The continuous payment of pension funds into the temporary pensions fund account (TPFA) at the Bank of Ghana (BoG), which is mostly invested in treasury bills are depriving the country’s capital market of the needed cash to grow.
It has emerged that pension contributions into the TPFA have been locked up at the central bank for a number of months. Data from the National Pensions Regulatory Authority (NPRA) indicate that pension contributions into the TPFA at the BoG have risen from GHS756.9 million in 2012 to GHS2.9 billion as of June, this year.
The amount comprising contributions from employers and their employees under the tier-two pension scheme as well as interests accrued from previous investments is yet to be released to the pension fund managers.
The African Eye Report can say confidently that the continuous payment of pension contributions into the TPFA followed the inability of many employers to register with certified trustees, which would have given the NPRA the approval to transfer their respective contributions to the trustees for onwards investment and management.
Impeccable sources at the NPRA reveal that the authority is unhappy with the continuous hold up of funds at the TPFA.
The TPFA, which was opened in 2010 as a temporary haven for tier-two contributions, has so far become a solution to the delayed registration of schemes by employers.
In a bid to remove the obstacles and speed up the growth of the pensions industry, the NPRA earlier this year, undertook a compulsory enrollment of unregistered employers onto the various schemes.
Under the compulsory enrollment exercise, unregistered employers were distributed among the trustees after whom the trustees were asked to follow up with the respective employers to finalise the registration process.
They explain some of them have done the follow ups but they have not concluded discussions. Other trustees are yet to do that. Because of that the unregistered employers still continue to pay contributions into the TPFA and that is how come they have money still accumulating in that account.
“We did the compulsory enrollment to help offload the TPFA quickly, but it appears it will continue to receive contributions until the last employer joins a trustee”.
Some pension fund managers who are also livid at the continuous hold up of the funds at the BoG say it limits the amount of pension funds in capital market, which is needed to help improve liquidity and ease the challenges associated with access to funds in the country.
Emmanuel Alex Asiedu, the Managing Director, STANLIB Ghana Limited, one of the fund managers adds to be honest they will have wanted all the funds to be released to them. But looking at it now, he would want to see it from the point of the glass being half full than half empty.
“I think the regulator has done its bit by encouraging companies to get schemes but since that has not happened, the authority obviously cannot transfer the funds.
“If the money comes, majority of it will be invested in government bonds and that will create captive debt for the government. The effect is that liquidity would improve and the entire financial sector will benefit,” Asiedu recently told Graphic Business.
Government versus labour unions strike
On 22 October 2014, 12 of Ghana’s labour unions including public health, local government and education sector workers — out of 18 autonomous national unions under the umbrella of the Trades Union Congress (TUC) of Ghana embarked on an indefinite strike to press home their demands over Government’s failure to pay their Tier 2 Pension Scheme contributions, and demanded full disclosure on the funds accrued in the scheme and control over selection of trustee for management of the funds.
The National Pensions Act, 2008 (Act 766) which became operational on January 1, 2010, established a new three-tier contributory scheme with the National Pension Regulatory Authority (NPRA) mandated to approve, regulate and monitor trustees, fund managers and custodians, and to provide overall policy advice on pension matters.
In the heat of the strike the Chief Executive of the National Pensions Regulatory Commission (NPRA) hinted that the amount accrued since the coming into effect of the new pensions law in 2010 was estimated at over GHS1.6billion. The amount was broken down into GHS522 million being contributions from private sector workers, originally paid to the Social Security and National Insurance Trust (SSNIT) and later transferred to the Bank of Ghana (BoG), GHS490 million being public sector workers’ contributions paid to the Controller and Accountant General’s Department (CAGD) and then transferred to the BoG, and investment income of GHS600 million from the two sources. This figure was far greater than the figure of GHS440 million that Haruna Iddrisu, the Minister of Employment and Labour Relations, indicated had been accrued at press briefings.
The Government had described the strike as “unlawful” and “unnecessary”, saying it contravenes the Labour Act (Act 651), and initially filed a suit asking the courts to declare the indefinite strike illegal and to seek an interpretation of the Pensions Act. The government, however, subsequently indicated in various briefings that it was prepared to withdraw the suit and was ready to dialogue with the unions.
Also, on Thursday, October 30, 2014 the government appealed to the labour unions to meet at the Labour Commission on Monday, November 3, 2014 to deliberate on ending the strike. However, before the court case could be called and the Labour Commission could meet, the government went to court on Friday, October 31, 14 and was granted an ex-parte application “ordering the twelve striking labour unions to return to work immediately.”
