Question

Explain the contributory three-tier pension scheme as defined by the Pensions Act 2008, Act 766.

NB: not more than 1 page

Answer 1

Three tier Pension scheme in Ghana

TIER 1: A mandatory basic national social security scheme. TIER 2: A mandatory occupational pension scheme that is fully funded and privately managed. TIER 3: A voluntary provident fund and personal pension scheme — also fully funded and privately managed.

Meaning of three tiers

Three-tier system, meaning a system that has three distinct levels, may refer to: Multitier architecture, a computing system architecture that may typically have three tiers, composed of a presentation tier, a domain logic tier, and a data storage tier.

Contributing to a Three-Tier Pension Scheme

Act 766 established a contributory three-tier pension scheme consisting of:

a) A mandatory Basic National Social Security scheme, managed by the Social Security and National Insurance Trust (SSNIT) – Tier 1;

b) A mandatory fully-funded and privately-managed occupational pension scheme – Tier 2;

c) A voluntary fully-funded and privately-managed provident fund and personal pension scheme – Tier 3.

Employers are required to remit a total of 18.5 percent made up of 13 percent from the employer and 5.5 percent from the employee on the salary (base pay) of the employee, irrespective of whether the salary is actually paid to the employee. The amount is remitted into the Tier 1 and Tier 2 schemes. At the point of payment into the respective schemes, the total of 18.5 percent is split into:

13.5 percent to Tier 1 where SSNIT ultimately retains 11 percent and remits 2.5 percent to the National Health Insurance Authority as National Health Insurance Levy; and the remaining 5 percent into the Tier 2 scheme.

With regards to the voluntary fully-funded and privately-managed provident fund and personal pension scheme (Tier 3), contributions can be made by the employer only, or the employee alone, or jointly by both the employer and employee at a maximum contribution of 16.5 percent of the employee's base pay.

According to Section 58(1) of Act 766, mandatory social security contributions are required to be made by every employer and each worker (including an expatriate).