WHAT THE NEW PENSION LAW CAN DO FOR YOUR COMPANY A guide for Employers Employee Retention Benefits The Problem: Employee turnover is extremely expensive to employers. Employee turnover is extremely expensive to employers. Replacing an employee means lost productivity, advertising, interviewing, and follow-up guidance, which cost both time and money. Employers are always seeking to retain their best workers and to attract their competitor s top talent. The Solution: Creating a Provident Fund or Pension Fund for employees is a way to give them a pay raise that is linked to their loyalty. Employers can contribute to the fund on behalf of their employees and require a duration of employment for them to be entitled to all (or a portion of) that money. This duration is called a vesting period. Each quarter, statements are printed and staff can see how much they have contributed, earned, and how much they stand to lose if they were to leave the company. Example: XYZ Company has a Vesting Period as seen in Figure 1. Kofi earns GH 1,000 per month and XYZ Company contributes 5% of his monthly salary to the company s Pension Fund (GH 50 per month). After three years, the company would have contributed GH 1,800, after six years; the company will have contributed GH 3,600. After six years of Service, Kofi could leave the company and be entitled to 80% (GH 2,800). However, if Kofi were to leave after only three years of service, he would be entitled to only 50% (GH 900). Thus, it is in Kofi s best interest to stay at the company as long as possible to maximize his benefit. This reduces the likelihood he would leave the company. This example does not take into account the interest gained on money invested. Figure 1 Years Completed % Vested 1 0% 2 0% 3 50% 4 60% 5 70% 6 80% 7 90% 8 100% Page 1
Tax Benefits The Problem: Employers have no incentive to contribute to their worker s retirement above the amount required by SSNIT (13% of their salary). Employees, too, have no incentive to contribute to their retirement other than the amount required by SSNIT (5.5%). The Solution: The Pension Law allows Provident Funds registered with Pension Authority to qualify for tax deduction that ordinary Provident Funds are not entitled to. Contributions made by both employers and employees will qualify as tax-deductible, as long as the Fund is certified by the Authority. Example: At XYZ Company, there are 100 employees, each earning GH 1,000 per month. XYZ Company and its workers each contribute 5% (for a total of 10%) to a certified Pension Fund. Thus, each month, the company contributes GH 5,000 (5% X 100 employees X GH 1,000 salary). When taxes are calculated each month, XYZ Company will subtract GH 5,000 from its income before taxes are calculated. If the company is in the 25% tax bracket, this results in tax savings of GH 1,250 each month. Furthermore, each employee is contributing GH 50 per month which is also deducted from his or her income before taxes are calculated. Managing the Fund The Problem: Managing a Provident Fund account can be a cumbersome and stressful task. Companies either lack the qualified staff, or they lack the resources to dedicate to managing the Fund. Tracking contributions, calculating earnings, and printing statements are other routine tasks that can prove difficult for any company. Also, relying on one person or entity to manage the scheme can also lead to mismanagement. The Solution: Selecting an experienced Fund Manager such as Gold Coast Fund Management takes the burden of managing the Fund off the employer and puts it in the hands of an expert with proven track record. Gold Coast also tracks contributions, calculates earnings and prints quarterly statements for clients. The Pension Law requires that each Fund has Trustees selected by the employer and employees to represent and maintain the best interests of contributors. The Trustees appoint a Fund Manager to provide investment advice and a Fund Custodian to perform the transactions. This separation of duties can reduce the likelihood of mismanagement. Page 2
Registering the Fund with the Pensions Authority The Problem: Registering a Fund with the Pensions Authority requires a significant amount of time to research the law and write documentation that adheres to it. Registering a Fund requires composing an Investment Policy Statement, Rules & Regulations, and a Trust Deed, which can be complicated documents. The Solution: Gold Coast Fund Management has spent months working with the Pensions Authority and refining documentation to ensure its clients Fund are registered quickly and without error. Gold Coast was among the first companies in Ghana to register a Pension Fund with the Authority and successfully registered 3 of the first 8 Pension Funds in the country. Gold Coast gives clients a worry-free