There have been reports in the media space in which the Ministry of Finance is purported to have indicated that a significant proportion of workers’ Tier2 Social Security contributions that are placed in Government Bonds may be affected by Ghana’s Debt Restructuring Programme.

It is however refreshing to learn that the Ministry has since refuted the possible use of pension funds in the debt restructuring process.

Notwithstanding, policymakers sometimes need to be guided (using science and proper review of the literature) to improve the quality of public policies and predict their impact and possible implications.

The team at the Africa Centre for Retirement Research finds it prudent and timely to contribute to the debate on the possible involvement of social security assets (pension fund managers holding government bonds) in Ghana’s Domestic Debt Restructuring strategy. The brief will also examine the efficiency and compliance with the National Pension Regulatory Authority Investment Policy Guidelines (restrictions on pension asset allocation).

The government is in financial difficulties and therefore intends to renegotiate new terms with existing bondholders to reduce its debt (debt restructuring) or by negotiating a reduction of outstanding interest payments or a portion of a bond payable (haircut), due to unsustainable public debt. One of the sectors in the economy that invest largely in government securities is the pension industry.

Potential involvement of pension funds in the restructuring programme would mean SSNIT and private pension fund managers would face value haircuts, coupon or interest rate reduction, and potentially maturity extension with below-market coupon rates.

Regardless, any form of involvement of pension assets in the debt restructuring process could have serious implications for Social Security Policy and would impose significant economic and financial disruptions which will ultimately impact the socioeconomic wellbeing of the retiring population.

Pension funds are independent legal entities that are established and managed mainly to provide retirement and other related benefits to the members of the scheme. In line with the international social security standards, the state has the primary responsibility to ensure the proper administration and financing of pension systems in the context of evolving circumstances and new challenges (demographic or economic) and more so in times of economic crisis.

Policymakers need to consider that the 3-Tier pension system in Ghana is fairly new and still grappling with challenges of supervision and monitoring to control investment risk (which contributors bear) under Tier2 and Tier3 schemes. The main indicator used to assess the efficiency and effectiveness of investment policy guidelines is the level of investment returns or interest income credited to members by Trustees or Fund Managers. One of the key findings of ACRR’s recent research has established that some Tier2 Fund Managers are awarding returns that are lower than returns on the basic risk-free Government of Ghana 91-day Treasury Bill.

This performance has not only informed the widespread benefits shortfalls retirees suffer under the current 3-Tier pension system but also gives the basis for the assessment that the investment risk facing individual workers is high. The finding has also questioned the capability of some Fund Managers who are paid fees to ensure maximum returns on investments at minimal risk.  This revelation has raised fundamental policy questions and has set the stage for us to begin to examine the efficiency of the NPRA investment policy guidelines (quantitative portfolio restrictions) and its monitoring mechanisms.

The NPRA Investment Policy Guidelines place restrictions on where to invest, how to invest and what quantity of pension funds to invest in which portfolio. The main goal of the guidelines is to enable Trustees or Pension Fund Managers to obtain safe and fair returns for contributors at minimal investment risk, as well as allow for the diversification of investment portfolios.

Due to these restrictions, Tier2 and Tier3 pension funds are constrained to typically invest more in government securities. According to the Financial Stability Review report of the Bank of Ghana, the total value of private pension assets was 31.4 billion as at June 2022.

By the posture of the investment limits as contained in the regulatory policy guidelines, the quantum of private pension funds that could be at risk, assuming pension funds would be involved in the debt restructuring exercise, could be more than the estimated 3.7 billion reported by the publications. This could heighten the spillover effects (which pensioners must bear) if pension funds are not excluded from the perimeter.

The SSNIT Scheme invests a significant proportion of its assets in bonds, treasury bills and fixed deposits. Any form of debt restructuring that would involve the scheme’s assets could have dire consequences for its ability to pay benefits in the near future. The SSNIT scheme uses the Government of Ghana Treasury Bill Rates (TBR) to compute workers’ Past Credit benefits.

Due to the increasing Government of Ghana T-bill rate (averaged 21.72% in the four quarters of 2022 as compared to 13% in 2021), the Past Credit benefit of each worker who contributed to the scheme before January 2010 will increase by 24% in 2022 as compared to average annual growth of 15% in the last 5 years. Secondly, price inflation is averaging 26% as at September 2022 as compared to 9.29% in the same period in 2021.

The increasing price inflation will impact significantly the cost of benefits in 2023 (due to indexation). On the income side, the Trust has recorded negative real returns on its investments for four consecutive years. Based on the foregoing, any attempt to renegotiate the interest rates on government bonds or T-bills will affect the medium to long-term solvency and sustainability of the scheme.

The sovereign debt restructuring frameworks of the International Monetary Fund (IMF) and other International Bodies, even though have encouraged high creditor participation rates, they have cautioned nations on the possible spillover effects of involving pension funds in the debt restructuring process – indicating that spillover effects potentially could persist for many years and have dire economic implications on the social security policy targets and ultimately the socio-economic wellbeing of citizens.

A sovereign domestic debt restructuring strategy that works best is designed to anticipate, minimize, and manage its impact on the domestic economy and financial system. The strategy should include clearly stated efforts to maintain financial stability, and ensure the functioning or security of the pension savings.

It is therefore imperative that the government consultative committee would consider analyzing carefully the implications of a domestic debt restructuring on the fiscal sustainability of pension funds and benefits payment function. A stress test prior to the restructuring is recommended – it will provide valuable information on the design of the perimeter, expected spillovers to the financial system, and appropriate policy responses or support.

In conclusion, it is important to note that Ghana is far from the United Nations Sustainable Development Goals target in social protection. It is therefore critical that the government in its attempt to navigate out of the current economically challenging times will recognize the fragile nature of the 3-Tier pension system.

Government should thus put in place responsive policies to achieve excellent cohesion in the various components and the overall efficiency of the pension system. It is not actuarially and socially prudent to involve pension funds in the domestic debt restructuring process.

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The author, Abdallah Mashud is the Executive Director of Africa Centre for Retirement Research (ACRR)