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Ghana, a role model in terms of economic and political stability has recently been upgraded to a middle-income country following years of implementing sound economic policy and stable political environment and with this upgrade comes its own challenges.
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Ghana’s economy is strong and promises generous future growth and the need for a much more comprehensive social security system is understood to be of great importance. In 2004, the government started a journey to reform the social security/ pension system and these reforms created an opportunity for the participation of the private sector in pension delivery. This proposed business plans seeks to establish a trustee company, which will provide pension related products to the formal and informal sectors of the Ghanaian economy who have traditionally been excluded from the national pension system.
The private pension industry is a new and virtually untapped industry offering an opportunity to serve a large proportion of Ghana’s workforce, as this section of the working class is key in the success of developing a comprehensive pension system. This industry is estimated to be valued at GHS and will insist of 2nd tier and voluntary 3rd Tier pension system. The national pension scheme has seen an average annual increase in contribution of 10%.
The target market for the proposed business is a young adult between the ages of 16 and 45 years. The target market will consist of young professionals, self-employed individuals and those who traditionally do not have access to the national pension scheme namely hairdressers, mechanics, etc. With the growing appreciation of securing one’s future, the target group demand quick and efficient services, products that meet their existing and future needs and an industry that responds quickly to their needs.
Currently, there is no existing service provider in the private pension industry however the life insurance industry is expected to lead the way and be the dominant players in the provision of these services. The proposed business plan seeks to be consumer focus providing excellent customer services, constant customer feedback and innovative and simple product design and use. The competitive advantage of the proposed business include accessibility through the use of a comprehensive distribution network, excellent customer service and product design based on need.
The proposed business is a private pension provider rendering trusteeship, custodian and fund management services. The company is a limited liability company with a proposed stated capital of GHS3, 000,000.00. Each of the business owners will raise GHS90, 000.00 each and the difference will be funded using bank credit lines, private investors and asset financing.
Undertaking the proposed business plan provides the following findings:
Ghana’s economy remains positive and stable providing generous growth now and in the future
New pension reforms and creation of new industry provides both threats and opportunity
Vast untapped informal market available to the new industry
Current shortfalls in the national pension will be catered for by private providers
Proposed business provides opportunity for development of local capacity in pension design and management
With robust regulatory system and effective strategic planning this propose business has a fair chance of succeeding and growing into a very successful business and being part of the development of the private pension industry in Ghana.
1.0 The Introduction
Research Background and Motives
Over the years concern had been raised about the current state of the Ghanaian social security system which has been characterized by inadequate benefits which is extremely difficult to live on if not mere impossible. As pointed out by the International Social security Association (2003), Social security systems in Africa are characteristically too exclusive and inadequate of which Ghana is not exception. Like other social security systems in Africa, Ghana’s social security system covers only the formal workforce, which constitutes a small fraction, usually no more than 20% of the total labor force.
This inherent characteristic of the social security system makes social security exclusive, as those outside the formal sectors do not have access to social security or a national pension. Furthermore due to the relatively small number of contributors to the national social security scheme, benefits under the social security scheme is inadequate. Ghana like many other African countries has institutions, laws and government structures that were adopted from their colonial masters without much modifications and thought. The institutional structures were most often designed to meet the goals and objectives of the colonial masters who at that time were the elite. One may wonder why social security systems that are meant to provide protection for all in society tends to cover only a small fraction of society.
The international social security association points out that, most social security systems like many other things were adopted from the colonial masters. These social security systems were really intended to cover a small body of employees who were at the time working in the colonial administration and mine workers. This meant that all others outside this scope fell outside the social security system. This inherently remained, as most countries even after independence were unable to devise social protection programs that were tailored to the needs and circumstances of the people.
Based on the background above, I am motivated through this business proposal to highlight the importance of the development of a much-needed private pensions scheme to augment the existing national social security system and also to provide those who are outside the national social security system an avenue to secure their futures and have enough to live on when they retire.
