Indexation of pensions safeguards purchasing power

Indexation of pensions would safeguard a fall in purchasing power in old age, Madam Evelyn Ampoful, Actuarial Manager of the Social Security and National Insurance Trust (SSNIT) has said.

She said indexation of pensions “is a phenomenon in most Organisations for Economic Co-operation and Development countries and several developing nations as well".

She noted that generous indexation, on the other hand, may also lead to transfers from the poor to the rich as it is the rich who has a higher life expectancy.

Madam Ampoful who was addressing a meeting at Aburi said the minimum pension for 2015 has been raised from GH¢ 200.00 to GH¢ 230.00 per month, an increase of 15.0 per cent.

She said “this covers new pensioners who are expected to join the payroll from January 2015 but whose pension amounts will be less than the minimum pension paid by the Trust".

According to her, the minimum monthly pension policy was in line with key cooperate objectives of the Trust.

Madam Ampoful said the minimum amount to be paid to new pensioners in the current year is aimed at preventing pensions from falling below a certain level; adding that it was targeted at not less than 50 per cent of the best three years average minimum wage.

She said currently the monthly pension covered a minimum pension of GH¢ 200.00, average pension GH¢369.03 while the highest pension was pegged at GH? 22,292.03; but the newly adjusted monthly pension were GH¢246.92, GH¢424.40 and GH¢23,443.55.

She said the Board of Trustee of SSNIT selected the appropriate indexation rate based on the recommendations to be used for any particular year.

According to her, SSNIT had used three options over the years based on peculiar situation of affordability and its impact on the Fund in the long term to indexing pensions, which included Fixed Rate index application, Fixed Rate and Flat Amount Index Application, and the Flat Amount index application.

She said the Fixed Rate index application was used from 1991 to 2000, stating that “using this approach is more favorable to high income pensioners.”

She said Fixed Rate and Flat Amount Index Application were used from 2001 to 2014, which was more favourable to the low income Pensioners.

Madam Ampoful stated that the Flat Amount index application was applied in 2011 with an overall rate of 7.0 per cent with each pensioner receiving an increase of GH¢ 10.03.

She said in order to achieve the solidarity principle; redistribution was done to cushion the pensioners in the lower income bracket adding that the rate of indexation also implied that no pensioner on the payroll as at 31st December 2014 would receive monthly pension of less than GH¢ 246.92; though the indexation rate of 15 per cent would cost the Trust an extra GH¢ 93.53 million.

Madam Ampoful said indexation rates were computed based on the percentage change of the mean, median, and modal earnings of contributors from the previous year to the current year.

She said inflation rates were also considered as well percentage in daily minimum wages from the previous year to the current year and that the computed rates with regards to the statistical averages, inflation rate and percentage change in minimum wage helped to recommend the appropriate indexation rate.

Madam Ampoful said different scenarios of hybrid (Flat rate and Flat Amounts) were done to subsidise the benefits to low income pensioners if it was affordable.

She noted that Indexation of Pensions was a technique used to adjust monthly pensions and other benefits in order to maintain the purchasing power of pensioners.

According to her, the indexation rate when determined was used to adjust all monthly pensions on the SSNIT Pension payroll at the end of every year; stating that all pensions in payment were adjusted annually at the beginning of January with the earnings-related pension index.

Madam Ampoful said the review was done in pursuance of the provisions of the repealed PNDC L 247, 1991, and the current Act 766, 2008.

PNDCL 247, section 39 states that ‘The Trust shall annually review the pension payment based on adjustment in salaries and wages’.

Act 766, section 80 states: ‘The Trust shall annually review the pension payment which shall be indexed to wage inflation rates of active contributors or other rates determined by the Trust in consultation with the Board of the Authority.”