR
By aligning the SSNIT self-employed scheme (SEED) with informal sector pensions, the NPRA may inadvertently create a framework that is less optimal for informal sector workers. The pension laws, when considered as a whole, seek to distinguish between formal self-employed individuals and informal self-employed workers, though this distinction may sometimes be difficult to maintain. However, ensuring this distinction in practice is essential to ensure that each group is served by the pension scheme best suited to its needs.
Classifying SEED under the informal sector reflects SSNIT’s historical practice, where all categories of the self-employed were included under the informal sector. SSNIT used to run an informal sector scheme under the old and repealed Social Security Act, 1991 (PNDCL 247), but the passing of Act 766 moved informal sector pensions to Tier 3 of the three-tier pension scheme.
Despite this, the practice of grouping all self-employed individuals under the informal sector classification may still persist. This contributes to a regulatory and policy gap, as the law has now shifted its focus to the unregulated self-employed for informal sector pensions, primarily under Tier 3. These practices may be continuing due to institutional inertia, as organizations often take time to fully adapt to legislative changes.
In this new dispensation, if SSNIT chooses to continue serving self-employed individuals who opt for Tier- 1, it must concentrate on the regulated, formal self-employed under the “enterprise approach”. These are individuals who, despite being self-employed, operate in a structured and formalized manner, making them more compatible with SSNIT’s requirements.
Meanwhile, the informal, unregulated self-employed under the “labour approach” would be better suited for Tier 3 pension schemes, which are designed to accommodate their need for flexibility. NPRA classifying SEED under informal sector over estimates the reporting figures for decision making.
THE PRESS RELEASES
· Timing and Perception
The timing of the two press releases from the National Pensions Regulatory Authority (NPRA) raises questions about their intent and the urgency behind them. The first press release, dated 26/08/2024, appeared to be a response to the NDC manifesto, launched on 24/08/2024, which promised a special pension scheme initiative, “Mo-Ne-Yo,” for informal sector workers.
This perception is reinforced by the opening statement of the press release, which reads, “The National Pensions Regulatory Authority’s (NPRA) attention has been drawn to some media reports on the proposed establishment of pension schemes for Cocoa farmers, Commercial drivers, Traders, Market women, and other informal sector groups and self-employed persons.
” Additionally, the last paragraph asserts, “It is therefore out of place to make statements suggesting that there are no pension schemes for informal sector workers and that pension schemes will be set up for informal sector workers.”
Even if the releases had nothing to do with the NDC manifesto, a well-thought-out corporate communication strategy would have avoided this situation, as it raises concerns that the NPRA was responding hastily to political developments.
Perception is critical in protecting the brand image of any organization and avoiding reputational risk. A regulator does not sell physical goods but rather an image of trust, integrity, and fairness to all stakeholders—an image that must be carefully guarded.
The timing of these releases, combined with the errors in the first, gives the impression of a hasty response to the NDC manifesto. By appearing to react to political developments, the NPRA risks being seen as politically influenced. This is damaging for a regulatory body, which is expected to operate independently and impartially. This urgency to respond was unnecessary, and the reputational risk it poses to the NPRA, especially after the approval of the controversial sale of SSNIT hotels, could have been avoided.
·Communication Strategy
The language and choice of words used in the 30/08/2024 press release, such as ‘well-meaning Ghanaians,’ suggest a communication style that may be perceived as more political than corporate. For a regulatory body, maintaining a tone of neutrality and professionalism is crucial, as any perception of bias can undermine public trust.
While encouraging public participation in pension schemes, the NPRA should also engage constructively with all groups, including political parties, that propose initiatives to enhance pension inclusion.
As public servants, the NPRA should foster a collaborative environment where innovative ideas are welcomed and assessed on their merits, ensuring the focus remains on broadening pension coverage rather than appearing to adopt a politically aligned stance. If informal sector pensions are to be reported, full disclosure with precise data separation is essential for stakeholders to fully understand their impact.
The NPRA’s press releases create an impression that informal sector pensions are performing exceptionally well, citing an Assets Under Management (AUM) of GHS 858.9 million with 747,705 members under Tier 3 pensions and SSNIT’s Tier 1 AUM of GHS 52.6 million with 103,292 members as of June 2024.
However, to properly analyse and appreciate these AUM figures, it is necessary for the NPRA to separate the figures of group pensions, which represent the informal sector proper, from personal pensions.
