Financial security is one part of the puzzle that must be considered to complete the E-Levy argument.
One avenue of financial security is Pension. Since the inception of the 3-tier scheme, there have been calls from all quarters, including the government, to rope in the informal sector. So far, not much has been done on that front as we have only achieved 4% informal sector penetration of pension.
This meagre penetration has been achieved mainly through mobile money (Momo) transactions. There has always been the battle of Momo charges on pension contributions into the private sector pensions, which is mainly the 3rd tier scheme. That issue remains unsolved and so currently, contributors pay charges on the contributions. As if that is not enough, now E-levy pops up! The general response to the mobile money transactions and contributors’ response to their pension schemes are a good sign of what will ensue when the E-levy is introduced.
Disadvantages of E-Levy: Some Statistics
The current pensions asset under management is estimated at GH₵ 36 billion. The portion under the private sector (2nd and 3rd tier) forms about 69% of the total pension assets. This translates to approximately GH₵ 25 billion for the 2nd & 3rd tier schemes, while the SSNIT 1st tier is estimated at GH₵ 11 billion. The private pension 2nd tier scheme commenced a widescale benefit payout from January 2020. In spite of that, the private pension asset is more than the public pension purse (under SSNIT 1st tier scheme).
The future of pensions in Ghana, just like the fortunes of the nation, rests in the hands of the private sector of whom the majority are in the informal sector. It is estimated that 70% of the workforce in the economy are in the private sector. However, they form just about 4% of contributors. Considering a workforce of an estimated 11 million people of which about 7.5 million are in the informal sector, and just a little above 300,000 persons are registered under any kind of formal pension scheme is a matter of great concern!
Disadvantages of E-Levy: Pushing the Agenda
In pushing this informal pension agenda, the most important function of all is the collection of the funds. It is an overly costly operational exercise for the trustee firms to resort to manual means of collection. The option left for them is the electronic means of payment. Can we imagine how the private pension assets will grow if we can achieve a 10% penetration of the informal sector? However, this potential will be massively threatened with the advent of E-levy. The overall cost of the contribution (charges plus tax) through the mobile money will deter the informal sector from contributing.
Charges as high as 2.5% (2.75% whichever applies) will kill the desire to contribute. Considering the (still) low confidence in the financial sector and the rather low appetite for risk associated with the informal sector, this phenomenon is likely to play.
It is very likely that trustees who are engaged in informal sector pension, have already started seeing a negative response to the levy. Redemptions will shoot up, while contributions will reduce. The level of withdrawals from the 3rd tier pension funds based on E-Levy ‘fears’ cannot be ignored. The added agony is when the contributors begin to see such charges applied to their contributions.
The recorded drop (GH₵ 3 billion) in Momo transactions between November 2021 – December 2021 may be proof of our fears.
Disadvantages of E-Levy: Threat to financial Security
The E-Levy will hamper the readiness of the informal sector to contribute to the private pension scheme. This is a threat to financial security. The issue of low pension coverage for the informal sector is itself a menace. Any situation that threatens it further should be reconsidered.
This is also some form of loss to the government as approximately 90% of the private pension funds reside in the bosom of the government in the form of bills, bonds and quasi bonds. It will serve the government’s own interest to bring up ways to enhance the collection of funds into the pension industry where the potential exists. E-Levy is definitely not one of them.