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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.
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.
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
Provision of an avenue for informal sector workers who have been neglected under the old pension system to attain a pensions
3.3 Business Description
The private pensions industry is a new and untapped industry in Ghana. The establishment of this industry has come about following extensive effort by the Government of Ghana to reform the social security system in Ghana with the introduction of a new three-tier system.
Under the new three-tier system, private participation in the delivery of social security is made possible under the second and third tiers which will be managed by private entities as either pension fund managers and custodians or as a trustee company respectively.
Under the Act, three main businesses has been created for private participation:
The proposed business will seek to provide private pension plans to individuals and organizations that want a more comprehensive and adequate social security plan in addition to the state pension. The firm will also serve informal clients who have been left out under the national pensions scheme and self-employed individuals who may want to start a pension plan for themselves.
The proposed company will be setup as a trustee company fully licensed by the national pensions regulatory authority to provide private pension schemes, the proposed business will also operate custodian and fund management services.
The custodian services and fund management aspects of the business will be outsourced to Ecobank Ghana Ltd and Ecobank Development Corporation (EDC) respectively as a result of their vast operational expertise on the African continent.
3.3.1 Products and Services
The proposed business will be offering the following products and services:
Tier 2 Occupational Pension Scheme
Tier 3 Provident Fund Scheme
Pension Fund Administration Services
Tier 2 Occupational Pension Scheme
This is a mandatory contribution scheme and this product will provide lumps sum payment to the retiree upon reaching the retirement age or to the nominated beneficiary should the retiree/ contributor die before the retirement age.
Lump sum payment at retirement
No option for withdrawals of any kind until contributor has reached retirement age
5% of employee's gross salary is contributed to the pension fund
Asset based fee of 2.4% per annum
Tier 3 Provident Fund Scheme
This product acts like a savings scheme with the aim of accessing the savings made at retirement. Benefits under this scheme will be paid to the contributor, beneficiary or trustee nominated by the contributor in the event of the contributors demise.
The product has the following features:
option to withdraw in accordance with contributing companies rules and regulations
tax relief incentive of up to 16.5 per cent of gross salary
option of further increasing pension entitlement with the availability of additional voluntary contributions
Asset based fee of 2.4% per annum
Pension Fund Administrative Services
Under this product we provide services that makes access to and managing individual personal pensions easy and reliable. We offer the following services to our clients:
Monthly e-statements and paper statements
Online access to pension accounts of each individual
Call centers and helplines to address any queries or enquiries on individual pensions
Prompt claims payment and excellent customer service
We provide all of the above for a small asset based fee of 0.8% per annum
3.4 Mission and Vision Statement
The proposed trustee company's vision is to become the foremost private pension service provider in Ghana. As such a mission statement has been chosen to reflect this vision.
The proposed business mission is:
"To provide innovative and affordable products, designed based on market demand and needs, delivered with a high level of service quality by a motivated and professional team with the aim of exceeding the expectations of customers, shareholders and all stakeholders"
Our primary objectives over the first three years of operations include:
Establishing a brand which is associated with or known for its innovative and affordable products delivered with excellent customer service
Gain and serve 30% of the private pensions market over the first three years of operations with an annual increase of 5% in market share
Design, build and implement an efficient and cost effective distribution system that also meets the expectations of customers
3.6 Location and Facilities
The proposed company will be based in Ghana's capital Accra, specifically within the Airport residential area. This location was chosen as ideal as it presents easy access to the area from any part of the capital city.
