Why Pension Loans and Pension-Secured Loans are Feasible: Propositions

Pension funds having long-term liabilities have long-term investment horizons. It is therefore a prerequisite in eliminating liquidity risk premium and the potential maturity gap created by the use of short-term assets in financing long-term liabilities. This inures pricing benefits to the borrower; for instance, loans are priced at the prime rate in South Africa (which is 16% currently in Ghana) relative to traditional mortgages.

Providing an alternative impetus for loan underwriting and pricing, pension assets enhance the viability of contributors as good borrowers regarding the 5Cs lending criteria. The amount and frequency of pension contributions are a readily effective means of assessing the credit worthiness of a borrower; as the regularity of payments could serve as a proxy and substitute to character and capacity. Accumulated pension contributions are a relatively liquid form of collateral and simultaneously provide live capital towards mortgaging; unlike the many houses without proper title in Ghana. 

Repayment of pension loans and pension-secured loans is senior-subordinated to mortgage repayment. This means that the 2nd tier contributions are deducted before mortgage obligations. Thus, a lender is relatively more secured upon loan default. Further, the positive co-movement of house values and inflation makes it a viable investment in very high inflationary economies with little or no inflation-hedging investment vehicles aside the potential of strong future cashflow generation where rented out. 

With 24.36% equity in HFC Bank, Cal bank (34.4%) and Ecobank Transnational Incorporated (9.04%), the Social Secuirty and National Investment Trust (SSNIT) of Ghana  is prominent for its role in housing development and indirect financing of mortgages. Yet, majority of SSNIT members cannot afford this mortgages because these two roles are disjointed. The Central Provident Fund of Singapore remains a quintessence; about 81% of the Singaporean population own an HDB flat, and over 95% of the adult population are homeowners largely due to pension and pension-secured loan (HDB 2000; McCarthy, Mitchell and Piggott, 2001).

Although Section 103 (2) of the Pension law of Ghana is clear on the intention of the 2nd Tier mandatory pension scheme in support of a contributor’s first mortgage, it is vague on the form in which it should be utilized: pension loan and or pension-secured loan? More so, the law does not specify the threshold of borrowing and whether it should be used for a down payment and or repayments. 

Pension loans and pension-secured loans as a possible source of long-term finance will eliminate liquidity risk and the maturity gap problem which contributes to high interest rates on mortgages. They present competitive pricing advantages to the borrower than the current traditional mortgages. This will improve borrowers’ affordability positions and expand mortgage funding opportunities as well as increases mortgage market participation. It will achieve efficiency by providing funds to the low and middle-income earners who need it most than hitherto, but its sustainability is a question of further research.

In conclusion, in a country where pension benefits are meagre, the value of which has also been eroded by high inflation, the dilemma is whether making compulsory contributions to a pension fund is feasible? This is even worsened by the fact that life-expectancy is dropping rapidly as most contributors may not live to enjoy retirement benefits. This confirms the findings of previous researchers that most people forced into a pension fund do not benefit from it. What is the use even where beneficial to be assured a comfortable pension without a roof over one’s head today? The National Pensions Regulatory Authority (NPRA) should be looking at the feasibility of implementing section 103(2).

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Kenneth A. Donkor-Hyiaman

Kenneth A. Donkor-Hyiaman

Dr Kenneth A. Donkor-Hyiaman is a Real Estate and Urban Economist and a Lecturer in Real Estate Finance and Real Estate Development at the Department of Land Economy, Kwame Nkrumah University of Science and Technology, Kumasi. kwakuhyiaman2@gmail.com +233(0)508043011

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