1.2 The Motives
The motive for undertaking this business proposal is to bridge the gap created by the current social security structure, which excludes those within the informal sector of the Ghanaian economy. Secondly, private pension plans will also provide extra revenue to those who have retired as the current benefits under the national plan is woefully inadequate.
At the end of this start up business proposal I hope to be able to:
Understand current economic and business environment in Ghana
Understand the structure of Ghana’s social security system
To analyze current regulatory framework in place and its likely impact on the operations of the start up
To analyze the development of the chosen market and industry
To determine the essential inputs for the start-up and future development plans
To analyze any academic theory on successful business start-ups
1.3 The Objective
The main objective of this business plan dissertation is to:
Identify if any, opportunities and challenges for a private pensions company in Ghana
With the opportunities I have identified and challenges write a start up business plan for a private pension company in Ghana
Provide information on procedure to follow when setting up a company in Ghana
In this write up the main focus will be on the company operating in one specific area of pensions which is the tier three of the pensions act. Long-term strategies may see the company evolve to extend other pensions/ savings products.
1.4 Research Methodology
The aim of this write up is to put together a business plan for a start up private pension company in Ghana based on sound research on the subject matter of private pensions in the chosen market and academic theory on the principles entrepreneurship and business management.
The research therefore will mainly be based on secondary data from credible governmental resources and non-governmental agencies. I will also make use of academic articles, journals and industry reports.
The write up will be split into five (5) chapters with details of each chapter as follows:
Chapter 1: The first chapter will have the introduction, which contains the background, the motives and objective, brief research methodology, structure of the write up and a comparative analysis of social security systems in the developed and underdeveloped worlds.
Chapter 2: Economic Overview of chosen market, history and importance of social security in chosen market, overview of the social security system now and then, social security structure, and challenges facing the national social security system
Chapter 3: Description of the business idea, marketing plan/strategy, pricing, mission and vision, Human Resources.
Chapter 4: Chapter four will be the financial plan. In this section will include financial assumptions and financial projections for the next five years.
Chapter 5: The conclusion, this section will contain exit strategies and also discuss any immediate or future impact of the proposed business on the Ghanaian economy. This section will also summarize key success factors of the proposed business.
Under this chapter I will look at the economic overview, economic performance and outlook of the chosen market for the proposed business, I will then go further to look at the development of social security/ pensions in Ghana, and then look at the overview of the social security system of the chosen market, Ghana.
As earlier stated under my aims for this project, I seek to provide some insight as to what it takes to start a business in Ghana, therefore under this section I will also provide information or insight in relation to what procedures needed to follow when setting up a business in Ghana.
2.0. Economic Overview of Ghana
The Republic of Ghana is a West African country with land area of 92,100 square miles, which is boarded by Cote D’Ivoire, Burkina Faso, Togo and Gulf of Guinea.
Ghana has always been known as a country of great natural resources, hence the nickname, “The Gold Coast”. Ghana is rich in gold, timber, diamond and cocoa and has an economy that is heavily dependent on agriculture. Ghana remains one of the leading producers of Gold and Cocoa in the world. Agriculture in Ghana accounts for 37% of GDP and employs an estimated 55% of the national workforce. It must however be noted that agriculture is still largely small scale, non- commercial and not mechanized.
Ghana’s economy is one of the most stable and fast growing economies in Africa and has achieved impressive growth as a result of the discovery of oil and natural gases. With such impressive growth and relative stability in the macro-economic indicators, Ghana attained a lower middle-income economy status according to the World Bank, however youth unemployment and poverty continues to be a major issue. 25% of Ghana’s youth are unemployed and 37% of the population currently lives on less than $1.25 a day.
Despite a 14.4 % growth in Ghana’s economy in 2001 according to the World Bank, Ghana’s external debt over the last 3 years has increased by 125% from $8 billion in 2008 to $18 billion in 2011.
