Donkor Hyiaman2016

International Journal of Housing Markets and Analysis
Another look at housing finance in Africa: The anatomy of pension asset-backed

housing financing
Kenneth Appiah Donkor-Hyiaman DeGraft Owusu-Manu
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IJHMA
9,1
Another look at housing finance
in Africa
The anatomy of pension asset-backed
20 housing financing
Kenneth Appiah Donkor-Hyiaman
Received 15 November 2014
Revised 13 March 2015 School of Real Estate and Planning, Henley Business School,
Accepted 10 August 2015 University of Reading, Reading, UK, and
DeGraft Owusu-Manu
Department of Building Technology,
Kwame Nkrumah University of Science and Technology, Kumasi, Ghana
Abstract
Purpose – Most households in Sub-Saharan African cannot afford adequate housing. Most often, their
pension benefits are also meagre, usually resulting from low contribution levels and mismanagement.
Coupled with low life expectancies, most would not live to enjoy the benefits of pensions, thus validating
the need to utilize their hitherto deferred pension benefits for immediate housing investment and
consumption.
Design/methodology/approach – Quantitative research methodology via the present value
technique was used in valuing pension benefits to demonstrate the potential of pension schemes as
savings mobilization mechanisms for long-term pension-backed housing financing in Ghana.
Findings – Policy wise, the paper provides some evidence to support proposals for the development of
pension-backed housing finance systems in Ghana with lessons for Sub-Saharan Africa. The authors
demonstrate that the Tier 2 defined contribution mandatory occupational pension scheme could serve
the purpose of a savings mobilization mechanism for long-term housing financing. The authors observe
that by increasing the Tier 2 contribution rate to 30 per cent, the majority of the sample, mainly of the
middle-income class, could accumulate between US$11,000 and US$17,000 over their working life. At
the same rate, between US$5,783 and US$9,550 could have been raised as savings between 2010 (when
implementation began) and 2014. This could form a substantial equity contribution in a mortgage
investment and or borrowed on a housing microfinance basis.
Originality/value – The paper contributes to the ongoing debate on the need to develop alternate
savings mechanisms and collateral assets using pension assets, other than property, for mortgage
financing. The proposals made are aimed at influencing policy by way of advocating for the use of latent
pension equity to improve the housing conditions of members while they are alive, and also to suggest
pension-backed housing financing as an alternative investment option. A comprehensive study would
be required to settle issues of scalability, pricing and model design.
Keywords Africa, Ghana, Mortgage, Pension loan, Pension-Backed housing finance,
Pension-Secured loan
Paper type Research paper
International Journal of Housing

Markets and Analysis
Vol. 9 No. 1, 2016
pp. 20-46
Background
© Emerald Group Publishing Limited
1753-8270
Housing financing varies across nations, and is a topical issue in the housing literature.
DOI 10.1108/IJHMA-11-2014-0048 In the developed countries like the USA and the UK, housing financing is synonymous
to mortgage financing. In developing regions like Africa, housing financing is usually Pension
informal, accounting for over 90 per cent of housing acquisitions through self-help asset-backed
approaches of incremental housing. Arguably touted as a more efficient mechanism for
the allocation of housing resources (World Bank, 1993), mortgage financing is
housing
insignificant in Africa. It is largely constrained by a host of factors that dissipate the financing
incentive to attract investors into its markets. Comparative literature suggests the law–
finance nexus, based on the theory that countries with poor investor protection 21
measured by the quality of their property rights regime tend to have less financial
development (Billmeier and Massa, 2009; Claessens and Laeven, 2003; Beck et al., 2003;
La Porta et al., 1997, 1998). In a comprehensive review of access to housing finance in
Africa, the (CAHF) Centre for Affordable Housing Finance in Africa (2013) observes that
land title insecurities (usually of communal-held land) engenders weak property rights
regimes, which restrict collateralized lending. Other factors including low, uncertain
and irregular income levels, lack of risk management infrastructure and the perennial
unstable macroeconomy, underpinned by large and erratic movements in inflation rates,

interest rates and exchange rates, have combined as a disincentive to savings (needed to
meet down payment requirements) and long-term housing financing ((CAHF) Centre for
Affordable Housing Finance in Africa, 2013; Chiquier and Lea, 2009; Boamah, 2011;
Allen and Johnsen, 2008; Kalema and Kayiira, 2008; Tomlinson, 2007; Karley, 2003,
2002). These prohibitive factors tend to create and magnify affordability problems.
There is a general belief that strains of failures exist in mortgage markets in Africa,
despite the rarity of empirical evidence on mortgage market efficiency in Africa (c.f.