In a bid to clear the confusion surrounding the issue, NPRA stated at a press briefing that the over GHS1.6 billion currently lodged in the Temporary Pension Fund Account (TPFA) at the BoG would be disbursed to trustees mandated to collect and manage the funds before year end 2014. It was added that the NPRA is deliberating with “Auditors, the Fund Administrators, SSNIT, Corporate Trustees and the Controller to ensure a smooth transfer of the TPFA to the Custodians of duly registered Occupational Pension Schemes.”
Implications of institutional investors
Economists have observed that in recent years emerging economies including Ghana have engaged in deeper financial liberalization and reform, including both the domestic financial sector as well as financial opening up to the international economy.
An important part of this development has been the pension fund reform: through the transfer of all or part of the state-operated pay-as-you-go system to the private sector in a fully funded “individual capitalization system”, several emerging economies have initiated and/or deepened the development of markets for long-term financial instruments.
Pension funds, and also and more gradually insurance companies, may have long run macroeconomic effects in the country through two different mechanisms: by channeling important amounts of long term savings to investment and by creating and developing markets for long term bonds and stocks.
Institutional investors and capital markets
Roberto Zahler, a renowned economist in a paper say international experience indicates that institutional investors, such as pension funds, insurance companies and mutual funds, are the main demanders of bonds. In the United States, country with the most developed corporate bond market, families hold only 12% of total corporate bonds and 7% of corporate bonds of non-financial companies. In Japan families also hold 12% of corporate bonds, and only 1.5% of corporate bonds of non-financial firms. This is due to the fact that families and companies prefer to invest through the intermediation of institutional investors, which specialize in collecting information and carrying out financial analysis.
Some institutional investors, such as pension funds, due to the nature of their liabilities, are natural candidates to demand long-term corporate bonds.
As pensions will be paid in the long-term, it is to the workers advantage to have their funds invested in long-term instruments and earn the corresponding risk premium. In terms of currencies, pension funds should seek a currency exposure comparable to the traded goods proportion of the basket of goods consumed by a typical pensioner, according to him.
In principle, in small emerging economy like Ghana pension funds should hold a higher share of foreign assets than in large, more self-sufficient countries.However, as in emerging economy long-term insurance for exchange rate differentials are very weakly developed, if pension funds make “excessive” long-term investments in foreign currency, the workers may end up carrying the foreign exchange risk.
However, the direct contribution from the pension fund system to capital accumulation is usually overstated since part of the financial intermediation of their funds ends up in consumption rather than investment. Although there is no clear evidence that social security reforms have increased domestic savings rates, the pension funds reform is an important factor explaining the shift in the composition of saving in emerging economy towards the long term.
In the case of insurance companies, the insured have a long-term horizon and company commitments are mainly in local currency, so they should prefer to make long-term investments in local currency. Mutual funds usually invest on shorter terms.
Thus, institutional investors generate a demand for long-term corporate bonds. They also provide liquidity to the bond market, which further increases the demand for corporate bonds.
The lack of liquidity, typical of many emerging economies including Ghana is not only a problem because companies must pay a higher cost for funds, but it also results in discouraging underwriters to subscribe issuances.
John Opoku, analyst tells GB&F that institutional investors should bring higher standards for investor protection and transparency, and contribute to improve corporate governance of companies, by requiring stricter supervision and regulation of publicly offered stocks and bonds, by imposing discipline over the company’s management and by aligning their interests with those of the majority of shareholders, all of which facilitates the development of equity and bond capital markets.
In short, institutional investors play a major role in providing long term financing to both the private sector and the government. So, withholding pension funds meant for institutional investors is not the best he says.
IMF Policy Discussion Paper on Pension Reform, Investment Restrictions, and Capital Markets observes: “As in the mature markets, pension funds’ assets under management (AUM) have been growing at a rapid pace in emerging markets that have implemented pension reforms”.
“The growth in AUM has been associated with quantitative and qualitative benefits for local securities markets. In contrast to the mature markets, benefits have been concentrated to a large extent in local bond markets, in part as a result of regulatory restrictions on portfolio choices”.
The IMF continues that the rapid growth in AUM of emerging market pension funds is likely to continue in the near term, and the response of local securities markets to the increased demand remains uncertain.
The growing imbalance between the demand and supply of local securities markets could cause significant distortions in asset pricing, concentrations of risk exposures, and asset price bubbles. This increasing imbalance calls for continuous and coordinated efforts to improve the regulatory frameworks for both pension funds and securities markets.
By Masahudu Ankiilu Kunateh
