Can a new pension scheme offer security to informal workers in Ghana?

Vendors sell on the side of the road in Ghana. Photo by: Jake Brown / CC BY

GENEVA — Month to month, an informal worker in Ghana can’t be sure exactly how much money she makes. Her wages depend on the market, the month and, sometimes, the weather. Despite this daily uncertainty, Sam Bediako Waterberg, CEO of the People’s Pension Trust, told Devex informal workers in Ghana are often more concerned about how long they will be able to work and being able to afford retirement.

“Bringing people on board is not that difficult,” Waterberg told Devex on the sidelines of the Social Good Summit in Geneva, Switzerland, on October 13. “People are really concerned about their pension, because they have seen older people suffering without a pension.”

As health care improves, Ghanaians are living longer. However, because 80 percent of Ghanaians are employed in the informal sector, the majority of aging workers have few options for safeguarding their health and well-being in the long term after they can no longer work.

Waterberg said the culture is also changing.

“In the past [people] were told their children are their pension, so a lot of people had four or five children hoping that one of them will take care of them,” he said. But now, “people are moving from the rural area to the urban area for work, leaving the parents to themselves without any support.”

As a result, as the older population explodes, the United Nations estimates the number of elderly people in sub-Saharan Africa will triple to 161 million by 2050. Old-age poverty is also accelerating at an alarming rate.

As the first pilot subsidiary of a Dutch-based pension firm, Waterberg and his team saw the potential value of a pension scheme designed for the informal economy. But when people are living on irregular wages, how do you convince them to take the risk inherent in any investment, particularly when many Ghanaians are still reeling from the national and global financial crisis that saw banks swallow their hard-earned savings?

On the contrary, Waterberg said, getting people to get on board with PPT “isn’t the problem.”

“The challenge is, once someone is registered, how do you keep that person saving consistently?”

At the logistics level, PPT has already found a few solutions. The pension infrastructure relies on text message technology for its customer interface. Customers don’t need internet access in order to sign up, make deposits, withdraw funds, check a balance, or seek support. A potential customer must simply have access to a mobile phone. In Ghana, mobile phone penetration currently outstrips the number of people by almost 10 million, and mobile money transactions far exceed those made through traditional brick and mortar banks, growing in value by more than 200 percent between 2014 and 2015. Most importantly, even though funds are housed and invested through Standard Chartered Bank, the rules for a pension through PPT allow for immediate withdrawal of invested funds.

For some, micro-pensions offer an exciting new opportunity for the development sector, but with little evidence available, others caution that their impact could be more limited than hoped.

Building trust

Since it launched in December 2016, PPT has acquired 10,000 clients, and Waterberg said he is hopeful they can reach 100,000 clients by the end of 2018. The key to growth, Waterberg said, is building trust among informal workers by providing early access to their money and by sticking, for the time being, to safe investments.

“In the informal sector, people remember when experienced banks came and collected their money and then went bankrupt, so a lot of people are like, ‘so how do I know that in 20 years, you’re still there to give me my money?’” he said.

“Now that we give them the opportunity to withdraw, people test us by coming to withdraw the money. And as they get their money back, trust is built and then they increase their savings amount.”

Waterberg said PPT is able to offer customers the opportunity to withdraw for a couple of reasons. For one, Ghana’s population is still relatively young, so the firm isn’t paying out many pensions yet.

Secondly, PPT invests more than 90 percent of its clients’ money in Ghanaian treasury bonds. Because it buys the bonds in bulk directly from the government on behalf of its clients, it can guarantee a higher rate of return than if an individual customer purchased bonds through a traditional bank. In Ghana, treasury bonds are among the safest investments, as the Ghanaian government routinely borrows and returns money to the country below inflation. PPT claims to pass along that benefit to the consumer with rates that beat inflation by 4 percent to 5 percent on average, Waterberg said.

As PPT’s clientele grows, however, Waterberg told Devex the company plans to make riskier, more aspirational investments in the country’s future, namely through development projects such as building hospitals, schools, and infrastructure.

“Assuming in five year’s time our assets have grown to 65 million euros, from there we can take on the risk that comes with projects like building hospitals, schools, retirement homes. What we are looking for in these projects are long-term benefits to our clients, this is what I think we can do that [traditional banks] can’t do,” he said.