Afrane et al., 2014; Oyalowo, 2012; Buckley, 1996; Pugh, 1994; Renaud, 1987; Boleat,
1987). This notion is fuelled by theoretical underpinnings of observable triggers of
market failure, including information asymmetry, externalities and the lack of or
incomplete markets. For instance, collateral efficiency – the ease with which collateral
can be foreclosed on and liquidated without major losses – is substantially constrained
by the lack of efficient legal systems and liquid land and property markets. This could
have negative implications for mortgage market efficiency and development. To this
end, lenders are not guaranteed the present value of their investments even if they are
allowed to foreclose on defaulting collaterals. There appears to be no easy and fast
solution in sight as decades of efforts and current efforts to formalize land titles and to
reform institutions have yielded little results (Toulmin, 2008). Nonetheless, there are
studies that suggest that financial development could rather hasten institutional
reforms in property rights and legal systems – that are needed for the efficient
functioning of mortgage markets – contrary to conventional wisdom (Miletkov and
Wintoki, 2012).
Therefore, financial innovation could play a key role in improving and extending
mortgage markets in Sub-Saharan Africa. The search for alternative collateral
instruments and savings mobilization mechanisms has been on the research radar,
against the backdrop of historical inadequacies in efforts to create such mechanisms. In
this paper, we explore the emergence of pension-backed housing finance (PBHF), a
housing finance concept that is evolving from pension fund capitalism – the shift in the
design and investment of pension funds from defined benefit (DB) pay-as-you
(unfunded) social insurance pension schemes to defined contribution (DC) (funded)
individual schemes since the 1970s. Pension funds are major financiers of mortgages
and have traditionally participated as secondary lenders through the capital markets,
IJHMA based on restriction on their investment allocations. They usually have long-term
9,1 liabilities and assets that match the long-term financing requirements of housing
investments. Jones and Datta (2002) relate that deregulation and reforms have spawned
innovation and a wider interpretation of the concept of collateral. In effect, innovation of
new arrangements will alter the way economic units such as lenders and borrowers
interact (Davis and North, 1970). The introduction of DC plans in reformed pension
22 schemes has been associated with the development of housing finance alternatives,
usually for scheme members.
The concept of PBHF enables the acquisition of housing finance, collateralized by
accrued pension benefits and or the use of the latter as capital (equity) for mortgaging.
Edward (1995) notes that such sophisticated financial products have increased the rate
of savings. Chiquier and Lea (2009) provides a comprehensive evidence of PBHF
globally. However, arguable the conceptualization of “PBHF” was perhaps first made by
Sing (2009), and later adopted by Short et al. (2009); Mutero (2011); Mutero et al. (2010)
and Afrane et al. (2014). That is not to deny that the idea had existed long before her
report, as Kim (1997); Buckley (1996); Rakodi (1995) and Reddy and Brijlal (1992) made
earlier references. For instance, since the late 1960s, PBHF has been the main source of
housing finance in Singapore, Mexico, Brazil and the Philippines. In Sub-Saharan
Africa, there is growing evidence of PBHF in countries including South Africa,
Botswana, Namibia, Mauritius and Zambia in Southern Africa (Short et al., 2009; Sing,
2009) and in Kenya and Tanzania in East Africa (Were, 2012; Mutero, 2011; Mutero et al.,
2010). Recently, Ghana has joined the PBHF innovation landscape, although yet to be
implemented and thus providing the impetus for further research (Afrane et al., 2014).
Proponents argue that the idea that low- and middle-income households do not have
the necessary savings to afford their entry into mortgage markets (Renaud, 1987) cannot
be sustained, due to the availability of their pension benefits, which many in
Sub-Saharan Africa may not live to enjoy (Sing, 2009). While pension accrues after 60
years (retirement age), life expectancy in Sub-Saharan Africa is about 52.11 years
((UNDP) United Nations Development Programme, 2013). Thus, what is the use of
pensions if not utilized to meet such needs as housing, which for most low- and
middle-income households and individuals, is difficult to access in decent and adequate
quantities? Thus, Pugh (1992) opinions, it is quite possible that alternative theories and
practices of housing could be beneficial, but such alternatives are not yet practised on
any significant scale. Obviously, the availability, type of finance and the mortgage
product available are of critical importance in explaining access to housing finance
(Jones and Datta, 2002; Karley, 2009).
However, very little is known about PBHF in the extant literature. For instance, what
is the theoretical and empirical convergence of the price of PBHF? Are pension-backed
asset collaterals more efficient than land and property? What is the potential, scalability
and sustainability of PBHF? What factors restrain the take-up of PBHF and the transfer
of this innovation to other countries in the developing world? Does PBHF increase the
savings rate and housing investments? What are the risks of PBHF? Why is PBHF
relatively successful in some countries than others? These questions have attracted
proposals for further research (Afrane et al., 2014; Were, 2012; Mutero, 2011; Mutero
et al., 2010; Sing, 2009; Short et al., 2009; Chirchir, 2006). This paper is perhaps the first
to consolidate the concept of PBHF with cross-regional evidence and a further testing of
same with data from Ghana. We acknowledge that a number of studies had earlier
proposed the national pension fund of Ghana, hitherto the Social Security and National Pension
Insurant Trust (SSNIT) as a possible source of long-term housing finance (c.f. Boamah, asset-backed
2011; Mahama and Antwi, 2006; Asare and Whitehead, 2006). However, their
recommendations were not precisely with respect to PBHF.