Furthermore, within personal pensions, the NPRA should distinguish between contributors from the formal economy—whether they are self-employed professionals such as lawyers, accountants, and consultants, or in formal employment, such as staff of the NPRA—and contributors who represent the true target for informal sector pensions inclusion, such as desktop MoMo agents and dog chain sellers. The SSNIT figures should also be separated in the same manner to know which group of self-employed they are targeting. This separation is crucial for informing policy direction on financial inclusion.
The press release dated 30/08/2024 also listed various informal sector schemes, identifying the schemes and their associated membership groups. However, it fell short of providing the number of members for each scheme, the associated AUM, and whether these members are active or inactive.
Simply reporting aggregate AUM and membership numbers without further breakdowns does not provide a full or accurate picture. Including this information would have demonstrated a commitment to good information symmetry, offering transparency and a fuller picture of the state of informal sector pensions in Ghana. Such detailed reporting would allow all stakeholders to have better insights into the current state of informal sector pensions and make more informed decisions.
Understanding the proportion of self-employed individuals from the formal sector who are in active employment or professionals classified as informal sector pensions is essential. For instance, if H.E. John Mahama decides to make a contribution to a Tier 3 personal pension, that contribution does not represent the informal sector as envisaged by the pension laws, nor does it align with the ‘Mo-Ne-Yo’ initiative being proposed by the NDC.
It would be erroneous to classify the contribution of H.E. John Mahama alongside that of a coconut seller in a personal pension, both under informal sector pensions in Tier 3 for financial inclusion policy formation. Grouping together contributions from such different social classes distorts the picture of how well the informal sector is being served by pension schemes.
The NPRA should incorporate data analytics to interrogate these figures and support business policy decisions, enabling the actualization of their mandate. Grouping AUM figures solely according to legal classification without further analysis by social class does not provide the necessary insights for effective policy-making.
· Engagement with Proposals
The NPRA, as the regulator, should have explored the potential benefits of the “Mo-Ne-Yo” initiative, especially if the NDC intends to amend certain aspects of the existing law to promote and encourage pension inclusion, a mandate of the NPRA. Instead of dismissing new proposals outright, the NPRA should have engaged more constructively with the NDC’s “Mo-Ne-Yo” initiative, as it could offer valuable innovations in pension inclusion. While there are generic “vanilla” financial products, financial institutions often differentiate their offerings with unique features. The pensions sector is no different and can benefit from innovation.
The challenge now is, should the NDC win the upcoming elections, how does the management of the NPRA intend to champion the course of a new government initiative as public servants? This scenario underscores the need for regulatory bodies to remain neutral and open to engagement, regardless of the political landscape.
RECOMMENDATIONS
To address the issues raised in this article, I recommend the following:
- Enhanced Disaggregated Informal Sector Data Reporting and Transparency: In the April 2024 edition of the Pensions Digest, the official newsletter of the NPRA, private pension funds were reported at GHS 50.706bn by the last quarter of 2024, with Tier 3 contributions accounting for GHS 16.493bn (33%).
However, Tier 3 includes Provident Funds, Individual Personal Pensions, and Group Pensions, all aggregated together without distinguishing the contributions of informal sector workers. Informal sector contributors were reported as 679,105, combining SSNIT, Group Pensions, and Individual Personal Pensions.
This lack of differentiation makes it difficult for stakeholders, such as researchers and trustees, to accurately understand the true extent of informal sector participation, which hinders effective policy formulation and strategic planning.
To address this, the NPRA should adopt a more detailed and transparent approach to reporting Assets Under Management (AUM) and membership data. This includes disaggregating figures for Group Pensions—specifically designed for the informal sector—from personal pensions.
Additionally, within personal pensions, it is essential to distinguish between contributors from the formal economy—such as self-employed professionals and employees in formal employment—and those from the true informal sector, as envisioned by Act 766 (such as small-scale traders and artisans).
Providing this level of detail will give stakeholders a clearer and more accurate understanding of the state of informal sector pensions in Ghana, enabling better-informed policy decisions and more effective strategic planning. Without this level of disaggregation, resources may be misallocated, and policies may fail to address the specific needs of the informal sector.