PPT will focus on projects that “contribute to their clients’ communities,” Waterberg said.

“How beautiful will it be that someone goes to a hospital knowing that through their savings, they contributed to building that hospital?” he asked.

Challenges ahead

Waterberg said PPT “has the support of the Ghanaian government” in large part because its effort to provide pensions to informal workers will contribute to national efforts to get those workers on the books in the formal economy. However, that goal is more long-term, he admitted, and isn’t central to PPT’s business model.

“For us, it doesn’t matter,” he said. “If our clients are formalized, it will make our work easier because then they will be able to pay through their bank account. But the firm is not asking its clients to formalize. Instead, PPT will simply collect data on the informal economy it serves as its clientele grows, eventually offering the data to the government.

“The government doesn’t have this data, but if we’re able to have data for 1 million people, know where they live, eventually we will have a database that we can give to the government and say that, these are the people paying into pension accounts, this is how much they pay, so that eventually the government can tax them and also give them benefits,” he said.

Asked whether PPT clients know that the firm plans to hand over their data, which is admittedly limited, since PPT requires only a city, landmark, name, and birthdate in order to register — Waterberg pointed out that its advertising partner, Vodafone Ghana, requires the same amount of data and regularly shares it with the government. Ghanaians are “accustomed” to this kind of cooperation, he said. That still leaves questions about the security of clients’ income data and identities under PPT.

Another important data gap PPT must overcome to survive, Waterberg said, is figuring out the average lifespan of a Ghanaian informal worker.

“The pension funds in Europe for example, they offer life-long pensions, you subscribe and then you get a pension until you die,” he explained.

“That’s something we can’t do in Ghana yet because we don’t have the data for how long people will live, so the scheme we have instead is based on a defined contribution. It means the money you put into the fund, that will be invested and given back to you, so if you are able to put a $100,000 fund, that will be given back to you on a monthly basis until it’s gone.” If any money remains in the fund, Waterberg said, it is passed along to the client’s next of kin.

Others in the sector pointed to the as yet unproven track record for micro-pensions, and expressed doubts that the business model could make a big enough impact.

“I don’t think that there’s much future for micro-pensions; usually contributions are too low, people find it difficult to make consistent contributions over the long term and there’s no mandatory annuitization,” Stephen Kidd, senior social policy specialist at Development Pathways told Devex. “They’re really just savings schemes.”

Kidd said the most sustainable way to offer pensions, even to informal workers, is “through tax-financed schemes for all citizens, such as the one just announced in Kenya and which are found in South Africa, Botswana, Namibia, Swaziland, Lesotho, Mauritius, and Zanzibar. These follow on from the model used successfully by many developed countries.”

Potential for growth

In part due to the lifespan question, PPT is already thinking about its next informal-centric instrument: an insurance pool.

“Assuming you have $100,000 in a savings account and you are 60, then you can buy the insurance and assuming you live quite long, we are able to support you based on that insurance pool.”

PPT hopes to roll out the first insurance instrument when it reaches 100,000 clients, and Waterberg hopes by 2018 it can begin enlisting subscribers.

One key to its future success Waterberg noted, will be access to workers. Through its partnership with Vodafone Ghana, PPT is able to access the mobile numbers of Vodafone’s eight million subscribers for regular advertising. PPT also recently gained endorsement from an informal workers union — the Union for Informal Workers Association, or Uni1 — whose members number more than 100,000 Ghanaians.

Finally, Waterberg said he recently discovered another untapped group of investors: the Ghanaian diaspora.

“When we started I didn’t think about it but then they approached me. They still have ambitions to go to Ghana in their retirement, now they live in the U.K., the U.S. or the Netherlands for example,” he said.

“They ask, can I put money aside so that when I’m 60 or 65 or 70, I have money coming in? So this is a group of clients that are just now coming on board,” he said.

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About the author

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    Molly Anders

    Molly Anders is a U.K. Correspondent for Devex. Based in London, she reports on development finance trends with a focus on British and European institutions. She is especially interested in evidence-based development and women’s economic empowerment, as well as innovative financing for the protection of migrants and refugees. Molly is a former Fulbright Scholar and studied Arabic in Syria, Jordan, Egypt and Morocco.