housing
Ayitey et al. (2013) proposed that the SSNIT should provide direct loans to its financing
members as part of its investment allocations; a practice already existing as far back as
the 1990s (c.f. Tipple, 1999, p. 49) and currently forbidden by the new pension law. Based 23
on the provisions of Section 103(2) in the new National Pension Act, 2008 (Act 766),
which enables “[…] a member to use that member’s benefit to secure a mortgage for the
acquisition of a primary residence”, Afrane et al. (2014) conducted an exploratory study
on PBHF in South Africa and shared potential lessons for Ghana. They re-echo the
proposals made by earlier researchers by postulating that the Tier 2 mandatory
occupational pension scheme (MOPS) of the new contributory three-tier national
pension Scheme of Ghana could be a source of long-term mortgage finance, reduce
collateral risk via the collateralization of members’ (borrowers’) pension benefits and
provide a better asset–liability matching needed to improve liquidity risk and the
maturity gap problem involved in lending long-term with short-term deposits in Ghana.
Therefore, the aim of this paper is to build on the recommendation of Afrane et al.
(2014), by providing some theoretical projections of the potential of the Tier 2 MOPS as
a tax-efficient savings mobilization mechanism for housing financing using survey data
from Ghana. Two major questions are answered in this paper. First, how much pension
equity has been accumulated and can be accumulated through this mechanism?
Secondly, can the Tier 2 MOPS serve as a source of long-term housing finance? We
conclude that at the current contribution rate of 5 per cent (of monthly income), not much
savings can be made to support a mortgage loan; however, at 30 per cent, the second tier
pension contributions could be able to provide adequate repayments for a potential
mortgage in the range of US$11,000-US$17,000 at an interest rate of 25 per cent per
annum effectively over a 26-year period for middle-income households earning a
minimum of about US$537 per month. The contribution rate is capped at 30 per cent as
is conventionally required as a mortgage payment-to-income ratio, although varies per
country. The potential mortgage term of 26 years falls within the time available (25-30
years) to the majority of our sample to work from now to retirement.
As innovation is possible through institutional learning (Pugh, 1994), institutional
reform and innovation via the collateralization of pension assets as an alternative
collateral asset class for mortgage financing could represent a paradigm shift in the
sources of mortgage funds. This could significantly open new vistas of
housing/mortgage financing opportunities to middle-income households in Ghana and
also stimulate the market for affordable housing development and financing. The
following section reviews the literature on property rights and mortgage market
development in Africa. The next section attempts to consolidate the theory and practice
of PBHF internationally. The rest of the paper is delineated into three parts:
methodology, discussion of results and conclusion.
Determinants of mortgage market development in Africa

The comparative literature on formal housing finance systems observe similar
constraints. Oyalowo (2012) estimated that two factors, namely, the depth of credit
information system and the strength of legal rights, are the major explanatory factors
IJHMA for low private credit-to-gross domestic product (GDP) ratios in West Africa. Private
9,1 credit measures the total amount of credit including non-mortgage credit-like consumer
loans and auto loans; hence, using it as a measure of mortgage market development
creates a measurement error that could overstate causality. In effect, the true
relationship between mortgage-to-GDP ratios and the independent variables – depth of
credit information system and the strength of legal rights – was not established as
24 intended. In a more comprehensive international study of 62 countries, Warnock and
Warnock (2008) finds similar determinants of the depth of mortgage markets in addition
to the macroeconomic environment. A critical look at the findings of these two studies at
the microlevel with respect to the relative importance of these estimated variables
suggest some differences. For instance, Warnock and Warnock’s (2008) claim based on
the regression coefficients that stronger legal system for borrowers and lenders
(through collateral and bankruptcy laws) is more important than the depth of credit
information systems in explaining the depth of mortgage markets is contradicted by
Oyalowo (2012).
This difference could be explained by the variation in the sample of countries used.
For instance, Ghana was the only country from West Africa that was used in the
Warnock and Warnock’s (2008) study. Hence, the latter study cannot be generalized for
West Africa. Perhaps, the Oyalowo (2012) study may be a better reflection for better
policy targeting, given the high budgetary constraints in the region. Similar
generalization of the Warnock and Warnock study to Sub-Saharan Africa may also not
be appropriate because it included explanatory variables for only Ghana and South
Africa. Butler et al. (2009) studied mortgage registration and foreclosure in 42 countries
and observed the importance of strong legal systems that guarantees property rights on
mortgage market development and vice versa. Sub-Saharan Africa was shown to have
the longest time (706 days in Ghana) to foreclose on collaterals in default and highest
cost of mortgage registration and title transfer – 12 per cent of property value in Burkina
Faso, as well as the longest registration time (1 year in Rwanda). Foreclosure times and
costs were also depicted to be relatively longer and expensive – 48 per cent of property
value in Zambia. Tables I and II below provide some classification from other studies
based on time and cost to register property and time and cost for property transfers,
respectively.