The proposed business will commence operations in rented accommodation and within three years acquire its own permanent accommodation. The proposed company will not have physical branches in other parts of the country when it commences business but will have representative offices within partner offices. Some of our partners will include banks, rural banks, NGO's and micro finance institutions. This strategy was opted for to reduce the capital requirement needed to commence operations. The proposed business aims to have the following facilities available at the start of operations:
Fully furnished offices
Computers and laptops for staff and management respectively
Working phone and fax lines
6 company vehicles
Security and Fire Systems
Minimum operations software as required under the National Pensions Act 2008
3.7 Targets and Specific Goals
We have set the following targets and goals over the next 3 years of operations:
Attain a 5% market share within one year of commencement and have at least 30% of total market share by the end of the first five years
Have a net profit of 0.10 by end of year five
Increase total asset base by an average 15% per annum
The following have been identified as factors, which may militate against the smooth achievement of the planned targets and specific goals:
Depreciation of cedi can affect purchasing power of targeted client base
Higher inflation rates
Competition and obstacles in market penetration
Lack of confidence and negative perception about pension business resulting from customers experience with the Social Security and National Insurance Trust (SSNIT)
Increase in man power cost as a result of the lack of expertise within the pensions industry
3.8 The Market
Evidence provided in earlier chapters points to the fact that Ghana's old social security system did not address the retirement needs of workers. One of the problems has been SSNIT's inability to rope in workers in the burgeoning informal economy. Farmers, fishermen, tailors, hairdressers, market women and traders as well as drivers and other self-employed Ghanaians can now participate in a pension scheme which will ensure that workers in the informal sector, like their counterpart in the formal sector, also receive monthly pensions as well as access a lump sum which will take care of them in their old age.
This has been made possible by the provision of a Voluntary Personal Pension in the Third-Tier in Ghana's new pensions Act to cater for peculiar need of worker particularly in the informal sector who constitutes about 85 per cent of Ghana's workforce. The workforce, which according to the 2000 census was about 12 million, is estimated at 13 million currently out of which only 1million constitutes a formal sector. The informal sector therefore presents a huge untapped pension business under the third tier whilst the formal sector constitutes a potential market for private pension scheme under the mandatory second tier.
3.8.1. Market Segmentation
Our target market consists of two distinct categories namely Rural Profile of our target market consists of the following characteristics:
The informal sector workers are our main target market with the formal second tier market being our secondary target market. The informal market has been selected as the main target market for the following reasons:
Informal sector workers constitute a high proportion of Ghana's workforce population; an estimated 12 million according to the 2010 national census
The lack of a pensions scheme for these group of workers motivates them to use private pension schemes as an alternative to the public or national pensions scheme which has over the years excluded the informal sector workers
There is new enthusiasm for private pensions scheme within the general workforce population with the hope that private pensions will provide better retirement packages than the national pension scheme has provided since its inception
Generous growth in the population of informal sector workers which would offer the proposed business generous growth if such clients are effectively targeted and served
The formal sector workers are also our secondary target market and offer some benefit for the proposed business. We also target this market for the following reasons:
Smaller growth but stable target group
Premium collection is easier and consistent
Better appreciation of private pensions scheme
3.8.2 Target Market Segment Strategy
In order to take full advantage of our target market our marketing strategy will focus on creating awareness, generating interest and effectively distributing of the products and services we offer. Our client base consists of formal and informal working population.
Informal workers are the dominant part of our target population constituting 90 per cent of target market. These consists of workers aged between 18 and 70 years however our target market out of the total market are informal workers between the ages of 16 years and 45 years. This population was targeted because they will meet the minimum contributory target of 180 months before retirement. For the informal workers located both in urban and rural areas the best way to create awareness is through local radio stations, especially those who operate using the native languages. This is because for rural areas of Ghana especially where most informal workers are found radios are the main informative gadgets. Radios are also quite common amongst urban dwellers as well and prove to be the most effective way of creating awareness and marketing our products and services.
For effective distribution, Microfinance institutions, NGO's, rural banks and credit unions are the most effective way of distributing products to informal workers. This is because most informal workers are excluded from the mainstream financial services and most commonly use rural banks, microfinance institutions and credit unions for their financial needs. NGO's who also work in these rural areas have relationships with the people in those rural areas and have a vast network that the proposed business can leverage to their advantage. There is also an already existing trust with these institutions; this makes using these distribution channels even easier and more advantageous to the proposed business.
Formal workers from an important part of our target market, though comparatively they constitute a smaller portion of the market. They represent a stable section of our market with higher regular salaries. Within this target group the targeted age group is also between the ages of 16 years and 45 years. For formal workers a mix of strategies needs to be used to create the desired awareness, mainly a combination of radio, television and newspaper marketing. These are the most effective awareness creation tools available for this section of workers. For effective distribution on the other hand, most of these workers have access to formal financial services hence the banks and employees of these formal workers will be the main distribution channel for our products and services.