In terms of investment, Ghana has Africa’s 3rd largest stock exchange with South Africa and Nigeria ahead of Ghana respectively.
2.1 Economic Performance and Outlook
Ghana’s economic performance over the last decade has been impressive. GDP average annual growth rate was 6% between 2005 and 2007, increased to 7.3% in 2008 but however declined to 3.9% in 2009 on the back of the global financial and economic crisis.
Inflation increased by 41.7% from 12.7% in 2007 to 18.1% in 2008 however due to effective economic policies and austerity measures inflation for the last 3 years has steadily falling to its current rate of 9% as at 2011 for the last 9 months since. Increase in non-oil imports and income outflows widened Ghana’s current account deficit by some 38% at the end of 2011.
Despite these challenges, Ghana’s economy has outgrown the global economy for the past 4 years. Whilst the global economy grew at an annual average rate of 3%, Ghana’s annual average growth rate has been 6.5%.
The adoption of austerity measures to cut public spending and the stability of macroeconomic indicators have helped Ghana survive probably the worst part of the global economic meltdown and it remains one of the most promising economies in Africa. Based on the indicators above on the economic health of the country, Ghana’s medium-term growth remains positive, largely driven by investments in the mining industries, public infrastructure and commercial agriculture according to the World Bank.
2.2 Development of Pensions Scheme in Ghana
Pension systems in Ghana date as far back as the colonial era. The first kind of pension system was introduced in Ghana in 1946. The pension system was a non-contributory pensions scheme and its aim was to cater to the retirement benefits of those who worked within the colonial administration and also included mine workers. Kpessa (2010) noted that Ghana’s social security system at the time was designed, as a means of encouraging loyalty and efficiency within the colonial service as a result was quite exclusive. Like most programs introduced during this era, old age income protection policies were limited to urban dwellers especially Europeans and a few Africans working in the colonial bureaucracy.
It was not until 1950, the Pension Ordinance No.42 (Cap 30) and Superannuation schemes was established in an effort to have a social security system in place that covered a greater portion of Ghanaian workers. It was established as a pension scheme for public servants in the Gold Coast. These schemes covered certified teachers, University lecturers and all government workers however a vast majority of Ghanaians were unable to benefit from this scheme (Adjei, 2000).
In 1965, the Social Security Act (No. 279) was passed to cover all private and public sector workers who were not covered under the Pensions Ordinance No.42. The scheme initially started as a provident fund, providing benefit for old age, invalidity and survivor benefit. This Act was repealed and the social security and national insurance act (SSNIT) was established under NRCD 127. The trust was established to administer the new social security scheme.
The scheme was later converted to a social security pensions scheme and in 1991 turned into a defined benefit scheme following the enactment of the Social Security Act 1991 bringing some level of adequacy into workers pensions.
For a worker to qualify for old age benefit, the worker must have worked for a minimum of 240 months and be at least 60 years of age. Workers in the extractive industries such as mining however have a mandatory retirement age of 58 years under which they qualify for old age benefits.
For workers who have been injured at work, they may qualify for payment under the invalidity benefit section of the social security system. Benefit is payable over a period of 12 months.
If a retiree dies before reaching the retirement age his or her benefit is calculated as the present value of all contributions and paid to the surviving spouse or dependents.
The Social Security and National Insurance Trust (SSNIT) has four major functions:
Collection of contributions
Record keeping – keeping up to date records of all contributing members
Processing and payment of benefits
Pensions fund management
2.3 Overview of Social Security/ Pensions in Ghana
A universal social security/ pensions scheme in Ghana has not been in existence for so long having been established in the 1990’s; earlier forms of social security were exclusive. The Social Security Pensions Scheme (SSPS) was established in 1991 under the Social Security Law PNDCL 247 and under the trusteeship of the social security and national insurance trust (SSNIT).
Twenty-five years prior to this, Ghana run a provident scheme established under the social security act of 1965 (Act 279).