Table I shows that time and cost to register property in Sub-Saharan Africa is higher
than other regions of the world. Although there are extreme difficulties in transferring
Region No. of days % of property value
Sub-Saharan Africa 116 14.4

Eastern Europe and Central Asia 133 3.2
Latin America and the Caribbean 62 5.6
South Asia 56 6.1
Middle East and North Africa 54 6.8
Table I. East Asia and Pacific 51 4.2
Time and cost to OECD high income 34 4.8
register property by
region Source: Adopted from World Bank (2005) as cited in Toulmin (2008)
Region No. of days % of property value
Pension
asset-backed
Angola 334 11.1 housing
Uganda 227 4.6
Burkina Faso 182 12.2 financing
Senegal 114 19.4
Nigeria 82 22.2
Kenya 64 4.2
25
Ivory Coast 62 16.9
Ghana 34 1.3 Table II.
Botswana 30 5.0 Time and costs for
South Africa 24 8.8 property transfers:
selected African
Source: Adopted from World Bank (2005) as cited in Toulmin (2008) countries
property in Sub-Saharan Africa generally, there are some countries with shorter, less
costly and more efficient procedures as shown in Table II.
Coincidentally, mortgage investments-to-GDP ratios across Sub-Saharan Africa has
been below expectation, averaging about 4.8 per cent in 2012 (for 22 countries for which
data is available, as shown in Table III). This is largely unexplained by quantitative
empirical work but partly by qualitative reasoning in related studies (Buckley, 1996;
Renaud, 1987; World Bank, 1993). South Africa and Senegal have the highest and lowest
mortgage-to-GDP ratios of 26.4 and 0.07 per cent, respectively. From Table III, eight
countries including Senegal, Ghana, Nigeria, Cameroon, Burkina Faso, Central African
Republic, Malawi and Tanzania have mortgage-to-GDP ratios below 1 per cent. Nine
countries have mortgage-to-GDP ratio between 1 and 4 per cent; and five countries with
mortgage-to-GDP ratios between 12 and 26.4 per cent. For South Africa, these figures
represent a significant drop from 39 per cent in 2008 (World Bank, 2005). Among other
causes, contagion from the global financial crisis could be culpable.
At the regional level, Figure 1 further shows that southern Africa and North Africa
have relatively deeper and larger mortgage markets, having the top five countries
discussed above. West Africa appears to have the least developed mortgage markets.
For instance, all the West African countries have mortgage-to-GDP less than 1 per cent.
Per observation and implication from studies elsewhere including Miletkov and
Wintoki (2012) and Besley (1995), the striking differences in the quality of property
rights systems and, for that matter, the depth of mortgage market across the African
region may be explained more favourably by the level of financial development
including innovation than by weak institutional frameworks. It is not surprising that
countries in southern Africa including South Africa, Namibia and Mauritius have better
developed financial systems than the other regions in Sub-Saharan Africa, according to
the International Monetary Fund (1997). This finding is also true for Ghana and Kenya
in West and East Africa, respectively. Thus, focusing on financial development may
create enough positive externalities to hasten institutional development and for that
matter the development of the mortgage market. Figure 1 shows mortgage investment
as a proportion of GDP in Africa.
Despite its existence on the continent since the 1950s, various studies provide
insights into the proportion of households that can afford a mortgage to purchase the
9,1
26
finance
IJHMA
Table III.