3.8.3 Market Trends
The private pensions scheme market will consist of the compulsory tier 2 (which is 27% of the mandatory pensions scheme) and voluntary tier 3 schemes. The private pension industry is expected to grow at an annual rate of 8% based on the annual rate of the national pensions scheme. It is assumed that growth within the private pension industry will be largely due to the dissatisfaction of the national pensions scheme that has resulted in many contributors looking for an alternative, the desire for an increase pension payments and tax incentives the third tier offers contributors. Furthermore workers who have traditionally been excluded from the national pensions scheme who now have the opportunity to have a pension plan will also drive growth.
The overall success of the business is dependent on the following factors:
Health of national economy: the private pensions scheme particularly the third tier will perform at its best when the economy is good. With a healthy economy workers earn more and inflation is low hence workers can save money to invest in their future. Also when their salaries increase their contributions to the second tier also increases as the amount contributed is a percentage of the workers salaries
Availability and need based product design: growth and success of the private pension industry will depend on how easy the products can be assessed by the target market and how best these products meet the needs of the target market
Creating awareness: effective awareness that isn't limited to making the product known but also creation of awareness whereby such awareness makes the target market understand the need for such products.
3.8.4 Market Growth
The number of formal workers is expected to increase by 5% annually with informal workers increasing by between 10 - 20 per cent annually. The bulk of the proposed business market growth is expected to come from the informal sector target market that has an average annual growth of 12 per cent. This is particularly because this section of the target market is has been traditionally excluded from any pensions program and the availability of a private pensions as an alternative will drive growth. It must be noted however that due to the peculiar characteristics of this target group growth will be less stable particularly due to irregular income flows. The formal target market is expected to provide stable growth for the proposed business. This section of our target market is relatively easier to track in terms of premium collection and has seen an average growth of about 8 per cent growth in contributions to the national pensions. We are assuming that such growth figures will reflect in the tier two mandatory scheme.
3.8.5 Market Needs
The proposed business will give its clients the opportunity to secure their future through the provision of pension products that meet their existing and future needs. Clients have the option of participating in a private pensions program in addition to the national pension scheme to benefit from the generous tax incentives it provides as well as to augment their pension entitlement.
We have identified the following needs within our target market that we strive to meet:
Opportunity to participate in a pension scheme
Active participation in the determination of their pension entitlement
Higher pension payout
Variety in the choice of pension products
Pension products designed based on the needs of the clients
Prompt and convenient service in the area of pension updates and claiming
3.9 The Industry and Potential Competitors
The trusteeship under the private pensions industry is most likely to be dominated by trustees set up by life insurance companies. Ghana currently has seventeen (17) life insurance companies and the market leaders in terms of market share are:
Enterprise Life Assurance Company (ELAC)
These companies currently have a wide coverage and hold a huge amount of corporate clients, which is key, because under normal circumstances corporate risks and pension plans of these corporate clients will be given to the life insurance provider of the companies.
3.9.1 Competitive Strategy & Competitive Edge
The foremost competitive advantage of the proposed business will be its stated capital. With the aim of having a state capital of about GHS 3 million we hope to place ourselves in a position where our sound financial standing will provide us the opportunity to manage a larger portion of the tier two mandatory scheme. We believe that sound financial footing will provide our potential clients the confidence that we will be able to pay their claims. Our second competitive advantage will be our network of business partners who will enable us effectively make our products available to our target market. When we make use of the distribution channels of our business partners our products and services will effectively become the most accessible within the industry. Finally our brand and reputation as being customer friendly and client focused will also help us edge ahead of our competitors as we aim to respond quickly to changing needs of our target market by giving opportunity to our clients to give us constant feedbacks and suggestions on our products and services.
To enable the proposed company compete and take full advantage of the market to attain its objectives the following strategic options have been identified:
Make use of external expertise in pensions management to build internal capacity
Leverage distribution channels of our business partners on the pensions operations
Make it a point to attract and retain corporate clients and individuals through first class customer service and need based product designs
3.9.3 Marketing Strategy
Our marketing strategy seeks to establish the proposed business as the preferred choice for people in need of a private pension plan. Our marketing strategy will focus on our need based product design and excellent customer service. We aim to let our client base see us as their partners in securing their future financially.
Our marketing strategy will be based on our superior performance in the following areas:
Variety of product choice to suit each individuals needs
Overall quality of product and service
Excellent customer service and support
Providing prompt information and feedback on individuals pension
Easy access to each individuals pension plan
Our marketing strategy will create awareness and generate interest in our products within our target market.