registration, allowing them run business-asusual. Why did the pension law change? Pensions Act, 2008 Frequently Asked Questions The pension law changed because a government-commissioned study showed that the previous plans were unsustainable and easily manipulated (such as CAP-30 and End of Service Benefit). The new pension law is designed to offer retirement benefits to more Ghanaians, with more security, flexibility and control in how the funds are managed and distributed. What happens to the old pension scheme? Old pension funds under the Social Security Act, 1991, are transferred to SNNIT. All other former public provident fund schemes will cease to be in force after four years from start of this new Pensions Act. Private pension plans can continue to exist as before and may be transitioned in accordance with regulations made under the new Act in order to work under the new law. Gold Coast Fund Management can assist companies in handling this transition process. What are the three Tiers? The three Tiers divide where the monetary contribution go. The 1 st Tier holds the mandatory contributions to SSNIT for national health insurance and monthly pension payments after retirement; the 2 nd Tier holds mandatory contributions to an individual s personal retirement savings; the 3 rd Tier holds voluntary contributions to an individual s Page 3
personal retirement savings. Upon retirement, the 1 st Tier is paid monthly, whereas the 2 nd and 3 rd Tiers are paid in a lump sum for those in the formal sector, and in an annuity for the informal sector. Who handles the money? The contributions are first collected by the employer, and at the end of each month, 1 st Tier contributions are directed to SSNIT and 2 nd and 3 rd Tier contributions are directed to a Pension Fund Custodian. The custodian keeps records of individual contributions and invests them as advised by the Trustees (representatives elected by the company). A Pension Fund Manager, such as Gold Coast Fund Management, advises Trustees where to invest collected monies. The Trustees, Fund Managers and Custodians are all independent parties, and the Trustees are not permitted to take direct possessions of the funds. What are the tax benefits? Employees and employers both contribute to the new pension scheme before taxes are calculated. This means that less tax is paid at the time of contribution. Additionally, the law exempts tax on all interest gained by pension funds and does not tax upon withdrawal of funds, within the rules of the Act (see: Withdrawing contributions). Mandatory contributions of 5.5% for the employee and 13% for the employer are tax deductible for either the employer or employee under the 3 rd Tier. What are the non-tax benefits for employers? Beyond the tax implications, the employers can benefit by contributing to employees 3 rd Tier plan and defining a vesting period, to which an employee is not entitled to the employer s contributions until after a specified period of time. By doing this, employers can increase employee morale, and better attract and retain the best quality workers. What are the non-tax benefits for employees? Employees have more control over how their funds are managed than in previous pension schemes. Because the Trustees take direction and are selected partially from employee input, they do with the funds as they are advised from their electors. Additionally, employees can use their benefit to secure a mortgage for a primary residence (see: Saving to buy a house). How much can one contribute? Employees can contribute as much as they can to retirement, but there are limits to the tax advantages for contribution. Employees are obliged by law to contribute up to 5.5% of their Page 4
pay to the 1 st and 2 nd Tiers, but there is no obligation to the voluntary 3 rd Tier contribution which limits tax exemptions to no more than 16.5% of a worker s salary in the formal sector. Should a worker wish to contribute more, Gold Coast Fund Management has provident funds for all types of retirement investments beyond the limits of the Law. The informal sector can contribute up to 35% of their income to a 3 rd Tier scheme. When can contributions be withdrawn? 