International
backed housing
evidence of pension-
Pension-backed housing finance
Mortgage/housing
Pension scheme Pension Pension-secured Pension-backed Down acquisition
Country Region Date permitted design loan loan securities payment costs#
Singapore South-East Asia 1968 DC X X X

Philippines South-East Asia
Mexico Latin America 1972 DC X X X X
Brazil Latin America 1966 DC X X X X
South Africa Southern Africa 1956, 1997* DC X X X X
Botswana Southern Africa DC X X
Namibia Southern Africa DB X X
Zambia Southern Africa DC & DB X* X*
Mauritius Southern Africa X X
Kenya East Africa 2009 DC & DB X X
Tanzania East Africa DB X
Uganda East Africa DC X
Ghana West Africa 2008 DC X
Notes: * The newer national pension scheme regulation does not permit this; however, regulations governing older schemes in Zambia do; The law neither
permits nor prohibits this model, but banks are reportedly offering loans to individuals on condition that they are pension fund members; # Mortgage/
home acquisition costs including stamp duty, valuation and legal fees. In Kenya, this excludes arrangement fees and commitment fees (Mutero et al., 2010)
Sources: Short et al. (2009), Sing (2009), Mutero et al. (2010), Chiquier and Lea (2009), Jones and Datta (2002), Addae-Dapaah and Leong (1996), Tomlinson
(2007), UN-Habitat (2010, 2011)
26
26.4 Pension
24 asset-backed
22
housing
Mortgage-to-GDP Raos (%)
19.6
20
18 16.9 financing
16
14 12 12.2
12 27
10
8
6 3.94
4 2.3 2.3 2.51
1 1.1 1.2 1.3 1.6
2 0.07 0.07 0.16 0.21 0.39 0.5 0.5 0.5
0
Central African Republic (2005) CA
Uganda (2011) EA
Algeria (2009) NA
Burundi (2011) EA/CA
Tanzania (2012) EA
Ghana (2012) WA
Egypt (2011) NA
Kenya (2010) EA
Morocco (2011) NA
South Africa (2011) SA

Seychelles (2010) SA
Tunisia (2010) NA
Malawi (2007) SA
Zimbabwe (2012) SA
Namibia (2011) SA
Rwanda (2010) EA/CA
Botswana (2009) SA
Maurius (2012) NA
Burkina Faso (2010) WA
Nigeria (2008) WA
Cameroon (2005) WA
Senegal (2010) WA
African Countries
Figure 1.
Mortgage-to-GDP
Notes: WA = West Africa; EA = East Africa; SA = Southern Africa; NA = North Africa;
ratios in Africa for
CA = Central Africa
Source: Centre for Affordable Housing Finance in Africa (2013) 2012
cheapest developer-built unit. For instance, the World Bank reports that only 3 per cent
of the population in Africa have income viable for a mortgage. This corroborates earlier
studies that opine that less than a quarter of households in low-income countries, where
most Sub-Saharan African countries are located, can afford a mortgage (Ferguson, 2006;
Porteous, 2006; Jones and Datta, 2002). Clearly, improving the efficiency of mortgage
markets in Sub-Saharan Africa might be imperative in achieving global and local
effectiveness (c.f. Pugh, 1994; World Bank, 1993), as the most capable and superior
financier of housing (Bank of Ghana, 2007). Improving the efficiency of mortgage
markets would require several and joint improvements in other factors including
income, the creation of secondary mortgage markets and other sources of long-term
funding, the size of the overall financial sector, macroeconomic stability and land titling
and urban planning systems (Nubi, 2010; Okoroafor, 2007; Erbas and Nothaft, 2005;
Chiquier et al., 2004). In the next section, we discuss the concept of PBHF.
Pension-backed housing finance: conceptual framework

According to Short et al. (2009), pension funds invest in housing in two ways: end-user
models and investment models. The latter provides a channel for pension funds to boost
the supply of housing finance either through direct investment in housing development,
or using debt and equity structure in allocating its assets. End-user models, which is the
IJHMA focus of this section, assist a pension fund member to obtain finance for the purchase or
9,1 construction of a home. This could also be referred to as PBHF and it comes in two
variants, pension loans and pension-secured (backed) loans (Sing, 2009). The pension
loan model was the first to evolve, followed by pension-secured loans. Pension loans are
direct loans from the fund secured in two ways: over the member’s ring-fenced accrued
benefits in a DC scheme and effectively as a mortgage loan in favour of the fund over the
28 property in question (Short et al., 2009). Funds remain intact and are not disinvested
from the fund and members continue to make contributions to the scheme on periodic
basis. They are financed and administered internally (by the fund) or through a
designated administrator depending inter alia on the in-house capacity, size and nature
of the pension fund. The size of the loan is primarily determined by the accrued pension
benefits which varies with time, size of contributions and returns earned from
investments.
Repayment structure may vary, but a common form is an interest-only conventional
bond over the life of the loan and the principal on maturity – upon retirement or leave of
the fund (Rust, 2002). In some arrangements, interest on the principal is paid from
borrowers’ occupational income separate from the statutory pension deductions. In this
case, the pension contributions remain intact over the funding period. At maturity, the
principal is deducted from the accrued pension benefits. In other words, the pension
contributions are considered as a “sinking fund[1]” – periodic amounts set aside from
income to mete out a future expenditure – to amortize the loan principal. An alternative
would be to deduct the loan principal from the proceeds from the sale of the property (if
it was the collateral) upon borrower default. In summary, the pension loan model allows
pension members to effectively utilize their accrued pension equity as “capital” for
financing homeownership or as a down payment for a mortgage. The model’s major
weakness is that the drawdown of benefits reduces the investible funds available to the
pension fund especially if pension contributions are pooled and collectively invested as
in a DB scheme. Afrane et al. (2014) observes that the drawdown of the investible funds
could have negative implications for investment diversification and risk reduction.
