What is a pension fund?
A pension fund is a pool of funds collected from individuals who set aside someof their income to live on when they are on retirement. In effect, it is a an investment product into which scheme members pay contributions in order to build up lump sums to provide income in retirement. The pooledcontributions from pension plans can either be set up by employers, unions, or other organizations to provide for the employees' or members' retirement benefits.
The pension fund/infrastructure development nexus
Pension funds are a growing influence in national economies. In some countries, pension funds are the largest investment blocks providing alternative sources of funding for infrastructure development. Aside serving as a social protection mechanism, pension funds can be invested in assets that can create returns and jobs, therebycreating a virtual cycle of economic growth.
Pension funds provide substitute sources of funding to fill the financing gap for infrastructure development. In effect, they represent a reliable and sustainable source of funding for infrastructure development and when invested strategically, could earn enormous returns.
The unique advantage of pensionfunds
Historically, pension funds have proven to bean important stimulusfor infrastructure development and economic growth,mainly because of the key advantage of the long-term nature of their financial liabilities.
If governments use pension funds for investments, technically they can deploy the funds for as long as feasible. The longer the tenure, the more time the government has to deploy the funds. The long duration allows government time and space to invest and dowhat they want with the money in terms of infrastructure development.
Tapping into the benefits of pension funds
Ghana’s pension funds sector is one of the most thriving within the financial ecosystem with an average annual growth rate of between 60 and 70 percent over the past four years. Investment into Ghana’s pension funds has also seen strong growth in recent years. The National Pensions Regulatory Authority (NPRA) reports that privately managed pension funds have maintained their robustness in growth over the past four years, with contributions under the tier two and three schemes hitting an all-time high of GH¢8.3 billion at the end of July, this year.
Despite this remarkable growth, the country is yet to optimize the use of pension funds and reap from the benefits accrued from it. We have been very conservative in prescribing where to invest our pension funds and regulations have largely contributed to this. Take Tanzania for example; in April this year, one of Tanzania’s biggest infrastructure projects, a six-lane toll bridge in Dar es Salaam, was commissioned. The project, which costs some $135 million, was funded largely with pension funds.
Going forward, government should introduce more liberal policies to free the pensions’space to enable for assertive use of pension funds.For example, the Temporary Pensions Fund Account (TPFA) would have to be released as quickly as possible and the asset class allocation should be slightly more aggressive and allowease of access to pension funds by the private sector. Currently, pension funds as a percentage of GDP is very low but considering the rate at which it is growing, sooner than later, it is going to be one of the biggest sources of funds in Ghana’s financial ecosystem and government must position itself strategically to take advantage of this.
Ghana has a huge infrastructure deficit that has to be reduced as we seek to industrialize our economy. Pension funds provide a viable and reliable source of funding, generated internally, which tend to be long-term in orientation. The country should start looking critically at how to leverage pension funds to supply the country’s infrastructure needs, to aid economic development and also minimize external government borrowing.
Source: STANLIB Research