In 2014, Enviu started the development of a micro pension company in Ghana, together with partners and a team of experienced pension professionals. After more than a year of plans, pivots and pilots we launch People’s Pension Trust Ghana in 2016. So far the project has been challenging, but also very rewarding. In 2015 the business plan even made it to one of the five nominees for the World Pension Summit’s Innovation Awards.
One of Africa’s most attractive assets is that it holds the world’s largest youth. But don’t be fooled, Africa’s elders are getting older as well. In merely a century the life expectancy in Africa doubled (from 25-35 years in 1912 to 65+ in 2012) and it is expected to increase to 75 years in 2050.
Increased life span means increased costs of living for elderly. For centuries, solidarity has been the basis of social security and income for people after retirement. But industrialisation, urbanisation and work migration is now breaking up the joint family support structure which directly impacts the social security for a large group: the elderly. These people will fall back into poverty after they stop working.
The case for micro pensions is compelling as global poverty is rising: more people will live longer, need more money to make a living and will have less support.
A key reason that governments have done little to address this problem is the fact that around 80% of the workforce in developing countries works in the informal sector (i.e. not registered with or as a company). Without a regular or official income to tax for contributions, people in the informal sector do not qualify for standard pensions. The majority of society has no access to a service that provides them with social security after retirement.
The size of the informal sector is staggering. In Ghana is estimated at 10 million people, in Africa it is 480 million people and worldwide it is 1.8 billion people.
Micro pensions for the informal sector
The business case for an alternative pension model for the informal sector is challenging for a number of reasons. First of all workers in the informal sector do not receive a fixed or regular income. Deposits will be based on small or ‘micro’ payments. To guarantee maximum payout at the end of a pension plan the cost structure has to be extremely lean. An additional challenge is that returns are poor and investments need to sustain high inflation rates. Due to corruption and lack of transparency the trust in financial institutions is rather poor.
Microfinance and savings are primarily used for cash flow management, especially when income is irregular and unpredictable. People find saving for the long term difficult. Research even tells us that the human brain cannot handle to set money aside for 20 or 30 years. This is alike for both poor and rich and is called hyperbolic discounting. Peer effects are an important determinant of saving decisions. In Ghana, existing community savings groups will use such group dynamics in order to facilitate and encourage saving for a pension.
Leapfrog and reversed innovation
The opportunities in Ghana (and the rest of Africa) however are also present. With a widespread mobile network in low-income groups and trusted systems to make mobile micro payments there is a good basis for mobile banking and saving products. Mobile technology will play a key role in both the payment and communications for People’s Pension Trust in Ghana.
The strong community culture is another asset that will play a crucial role in the roll out of the micro pensions plan. The strong sense of community has proven to keep participants in the game and create a greater sense of trust. Working with communities, like local farmer organisations, trade unions and community-based organisations helps drive conversion.
Pension systems operate differently in most of the developed world, yet self-employed people in many countries struggle as well to find a way to save for their retirement. There seems to be a learning here for not just developing countries, but developing countries alike.
For the first phase of this adventure Enviu has closely collaborated with experts from our partners Cordaid, Foundation for Sustainable Micro Pensions, Piramide Group and Ministry of Foreign Affairs.
Not there yet
In 2015 Enviu, together with its partners and entrepreneur Samuel Waterberg raised approximately 80% of the capital (with a number of leading insurance companies and foundations) to cover the first years of PPT Ghana until break even. It was at that time agreed to postpone this capital raise until the end of 2016 in order to further develop the ICT platform and continue attracting and building on client groups. In Q4 of 2016 PPT Ghana expects to come to a financial close and raise the capital needed to provide half a million Ghanaians working in the informal sector with a pension in the next 5 years.