1 st Tier benefits are available in monthly installments upon reaching retirement age of sixty years (or fifty-five years in the case of an underground mine worker). All 2 nd and 3 rd Tier contributions can be withdrawn in a lump sum upon reaching retirement age of sixty years, or early retirement of fifty-five years with no employment or self-employment. Additionally, the law makes funds available without penalty before the retirement age if (a) the member is deemed mentally or physically unable to work by a suitable qualified physician, or (b) upon death. After ten years from the date of the first contribution (five years for informal sector), 3 rd Tier contributions can be withdrawn without penalty. Should a member withdraw 3 rd Tier contributions before ten years, taxes must be paid on the amount withdrawn. Why should one contribute to the voluntary scheme? Although the mandatory scheme saves small amounts each month, it is relatively small when compared to the potential of the voluntary scheme. The benefit of saving money increases tremendously when saving begins earlier in one s career. For example, if an individual saves GH 500 for one year at the age of 30 and saves nothing after that, the investment would grow to GH 8, 724 by the age of 60. On the other hand, if the person saves GH 500 for one year at the age of 20 and saves nothing thereafter, that amount will grow roughly GH 22,629 by the age of 60! If the employer decides to match contributions, the results get even more exciting for the employee. Gold Coast Fund Management can help individuals determine how much they should save to reach their targeted net worth upon retirement. Why should I contribute to the voluntary scheme in addition to SSNIT if my income is very low? Even the smallest contributions can add up to an enormous sum over the long run. For example, saving GH 10 per month for 25years would yield GH 11,801.65. Everyone should save for retirement, because the future is never certain. Illness, death and catastrophe can drive a family into poverty, and contributing to retirement is a way of reducing the effects of these events and providing comfortable retirement. 1 These calculations assume a conservative average annual growth of10%, which is well below the actual growth of the Ghana Stock Exchange over the past decade. Page 5
How does an employer contribute on an employee s behalf? An employer can, but is not obliged to contribute on behalf of an employee. Employers typically choose to do this to increase employee morale and to better attract and retain quality employees. Typically, an employee will sign an agreement with the employer, indicating the employer s contributions do not belong to the employee until after the vesting period. Gold Coast Fund Management offers free informational sessions with employers to educate them on this topic. Contact GCFM to setup this appointment. What is vesting / What is a vesting period? Vesting is the right of an employee to the benefits that the employee has accrued, or some portion of them, even if employment under the plan terminates. A vesting period is a defined duration of time that must pass for an employee to be vested. Should an employee resign before the vesting period ends, he will forfeit some or all of the employer s contributions on their behalf. On the other hand, if an employer terminates an employee (for reasons excluding him not limited to fraud or theft), the employee is entitled to the employer s contributions on their behalf, even if the vesting period is not over. What happens to the money if an employee changes jobs? Benefits to which the employee has a vested right are fully portable.under a change of employment, accrued benefits may be transferred to another registered scheme to which the member is eligible to belong or to another within the same scheme, if permitted or required by regulations of that scheme. (Also see: Vesting). How can savings be used to buy a home? Pension scheme funds are not assignable, however, there is an exception allowing a member to use that member s benefit to secure a mortgage for the acquisition of a primary residence. For this purpose, a member is not liable to pay tax on any withdrawal from the voluntary 3 rd Tier. How does a company register a scheme? The National Pensions Regulatory Authority has various requirements for registering a scheme. In addition to completing the application forms and registering a scheme trustees, some specific documents will be needed to register: (1) Trust Deed, (2) Investment Policy Statement, and (3) Rules and Regulations. Also, if a current Provident Fund is in place and the company wishes to transition it to work under the new law, it must be reviewed and Page 6
modified to ensure it qualifies. Gold Coast Fund Management is fully capable of performing all these service. Product Risk Comparisons Product Risk Comparison General Products Product Risk Level Return Level Ideal Age Standard Fees Duration T-bills Low Low 55+ None Short Term Bonds & Commercial Paper Gold Fund Unit Trust Low Low 55+ None Mid Term Mid Mid 20-55 Equity / Stocks High High 20-35 Before 3 years: 1% upon withdrawal 2.5%nof Trade Value Mid to Long Term Long Term Product Time Horizon Customized Products Members Can Borrow Against Tax Benefit Welfare Fund 2 3 years Yes No Provident Fund 5-30 years No No Pension Fund 10+ years No Yes Private Asset Management Savings & Investment Plan Flexible 1+ years No No Page 7