Besides, pension funds may lack the requisite infrastructure for originating,
underwriting and administering housing loans.
A housing survey conducted in 1987 by the Pension Institute of South Africa
significantly favoured indirect assistance to members (Reddy and Brijlal, 1992).
Subsequently, pension-secured loans were designed to enable contributors to
collateralize their accumulated pension equity secure from housing loans from a third
party mostly commercial banks. It must be noted that this innovation effectively
expands the source and options of mortgage finance to prospective homebuyers. The
pension fund (or administrator), in this case, acts as a guarantor (Sing, 2009). The
loan-to-pension benefit value ratio is determined by the banks’ lending standards and
repayment term could be as long as 30 years within the normal retirement date (Chirchir,
2006). Similar to pension-loans, repayment requires monthly interest-only payments to
the lender via direct salary (payroll) deductions during the term of the loan and the
principal deducted from accrued pension benefits at the maturity of the loan. Payroll
deduction of repayments minimizes default risk, making unemployment as a result of a
loss of job or delays by employers to remit repayments as the major source of default or
delinquency respectively. In essence, the efficiency with which employers’ remit pension
contributions rather than borrowers’ behaviour or fiscal position determines the
character of credit default probabilities. Therefore, data on pension contribution Pension
remission could be used in forecasting default rates and determining default risk asset-backed
premiums where banks have little or no information about the borrower’s debt servicing
behaviour – character; a potential source of credit rating innovation. Figure 2 is a
housing
diagrammatical representation of the pension asset-backed housing finance model. financing
Some expected model risks 29

Despite potential of PBHF in improving borrowers’ capacity and access to affordable
housing finance, the bond-like (interest-only) structure of pension loans is intrinsically
riskier than conventional constant payment mortgages. In the latter, monthly
repayments are a sum of the loan interest and amortization of the loan principal. This
significantly reduces the outstanding loan balance and the risk of substantial loss.
However, by deferring the repayment of the principal to the loan maturity date as a
balloon payment in the former, the balloon risk and potential loss is substantially
increased as the global financial crisis typifies (c.f. Levin and Wachter, 2012;
Brunnermeier, 2009). Higher-risk mortgage products ultimately caused massive
defaults (Duffie, 2008). Levitin and Wachter (2012) observes that similar interest-only
loan structures in the US mortgage market exposed lenders to balloon risk. Hence, the
model represents a trade-off between affordability and risk.
Intuitively, the interest-only loan structure of PBHF requires the matching of the
future market value of borrowers’ DC pension benefits to the balloon payment. In other
words, the accrued value of pension benefits (collateral) accumulated through the
sinking fund should be equal to the loan amount to effect a balloon payment at maturity
(Afrane et al., 2014). However, because DC plans may be designed to yield relatively
higher returns with commensurate higher risk exposure, the collateral (accumulated
pension benefit) could be subject to higher volatility than property as collateral – which
are likely to appreciate in value, although they are also volatile. Hence, further research
is required to understand the nature of pension asset-backed collaterals for the purpose
of loan underwriting in practice and to enhance theoretical understanding. As a form of
securities lending or repurchase agreement, the performance of the pension
asset-backed collateral would depend on the characteristics of the investment assets of
the pension fund, likely to be a mixed portfolio of stocks, bonds and real estate, beside
Pension
Fund
Guarantee
Interest-Only Repayments
Administration Pension Loan
Investors Interest-Only Repayments

Member
(Financial
Institutions) Figure 2.
Pension-Secured Loan Pension asset-backed
housing finance
Source: Adopted from Sing (2009) model
IJHMA others. Given the relatively high volatility of stock markets (Poterba and Summers,
9,1 1986; Shiller, 1981; Black, 1976), the market value of the pension asset-backed collateral
could be subject to higher volatility. Lenders and guarantors (pension funds) of
pension-secured loans are likely to be “out of the money” if the collateral values falls
short of the loan principal at maturity. According to Kiyotaki and Moore (1997) and
Pintus and Wen (2008), the value of collateral fluctuates and thus even carefully
30 collateralized deals are subject to some risk. Procyclical fluctuation in the value of
collaterals could exacerbate financial booms and busts through frequent margining to
ensure that the ability of the collateral to service outstanding mortgage debts upon
default is not compromised (c.f. Levitin and Wachter, 2012).
By collateralizing pension assets as substitutes for the houses purchased, the loan
implicitly behaves as a non-recourse loan or a loan with limited recourse to borrowers’
accumulated pension benefits. This has moral hazard implication for lenders and
guarantors (pension funds) because borrowers could strategically exercise the “put
option[2]” implicit in a non-recourse mortgage by abandoning the property to the lender

when the put option becomes “in the money[3]” because the loan is “underwater”. This
means that the pension asset-backed collateral securing the loan is worth less than the
unpaid loan balance. This is likely because, compared with historically meagre pension
pay-outs across the region, rational pension contributors would be expected to prefer
their houses. Pension funds engaged in this practice could in effect face substantial
portfolio performance risk and high investment drawdowns as a result. Jointly and
severally they could also experience “runs[4]” on pension investments and “loss
spirals[5]” where investments may be divested to meet margin calls. This could lead to
a potential finance capital market collapse due to contagion, as pension funds are major
players in finance capital markets in almost every economy where they exist.