Under the 1991 scheme, the Social Security and National Insurance Trust collected the contributions of the Ghanaian worker. The Act provided for compulsory coverage for workers in establishments that employ at least five workers. An establishment with less than five employees had the option to join the scheme, but there was no compulsion (Kumado & Gockel, 2003). However, the following categories of workers, although they employed more than five persons, were exempt by law from joining the scheme;
members of the Armed Forces, the Police Service and the Prison Service;
Foreigners in the diplomatic missions; and
Senior members of the universities and research institutions.
Funding of defined contribution schemes is based on contributions made by the employer and the employee on behalf on the employee. These contributions are invested and when the employee reaches retirement age, becomes permanently incapacitated or dies prior to retirement; the total contributions together with returns on the investment are paid as a lump sum to the employee or his/her dependents (Kpessa, 2010)
Under the scheme the Ghanaian workers total contribution constitutes a total of 17.5% of his salary to the scheme towards his pension and the contribution structure is designed as follows:
Employees – 5% of employee’s salary
Employer – 12.5% of employee’s salary
Total Contribution – 17.5% of employee’s pay
Under Ghana’s pension scheme there are three basic benefits, which include Old Age Pension, Invalidity Pension and Death Survivor Payment. Pension benefits in Ghana are indexed annually using the average rate of increase in the contributions inflow from the previous year. This is done to prevent any distortions in the financial equilibrium of the scheme.
In order to qualify for benefits under the pensions scheme one must meet the eligibility requirement and amounts payable under each section are as follows according to the Social Security and National insurance Trust:
Old Age Benefit
To qualify for old age full pension payment, a worker should have contributed to the scheme for a minimum of 240 months, which is equivalent to 20 years, and should have attained either the voluntary retirement age of 55 or compulsory retiring age of 60. The law applies differently to persons who have worked in hazardous conditions such as the mines. Such categories of workers under the law qualifies for a full pension at the age of 55 provided the worker has been engaged in such work for 240 months or more.
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The minimum pension payable is 50% of the average of the 3 best years salary for a minimum contribution period of 240 months. For any additional month served after the 240 months, a worker earns a pension right of 0.125%, i.e. 1.5% for every 12 months in addition to the 50% start off. Thus, a worker can theoretically earn up to 80% pension when he shall have worked and contributed to the scheme for 40 years.
As earlier mentioned, workers who opt for early retirement at age 55 or retire anytime before they are 60 years are entitled to a reduced pension. Benefit due is calculated on an increasing scale from the age of 55 years, meaning that those who retire closer to the statutory retirement age receive a higher percentage of their full pension than those who don’t. Percentages of full benefit due are as follows:
Age 55, 60% of full pension; 56, 67.5% of full pension; 57, 75.0% of full pension; 58, 82.5% of full pension; 59, 90.0% of full pension.
Pensions are paid monthly, however retirees have an option of receiving payment in advance equivalent to 25% of 12 years pension as a lump sum and subsequently be on a reduced pension.
If a worker before attaining the age of 60 is unable to have contributed the minimum 240 months to the scheme he is entitled to receive all his actual contributions plus interest at half the prevailing interest rate on government treasury bills.
With regard to survivors benefit, if a contributor dies while still a member, his dependents qualify for a lump sum of the earned pension. When a member contributes to the Fund for 240 months before dying, a lump sum equal to the value of his pension for 12 years shall be paid to his survivors. If a member dies without having contributed to the fund for 240 months, the payment to his survivors will be his proportional pension for a period of twelve years. Where a member who has retired dies before he is 72, his survivors will be paid in lump sum the unexpired pension up to age 72.