3.9.4 Operational Software
The proposed business operations will be run automatically with the help of pension administration software, in accordance to the software specifications outlined in the National Pensions Act 2008. The installation and training will precede commencement of operations.
3.9.5 Management Team and Personnel
The management team will consist of the CEO, GM Operations, GM Finance and Investments, SM Sales and Marketing and SM Administration and Human Resources. Key personnel needed for operation of business in the first year will include:
Chief Executive Officer
General Manager Operations
General Manager, Finance and Investment
Senior Manager, Sales and Marketing
Senior Manager, Administration and Human Resources
Two pensions specialist
Two operations officers
Two back office officers
188.8.131.52 Management Team Profile:
3.9.6 Analysis of Strengths, Weaknesses, Opportunities and Threats of market
Comprehensive Law concerning pension
Existence of appropriate pension regulatory body
Lack of technical staff
Inadequate response to changing customer needs and expectations
Untapped formal second tier market
Availability of large informal market
Cross selling opportunities to clients of our partners
Competition form life insurance companies
Lack of adequate pension knowledge
Public's distrust of SSNIT and its repercussions on the private pensions market
Economic down turn and high inflation
CHAPTER 4- FINANCIAL PLAN
Sound financial footing of any new venture is important for the success of the business. Under the financial plan chapter, I hope to address questions in relation to how the business will be funded, give an idea of the potential revenues the business may generate as well as provide an insight on the assumptions made. The financial plan will cover the following:
Funding the business
General and Financial Assumptions
Projected Cash flow
Projected Balanced Sheet
Projected Profit and loss
4.0 Funding the business
The business seeks to secure funding from four main sources:
Investment from partners
Bank loans/ credit facility
Investment from partners:
Investment from each partner is not only the easiest way of funding this business but also the cheapest way. Each partner is to invest an amount of GHS90,000.00 each representing a small portion of business ownership.
We opted for private investors as this section of investors invest in specific industries. Unlike the banks who may not understand the kind of business this may be and really understand its potential, private investors specialized in private pension funding are most likely to understand the businesses better and the level of risks involved. This in effect can make borrowing cheaper as they will not impose a higher interest premium because they may overestimate the risks involved with the business. We will raise GHS 1,500,000.00 from private investors by selling part of the ownership of the firm to them.
We will use asset financing for the relevant assets that he firm will need in its operations. Asset financing will help the proposed business save some money for other investment opportunity, as it will enable the firm access key assets without injecting cash into capital investments all at once. This will reduce start up costs. The following assets is expected to be acquired through assets financing:
Bank loans will make up our debt financing. We are expecting to have a credit line of up to £100,000.00 at a negotiated interest rate. We opted for a credit line rather than fixed loan amount because until the credit line is used we need not pay interest saving money on interest payments, furthermore it serves as emergency funds and will not sit on our books as debt until we access it.
4.2 General and Financial Assumptions
The following assumptions will determine the potential for the proposed business:
The new company will assume 15% of the 2nd tier compulsory pension fund and increase to 10%, 15%, 18% and 20% for 2012, 2013, 2014, 2015 and 2016 respectively.
It is further assumed that 20% of our share of the market will have a 3rd tier scheme in place and that 50% of them will out-source to us
We will pay 1% and 0.5% respectively to fund managers and custodians
Corporate Tax rate will remain at 25%
4% of the fund from the 2nd and 3rd tier will come to us by way of gross fees. Details of fees are detailed below:
3rdTier Provident Fund
It is assumed that SSNIT will grow at an annual rate of 28% based on the actual average growth of SSNIT between 2002 and 2010 and total contributions will increase from 17.5% to 18.5% according to the new law.
The company will handle both the trusteeship and the administration of the fund and outsource the custodian and fund management services
Staff cost and other expenses in 2013 is expected to go up by 20% from the 2012 budget figures and a further increment in staff numbers
4.3 Projected Financial Statements:
4.3.0 Income Statement
The proposed business experiences loss during the first three years of operation but records a profit from the third year growing by 912% between the forth and fifth year.
