Prior to the passing into law of the National Pensions Act 2008 (Act 766), some employers were already running Provident Fund (PF) Schemes. These PFs have traditionally not enjoyed the tax reliefs offered by PFs that operate under Act 766. Most of these PFs have operated under Defined Contribution (DB) pension arrangements whereby benefits are based on accrued contributions and returns on investments (ROI).

The Pensions Law (Act 766)makes it mandatory for all occupational-based pension schemes with DB characteristics to operate under the law. Among others, some of the benefits for operating under the law are the tax reliefs granted by government and protection of workers’ funds by the pensions regulator; the National Pensions Regulatory Authority (NPRA).

For many firms that operated PF schemes before the pensions reform, the dilemma has been whether to convert or not to convert them into Tier 3 schemes under Act 766. That is, should the running PFs be liquidated and benefits distributed to members so that the new scheme that will operate under Act 766 can start from fresh contributions? There are obvious benefits in and prices to pay for all possible decisions made – ranging from converting 100% of the current Fund, through converting just a part to not converting at all (liquidating current PF).  Below are three different scenarios:

  •   SCENARIO A – converting 100% of the current PF into a voluntary Tier 3 Scheme under Act 766.
  •   SCENARIO B – converting 50% of the current PF into a voluntary Tier 3 Scheme under Act 766 and liquidating 50% – for distribution to contributors.
  • SCENARIO C – liquidating the entire current PF and starting a new voluntary Tier 3 Scheme under Act 766 from fresh contributions.



i.    This offers higher growth potential for investments. For instance, assume that the monthly PF contribution is GH¢ 100 for a specific contributor, Mr. Z who has an accrued benefit of GH¢ 2,000 in the current PF. If ROI is 15% per annum, the converted GH¢ 2,000 invested will yield a return of GH¢ 300 per annum whereas Mr. Z would only get a return of GH¢15 if he did not convert current PF into a Tier 3 but rather started the Tier 3 from fresh contributions.

ii.    Funds converted are still available for withdrawal as converted funds are not subject to the 10-year waiting period for Tier 3 schemes, for tax relief purposes. This is notwithstanding the fact that under the law, Tier 3 contributions ordinarily are subject to a 10-year waiting period before withdrawal, to qualify for full tax reliefs. In this case, because funds converted have not enjoyed tax reliefs, they are not subject to that wait. Thus they can be withdrawn by contributors without any penalties.


Contributors who are looking forward to liquidation of current Fund so benefits could be paid immediately are likely to be disappointed.


Advantages and Disadvantages

All the advantages and the disadvantage under SCENARIO A apply here; but only to an extent in each case. Thus, the rewards and the price under SCENARIO A would be enjoyed and paid respectively, to the extent of the partial liquidation under SCENARIO B. Here, only part of the accrued benefits will be available for immediate spending whilst investments in Tier 3 will see more income than if Tier 3 started from fresh contributions.



Liquidated funds will provide immediate boost to contributors’ disposable income.   For those with alternate needs for their income other than saving toward retirement, there is great satisfaction under SCENARIO C.


Using the same analogy for Mr. Z under (i) above, income from the returns on investments in the voluntary Tier 3 will require a lot more time to grow. As that analogy indicated, whilst GH¢ 2,000 will return GH¢ 300 per annum, because under SCENARIO C the entire accrued benefits from the current PF has been liquidated, Tier 3 investments are made from fresh contributions (GH¢ 100) returning only GH¢ 15 at a ROI of 15% per annum.


Ultimately, the decision taken one way or the other comes down to priorities. Since pension contributions are meant for retirement income, a long term perspective is needed for the substantial growth often desired. Substantial growth in investments is realized from higher invested amounts – which in this case suggests that converting the current PF may be more beneficial. The need for money however by certain contributors to meet present obligations or needs may be compelling enough to make choices other than full conversion of the current Provident Fund into a Tier 3 scheme under Act 766. Whatever the decision is, sight should not be lost on the purpose for saving toward retirement. In the end, we will all retire.