To qualify for invalidity pension, a member shall have contributed to the Fund for 12 months within the last 36 months before becoming invalid. In addition, the member should have been certified permanently invalid and incapable of gainful employment by a medical board including
2.4 Parallel Pensions Scheme
One may be tempted to think that the pensions scheme being administered by the Social security and national insurance trust covers all workers in Ghana, however as indicated above some sections of the working public are exempt from the national pension scheme. This is because such workers are covered under a different pensions scheme with pre-dates the national pensions scheme.
The scheme, which is affectionately, called CAP 30 (name derived from Chapter 30 of the Pension Ordinance of 1946) provides pensions for Civil Servants and the Armed Forces and some teachers. Today there are still members of these working sectors who are covered under CAP 30. Such members contribute 5% of their pre-tax salary, which is nevertheless not saved but recycled into the Consolidated Fund. However, it is still a non-contributory plan for the armed forces, the police, and the prisons services. These employees take home all of their earnings; no deductions for pension coverage. This aside there are other features of the CAP 30 that offers superior value as compared to the Social Security and National Insurance Trust including:
10 years for full retirement vs. 20 at SSNIT;
70% of final salary compared to 50% of average of three highest years’ salary at SSNIT
CAP 30 pension payments are indexed annually to current salary scales
Ghana’s social security system lacks cohesion as evidenced in the disparities that exists under the SSNIT and CAP 30 an there is an urgent need for the harmonization of the social security system in Ghana by replacing the current systems with a comprehensive all inclusive system
2.4 Pensions Reform in Ghana and overview of National Pensions Act 2008
Over the years concerns have been raised about the disparities and seemingly greater benefit under the CAP 30 as compared to the Social Security and National Insurance Trust (SSNIT) pensions scheme. Public sector workers further agitated over the inadequacies of the current social security benefits and its inability to sustain a respectable life during retirement. Furthermore, the current social security system has failed to include those in the informal sector who constitute about 80 percent of the working force.
The road to social security reform in Ghana began in July 2004, to provide a universal pension scheme for all Ghanaian workers following the agitations described above which lead to the drafting and passing of the National Pensions Act 2008. The Act is divided into four parts; the first part talks about the establishment of a National Pensions Regulatory Authority that will be responsible for the regulation of pensions schemes in Ghana as well as a three-tier contributory pensions scheme.
The second part deals with the basic national social security scheme; Part Three provides for occupational pension schemes, provident fund and personal pension schemes and management of the schemes and finally the general provisions of the Act is contained in part four.
According to the Social Security and National Insurance Trust, under the new Pensions Act 2008, there is a three tier contributory scheme, which replaces the current Social Security Pensions Scheme and CAP 30. Under the new scheme a total contributory amount of 18.5% of a workers monthly salary will be paid towards their pension and this is distributed between the first two tiers. The first two tiers are mandatory and the third tier is voluntary. Below are the features of each tier:
The first tier is the basic national social security scheme, which incorporates an improved system of SSNIT benefits. This tier is mandatory for all employees in both the private and public sectors. The mandatory basic national social security scheme is to be managed by SSNIT.
Contribution to the first tier will be 13.5% of an employee’s monthly salary. Whilst this tier is mandatory for all employees in the public and private sectors, self-employed members of the working class have an option to join the scheme and are under no obligation to do so. Of the 13.5%, 2.5% will be deducted and transferred to NHIF.
Benefit due under this tier will be calculated using the average of the highest 3 annual salaries Ã- 50% +1.5% of every additional 12 months contributed. A contributor under the first tier cannot be less than the age of 15 and not older than the age of 45 years when joining the scheme.
The second tier is occupational (or work-based) pension scheme and it is a mandatory scheme for all employees, however this tier will be privately managed. This tier was designed primarily to give contributors higher lump sum benefits compared to what is presently available under the SSNIT or Cap 30 pension schemes. A total of 5% of an employee’s monthly salary shall be allocated to the second tier provided the employee falls within the age limit stipulated under the first tier.
