DEFINED CONTRIBUTION AND DEFINED BENEFITS: INHERENT RISKS AND RISK TRANSFERS IN GHANAIAN PENSION SCHEMES

ABSTRACT

Ghana, due to various economic and demographic factors, also growing concern among the general populace on the adequacy of pension benefits has undergone pension reform. The new Ghanaian Pension scheme set with the objective of securing pension income of plan members is a combination of the Defined Benefit (DB) and a Defined Contribution (DC) pension plans in a three-tier structure. This thesis examines three major issues affecting pension provision in Ghana. That is, the risks associated with pension schemes, and the effect of the structural and parametric changes of the new scheme on pension provision. Thirdly, a demonstration of the adequacy of pension benefits from the new scheme relative to that receivable prior to the reform considering investment risk (market risk).

A simulation methodology was adopted using 10,000 simulations of risk scenarios of a plan member over a projected 40yr contributory period to demonstrate whether pension benefits under the new Pension scheme was adequate relative to a DB benchmark as was the case prior to reform. Three major conclusions are drawn; firstly, a DC pension plan may promise higher benefits relative to a DB benchmark, however, it is subject to more risk hence pension ratios are less predictable. Secondly, the asset allocation strategy used by fund managers has an influence on pension provision and one with high equity weightings in investment delivers higher benefits compared to that with less weight in equities as prescribed by the National Pensions Regulatory Authority (NPRA). Lastly, contributions to Tier 3 of pension scheme by formal sector plan members towards a personal pension or provident fund may significantly increase pension benefits.

Keywords: Defined Contribution pension plan; Defined Benefit Pension Plan; Asset-allocations strategy; Social Security and National Insurance Trust (SSNIT)