Pension-backed housing finance in practice

Table III provides international evidence of PBHF in practice. It also presents
country-specific details including the type of PBHF, design of the pension fund,
geographical location and other uses of accrued pension assets. In Singapore,
homeownership rate since the 1990s has been about 90 per cent (Phang, 2007) compared
with 29 per cent in 1970, essentially as a result of PBHF through arrangements between
the Central Provident Fund (CPF) and the Housing and Development Board (HDB). The
CPF is a multi-pillar DC scheme that allows members to use their accrued pension
benefits in the “ordinary account” for housing purposes. The CPF is funded by
mandatory contributions of employees (20 per cent of the gross salary) and employers
(20 per cent matching) (Kim, 1997). Since 1968, savings accruing to the ordinary account
could be utilized partly or fully for the outright purchase of a house (either HDB flats or
private properties) or for mortgage payments and interest payments for the purchase of
private housing since 1981 (Phang, 2007; Addae-Dapaah and Leong, 1996). While the
contribution collection is performed by the CPF, the lending function is administered by
the HDB (Chiquier and Lea, 2009). Other permitted uses of CPF savings include
withdrawals for purposes of making down payments for mortgages and paying stamp
duties on property ownership transfers. The typical loan size is 80 per cent of the price
of the new flat and the maximum repayment period is 25 years (ibid.).
In South Africa, Sections 19(5) and 37D of the Pension Act of 1956 (Act 24) provide the
statutory basis for PBHF (c.f. Reddy and Brijlal, 1992). Although proposed by the World
Bank’s Principal Economist Stephen Mayo (Principal Economist of the World Bank) in Pension
the early 1990s, actual implementation began somewhere in 1997. This was motivated asset-backed
by the search for alternative collateral instruments due to high insecurity of land tenure.
Prior to this, the latter was mitigated by the Government’s Mortgage Indemnity Fund.
housing
When it was withdrawn, a new form of collateral guarantee in pension benefits emerged financing
(Tomlinson, 2007). In 2009, pension loans amounted to R9 billion (£596.61 million) (Sing,
2009), while pension-secured loans amounted to R5 billion (£331.45 million) and R10 31
billion (£662.90 million) as at December 2005 and 2008, as noted by the Financial
Services Board and Alexander Forbes, respectively. Significantly, the industry
experienced growth in pension-secured loan portfolios to a total of R17 billion (£1.127
billion) in 2009 (Sing, 2009). According to the CAHF in Africa (2012), there are about
850,000 outstanding pension-secured loans based on average loan size of about R20,000.
Pension-secured loans are currently securitized, the first in 2005 by Alexander Forbes.
In the rest of southern Africa, Short et al. (2009), observes operations in Botswana,
Mauritius and Namibia, though they are neither permitted nor prohibited by law in
Zambia.
Mutero et al. (2010) studied PBHF in East Africa. They report that pension loans are
only provided by some DC pension schemes in Uganda. On the other hand,
pension-secured loans are offered in Kenya and Tanzania. Indeed, the PBHF market in
East Africa is in its infant stage as a relatively new housing financing option with great
potential, albeit constrained by uncertainties regarding pricing, tax treatment, risk of
pension loss, high house price inflation and high interest rates (Were, 2012; Mutero et al.,
2010). Set up in 1972, the Institute Nacional del Fondo de Vivienda para los Trabajadores
(INFONAVIT) and the Fondo de Vivienda del Institute de Seguridad y de Servicios para
los Trabajadores del Estado (FOVISSSTE), which are private sector and public sector
pension schemes, respectively, in Mexico, provide PBHF to their members (c.f. Zearley,
1993). The INFONAVIT account is a composite of three sub-accounts: housing,
retirement and voluntary deposits (Castillo and Laviada, 1999). INFONAVIT and
FOVISSSTE together manage two-thirds of the mortgage portfolio in Mexico (Herbert
et al., 2012; International Monetary Fund, 2007). Pension-backed securities of more than
2.9 billion in mortgages were first issued in 2004 by INFONAVIT as an alternative
source of funding. In Brazil, the Caixa Economica Federal (CEF) – Public Bank for
Savings and Real Estate Finance – administers PBHF funded by Fundo de Garantia por
Tempo de Serviço – Guarantee Fund for Length of Service (Marinho, 2011). The CEF is
considered as the biggest savings bank with a market niche for low- and lower
middle-income housing financing, and accounted for over 60 per cent of housing
financing since 1988 – about 71 per cent in 2008 and 83 per cent in both 1999 and 2000
(UN-Habitat, 2010).