- Adopt a Neutral and Professional Communication Strategy: The NPRA must refine its communication strategy to ensure that its messaging remains neutral, professional, and aligned with its role as a regulator. Language that could be perceived as politically charged should be avoided. Instead, the NPRA should focus on clear, fact-based communication that upholds an image of trust, integrity, and fairness.
By keeping its messaging clear, fact-based, and politically neutral, the NPRA can protect its reputation, maintain public trust, and avoid potential conflicts or misinterpretations that may arise from poorly framed communication. As a proactive step, the NPRA could regularly update its website with relevant statistics and information on the informal sector, making it accessible to any stakeholder who seeks such data.
- Constructive Engagement with Stakeholders: The NPRA should proactively engage with all stakeholders, including political parties, civil society groups, and professional associations, to understand and incorporate innovative ideas into its regulatory framework. For example, instead of dismissing the NDC’s “Mo-Ne-Yo” initiative outright, the NPRA could have engaged in discussions to explore its potential benefits and how it might complement existing pension schemes. This would help the NPRA determine whether such initiatives could complement existing pension schemes, making the system more comprehensive and inclusive.
This collaborative approach would not only foster innovation in the pensions sector but also reinforce the NPRA’s commitment to inclusivity and financial coverage for all segments of the population.
- Policy Development and Innovation: The NPRA should consider how existing pension laws and regulations might be updated or amended to better serve the evolving needs of the targeted informal sector. The informal sector is not homogenous, so recognizing the distinct financial realities of different groups—such as small-scale traders versus self-employed professionals like lawyers or consultants—is essential for developing tailored pension products that cater specifically to their unique needs. By embracing innovation and working closely with stakeholders, the NPRA can enhance its regulatory framework and support the development of pension products that drive greater financial inclusion.
- Commitment to Financial Inclusion: The NPRA must reaffirm its commitment to financial inclusion by ensuring that its policies and actions are truly aligned with the needs of Ghana’s most vulnerable and underserved populations. This means focusing on extending pension coverage to the unregulated, financially unsophisticated self-employed individuals who are currently excluded from the formal pension system. The NPRA should also explore how data analytics and Artificial Intelligence (AI) can be used to identify gaps in coverage. These technologies can provide insights into underserved populations, helping the NPRA develop targeted policies that directly address these coverage gaps and ensure that all segments of society are included.
CONCLUSION
The NPRA’s recent actions, particularly its press releases on informal sector pensions, highlight the need for a more nuanced and strategic approach to regulating and promoting pension inclusion in Ghana. While the NPRA has made strides in extending pension coverage, there remains a critical need to differentiate between the various categories of workers and to develop policies that are truly reflective of their unique circumstances.
The legal framework established by the National Pensions Act, 2008 (Act 766), and the associated Legislative Instruments, was designed to provide a structured approach to pension coverage, ensuring that all workers, including those in the informal sector, have access to financial security in retirement. However, the broad classifications and aggregate reporting used by the NPRA risk undermining the effectiveness of these laws. By failing to distinguish between formal self-employed professionals and unregulated informal workers, the NPRA may inadvertently create policy blind spots that could leave significant portions of the population underserved.
To address these challenges, the NPRA must embrace a more detailed and transparent approach to data reporting, adopt a communication strategy that reflects its role as a neutral regulator, and engage constructively with all stakeholders to foster innovation in the pensions sector. By doing so, the NPRA can strengthen its regulatory framework, enhance public trust, and fulfil its mandate to promote financial inclusion for all Ghanaians.
The NPRA’s ability to navigate these challenges will not only determine the success of current pension initiatives but also shape the future of financial security for millions of Ghanaians.
As a regulatory body, the NPRA must remain committed to its core values of Professionalism—demonstrating competence, discipline, dedication, and good judgment; Integrity—upholding high moral standards and confidentiality; Consistency—ensuring the fair application of rules and regulations across the pensions industry at all times; Teamwork—achieving synergy through consultation and collaboration; Excellence—promoting best practices at all times; and Responsibility—embracing its mandate and demonstrating accountability.
By living these values, the NPRA can ensure that Ghana’s pension system not only meets current needs but also adapts to future challenges, providing security for all workers.
The author is a Chartered Banker, holds Post Graduate Diploma in Financial Management (ACCA) and an LLB. He was the former CEO of National Pensions Regulatory Authority (NPRA). (Contact: [email protected])
