Including worker contributions in debt restructuring process could have payoff – ACRR
There have been reports in the media space in which the Department of Finance is believed to have indicated that a significant proportion of workers’ Tier2 social security contributions that are placed in government bonds could be affected by the restructuring of Ghana’s debt.
It is however refreshing to learn that the ministry has since refuted the possible use of pension funds in the debt restructuring process.
Nevertheless, policy makers sometimes need guidance (using science and an appropriate literature review) to improve the quality of public policies and anticipate their impact and possible implications.
The Africa Center for Retirement Research team 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 the restructuring strategy of Ghana’s domestic debt. The dissertation will also examine the effectiveness and compliance with National Pensions Regulatory Authority investment policy guidelines (restrictions on allocation of pension assets).
The government is in financial difficulty and therefore intends to renegotiate new terms with existing bondholders to reduce its debt (debt restructuring) or by negotiating a reduction in outstanding interest payments or part of a bond to pay (haircut), due to an unsustainable public debt. The pension plan industry is one of the sectors of the economy that invests primarily in government securities.
The potential involvement of pension funds in the restructuring program would mean that SSNIT and private pension fund managers would face haircuts, reduction in coupons or interest rates, and possibly an extension of l maturity with coupon rates below those of the market.
Be that as it may, any form of involvement of pension assets in the debt restructuring process could have serious implications for social security policy and would lead to significant economic and financial disruptions which, ultimately, will have an impact on the socio-economic well-being of the retired population.
Pension funds are independent legal entities established and operated primarily to provide pension and other related benefits to plan members. In accordance with international social security standards, the State has the primary responsibility for ensuring the proper administration and financing of pension systems in the context of changing circumstances and new challenges (demographic or economic) and even more period of economic crisis.
Policymakers should take into account that the 3-tier pension system in Ghana is relatively new and still grapples with supervision and monitoring challenges to control the investment risk (that contributors bear) in under the Tier2 and Tier3 regimes. The primary 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 main findings of recent ACRR research has established that some Tier 2 fund managers are giving yields below the yields of the risk-free 91-day Government of Ghana core treasury bills.
This performance not only shed light on the widespread benefit shortcomings suffered by retirees under the current 3-tier pension system, but also provides the basis for the assessment that the investment risk faced by individual workers is raised. The finding also called into question the ability of some fund managers who receive fees to deliver maximum return on investments at minimum risk. This revelation raised fundamental policy questions and set the stage for us to begin examining the effectiveness of the NPRA’s investment policy guidelines (quantitative portfolio restrictions) and oversight mechanisms.
NARP’s investment policy guidelines place restrictions on where to invest, how to invest, and how much pension funds to invest in which portfolio. The main objective of the guidelines is to enable trustees or managers of pension funds to obtain safe and fair returns for contributors at minimal investment risk, as well as to enable the diversification of investment portfolios.
Due to these restrictions, Tier2 and Tier3 pension funds are generally forced to invest more in government securities. According to the Bank of Ghana Financial Stability Review report, the total value of private pension assets was $31.4 billion as of June 2022.
Given the position of the investment limits as set out in the regulatory policy guidance, the amount of private pension funds that could be at risk, assuming that pension funds would be involved in the exercise of debt restructuring, could be higher than the estimated 3.7 billion reported by the editions. This could reinforce the ripple effects (which retirees have to bear) if pension funds are not excluded from the scope.
The SSNIT Scheme invests a significant portion of its assets in bonds, treasury bills and term deposits. Any form of debt restructuring that involves plan assets could have disastrous consequences on its ability to pay benefits in the near future. The SSNIT scheme uses Government of Ghana Treasury Bond (TBR) rates to calculate workers’ past credit benefits.
Due to the increase in the Government of Ghana Treasury Bond rate (on average 21.72% in the four quarters of 2022 from 13% in 2021), the past credit benefit of each worker who has contributed plan before January 2010 will increase by 24% in 2022 compared to an average annual growth of 15% over the last 5 years. Second, price inflation averages 26% in September 2022, compared to 9.29% in the same period of 2021.
Rising price inflation will have a significant impact on the cost of benefits in 2023 (due to indexation). On the income side, the Trust has experienced negative real returns on its investments for four consecutive years. Based on the above, any attempt to renegotiate interest rates on government bonds or treasury bills will affect the medium to long term solvency and sustainability of the scheme.
Sovereign debt restructuring frameworks from the International Monetary Fund (IMF) and other international bodies, while encouraging high creditor participation rates, have warned nations of the possible ripple effects of the involvement of pension funds in the process of debt restructuring – indicating that the ripple effects could persist for many years and have disastrous economic consequences on the objectives of social security policy and, ultimately , on the socio-economic well-being of citizens.
A best working domestic sovereign debt restructuring strategy 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 retirement savings.
It is therefore imperative that the Governmental Advisory Committee consider carefully analyzing the implications of a domestic debt restructuring on the fiscal sustainability of pension funds and the benefit payment function. A stress test before the restructuring is recommended – it will provide valuable information on the design of the perimeter, the expected impact on the financial system and the appropriate policy responses or support.
In conclusion, it is important to note that Ghana is far from the target of the United Nations Sustainable Development Goals on social protection. It is therefore essential that the government, in its attempt to emerge from the current difficult economic times, recognizes the fragile nature of the 3-tier pension system.
The government should therefore put in place reactive policies to achieve excellent cohesion in the various components and the overall efficiency of the pension system. It is not actuarial and socially prudent to involve pension funds in the process of restructuring domestic debt.
The author, Abdallah Mashud is the Executive Director of the Africa Center for Retirement Research (ACRR)