If the worker however, falls outside the stated age limit, all of the 18.5% contribution shall be transferred to the second tier. The voluntarily provident fund and personal pension schemes are to be managed by approved trustees, licensed by a National Pensions Regulatory Authority and pension fund managers and custodians, licensed by the Security and Exchange Commission and registered with the Authority.
Under this tier a defined benefit is payable to a retiree, spouse or dependent after termination of service, retirement or death.
The third tier is a voluntary provident fund and personal pension schemes, which provides tax benefit incentives for workers who opt for this scheme in addition to the first two. As earlier mentioned, the previous pensions scheme was relatively exclusive and did not provide cover for 80% of Ghana’s working population. The introduction of the third tier is an effort to address the issues concerning the old pensions system, which by design excluded those in the informal sector and did not provide avenue for the citizenry to arrange their personal pensions in addition to the state pension. The aim of the third tier therefore I believe, was to provide those in the informal sector to have their future secured by contributing to a private scheme and also provide those already covered under the national scheme to augment their existing benefits should it still be seen as inadequate.
This tier is fully funded and is also privately managed by licensed trustees that will want to provide private pension schemes.
A National Pensions Regulatory Authority (“the Authority”) has been established to regulate both public and private pension schemes in the country. The Authority will approve, regulate and monitor Trustees, Pension Fund Managers, Custodians and other institutions relating to pension matters.
To ensure that contributors” interests are adequately protected, the National Pension Act has in-built safeguards. These include stringent approval and registration criteria by the Pensions Regulatory Authority; separation of functions of Trustees, Fund managers and Custodians; on going monitoring among several others.
Trustees licensed by the Authority would be required to take out adequate insurance to indemnify scheme members against any losses of scheme assets caused by malfeasance or misconduct of the trustees or their service providers.
Among other impacts, the new scheme will ensure improved living standards of the elderly; financial autonomy and independence of retirees; increased national savings and availability of long-term funds for economic development; and the Promotion of growth and development of the capital, mortgage and insurance markets.
CHAPTER 3 – THE BUSINESS IDEA AND PLAN
In 2004, the government of Ghana started the process of reforming Ghana’s pensions system and in 2008 passed the National Pensions Act 2008, which saw the birth of a new pensions system in Ghana, the establishment of a new pensions regulatory body and most importantly the participation of the private sector in the delivery of social security in Ghana.
The opportunity presented through the National Pensions Act 2008, is what has motivated me to write this business proposal for the establishment of a pensions trust in Ghana to participate in the third tier of Ghana’s pensions System.
The new pension scheme will comprise two mandatory schemes and a voluntary scheme as follows:
First tier which is a mandatory basic national social security scheme will be managed by the Social Security and National Insurance Trust (SSNIT)
Second tier occupational (or work-based) pension scheme will also be mandatory for all employees but privately managed by approved and licensed trustees
Third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives to provide additional funds for workers in both the formal and informal sectors who want to make voluntary contributions to augment their state pensions benefit.
The Second tier and the voluntary third tier will be privately managed by approved trustees licensed by the Pensions Regulatory Authority with the assistance of pension fund managers and custodians registered by the Authority. It is within the third tier that a business opportunity exists for the establishment of a trustee company that will provide pension products to individuals and organizations in Ghana.
3.2 Benefits of the New Pensions Scheme
The new pension scheme offers a number of benefits above the old system. According to the Social Security and National Insurance Trust (SSNIT), workers within the formal and informal sectors stand to benefit from the following under the new pensions scheme:
Provision of Superannuation:
Reduction of contribution period from 240 months to 180 months
Full benefit increased from 50% of the average of the highest three years earnings to 80%
Provision of healthcare premium for all contributors to social security pensions scheme
Occupational Scheme: provides lump sum benefits to contributors after attaining the age of 50 years.
Survivors benefit calculations increased from 12 to 15 years
Using lump sum benefits under the second tier to secure mortgages meaning workers can obtain their own houses by using their lump sum benefit as collateral
Better controls over personal pensions under the second and third tier
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