Graph showing Net Income of Proposed Business
Cash flow Statement
Chapter 5- EXIT STRATEGY AND FINDINGS
In the final chapter I will conclude by highlighting some of benefits of a privately managed pensions scheme on Ghana's economy and for its consumers. I will also highlight my findings as a result of carrying out this proposed business plan.
5.1 Exit Strategy
Exiting the business is as important as planning for it. We are aware of the fact that our investors may at some point want to exit the business and recoup their investment. It is our hope that our investors and partners will be willing to run the business as long as possible before opting out of the business. After creating a successful business investors and owners of the proposed business may exit the business using the following means:
Selling of equity:
Each investor has an option of selling off their equity share in the business to either the business or to any institution or investor willing to take up those shares. This offers the investor an easy way to exit the business as well as an option to sell whatever proportion of their interest they are interested in letting go of. Aside being an easy option it gives the investor an option of still holding on to a part of the firm no matte how small as against an outright sell which may leave the investor out of the firm altogether. For any investor who wishes to sell their equity stake it must be noted however that the business has the first option to buy those shares before any third party.
Outright Sell/ Acquisition:
If investors and owners after creating a successful business wish to totally exit the business there is an option of selling the business outright to an institution or investor who may be interested. Under this option investors may no longer have any claim to the business and there is a potential to be paid below the value of the firm. There is also a possibility that the business may be overestimated and investors may receive a lot more on their investment.
An outright sell may on the other hand provide an easy and clean exit for investors and investors may have an option of still holding some equity in the business as part of the deal.
Going public even though available, as an exit option may not be the easiest way out of the business. This is because IPO's take time and the business may not have what it takes to go public within the time frame that some investors may want to opt out of the business. Furthermore an IPO may cost the company a lot more money than it may be able to afford and may not raise the money it may intend to raise. The market may also underestimate the true value of the firm which will mean that should the firm go public there is the potential or the firms shares to trade at a value far less than the true value of the firm.
In the event that the proposed business is not successful, the owners of the proposed will ensure that all investors recoup as much if not all of their investment as possible without damage to all parties involved. In the event that business is unsuccessful, the assets of the proposed business will be sold off to pay off all investors.
5.2 Benefits of proposed business on the Ghanaian Economy
The ultimate aim and responsibility of every country is to protect its citizens and one of the ways the state does this is through social security and the provision of a pension to protect the financial health of its citizens. The state in its efforts cannot always meet the needs of the citizens as the state provides just the barest minimum pension scheme. For this the importance of a privately managed pensions scheme is important to any economy especially for developing economies. Privately managed pensions fund provides some benefits to both the economy and the contributor. Considering the many problems being experienced by the national pensions provider the importance of a private pensions provider could not have come at a better time for the Ghanaian worker. It is my hope that this business proposal will help meet the needs of the Ghanaian worker in securing their financial future.
Some of the benefits my proposed business will bring to the Ghanaian economy and the pension contributors include:
Better control of pension entitlement and higher flexibility:
One of the benefits the proposed business will provide its customers is the opportunity to better control their pension entitlement. With a private pension the contributor, in addition to the national or public pension scheme, can have access to additional pension benefit under the private scheme. Furthermore since the private pension provides some tax incentives it further reduces the tax burdens of contributors and contributors can contribute as they want and are able to contribute. An opportunity that is not available under the public pension scheme, as contributors contribute a fixed percentage of their salary throughout their working life. At any point in time a contributor can access the state of their private fund and decide for him or herself if they are receiving the best returns on their funds. This further gives the contributor or beneficiary the right and opportunity to move their pension fund from one private pension fund to another should they believe that is in their best interest and can receive higher returns on their pension. This provides greater control and flexibility in the determination of how one's pension fund is managed.
Creation of jobs
One of the benefits of the proposed business to the Ghanaian economy is the fact that it creates some jobs for the Ghanaian people. Unemployment is one of the greatest challenges in developing economies especially youth unemployment. With 20% of Ghana's youth unemployed, the proposed business in its own little way will provide the opportunity for some young graduates and professionals to be employed, thus reducing the number of unemployed youth. Furthermore, with the creation of the jobs comes the opportunity to build local capacity in the area of pension management and design. Currently there is a lack of technical expertise in the area of pension, which means that the proposed business will need to buy expertise or pay consultants; a trend I hope the proposed business will eventually reverse b