In summary, we observe the important effects PBHF could have on domestic saving
rates, capital market development, housing investment and the development of housing
finance systems. Potentially, PBHF could serve as a useful alternative source of housing
finance where conventional mortgage financing is not possible, either because of
under-developed mortgage markets or limitations of insecure land tenure and its
attendant weak legal and property rights systems – essential for mortgage markets to
work well. We envisage the particular usefulness of this innovation in the development
and deepening of formal housing financing systems in Sub-Saharan Africa. Hopefully,
pension-backed securities provides us with a glimpse of the future of mortgage
IJHMA securitization in Sub-Saharan Africa; which has seldom taken off due to the bad
9,1 brick-and-mortar collateral risk environment.
Materials and methods

Brief overview of the macroeconomy and housing finance in Ghana
32 After periods of political instability and economic decline before the 1990s, there has
been stability and growth over the past two decades. Ghana is now classified as a
middle-income economy by the World Bank. The recent oil find brightens its economic
future. This is underpinned by considerable growth in GDP from US$4.977 billion in
2000 and US$8.872 billion in 2004, to US$16.124 billion in 2008, showing a growth rate
of 7.2 per cent per annum. Per capita GDP stands at US$716.3. Ghana’s population is
about 24.7 million, which represents an increase of 30.4 per cent over the 2000 census
population of 18.9 million, and an annual average intercensal growth rate is 2.5 per cent
(Ghana Statistical Service, 2012). Given a total housing stock of 3,392,745 dwelling units,
housing tenure favours homeownership at 47.2, 31.1 renting and 20.8 per cent of rent-free
occupation. Housing deficit is estimated at anywhere in the range of 1.5 million – 2 million
and an estimated need of about 5.7 million by 2020. Generally, housing market
development is constrained by unstable macroeconomic fundamentals and weak
institutional and regulatory framework, despite a fairly developed financial sector
(Karley, 2009).
Since 2003, the annual inflation rate has varied between a high of 26.7 per cent in 2004
and a low of 10.7 per cent in 2008 and 16.40 per cent in January of 2015 (Index Mundi).
Persistent budget deficits has resulted in excessive government domestic borrowing,
which has had the effect of crowding out the private sector by pushing interest rates up
to unaffordable limits. For instance, according to the Bank of Ghana (2014), fiscal
developments in the third quarter of 2014 resulted in an overall deficit (including
divestiture proceeds and discrepancy) of GH¢1,873.8 million (1.6 per cent of GDP)
compared with GH¢2,469.3 (2.1 per cent of GDP) in the second quarter of 2014. The
deficit was financed by net domestic borrowing of GH¢1,172.5 million and a net foreign
inflow of GH¢3,593.2 million. At the end of September 2014, the stock of domestic debt
was GH¢28,458.6 million, the equivalent of 24.8 per cent of GDP. By the same source,
interest rates on the 91-day and 182-day bills went up by 137 basis points (bps) and 512
bps, respectively, within the quarter to 25.46 and 26.40 per cent at the end of September
2014. While the average bank lending rate decreased by 40 bps to 27.45 per cent at the
end of September 2014, mortgage rates hover around 32 per cent per annum.
The use of land and property as collateral is largely constrained by a cumbersome
and expensive land and mortgage registration system, which many avoid. Together
with land boundary disputes that have clogged the inefficient courts, property rights are
largely at risk with very little certainty of foreclosure, although currently allowed by the
Home Mortgage Finance Act, 2008 (Act 770). Coupled with low levels of income, high
house price inflation (due to dollarization) and credit information asymmetries, about 90
per cent of Ghanaians cannot afford a mortgage to purchase the cheapest
developer-built unit (Ayitey et al., 2013). According to the Un-Habitat (2011), the
majority of Ghanaian households can only afford housing within the price range of
US$10,000 and US$18,000, given a house cost to income ratio of 1:3. Proposals for
alternative forms of collateral have been made and pension assets are attracting
research attention (Afrane et al., 2014).
The national pension fund – Ghana Pension
With a registered membership of 1,390,945 and monthly minimum average salary of asset-backed
GH¢497 and GH¢688 from public sector workers, the total amount of GH¢825.955 million
(43.19 per cent) was collected in 2011 over GH¢576.833 million previously ((SSNIT)
housing
Social Security and National Insurance Trust, 2011). The total investment portfolio of financing
GH¢3.42 billion increased over GH¢2.90 billion previously. The new National Pensions
Act, 2008 (Act 766) establishes a contributory three-tier pension system that requires 33
employers to contribute 13 per cent and workers 5.5 per cent of gross income, making a
total contribution of 18.5 per cent. This is distributed below as:
• Tier 1 basic national social security scheme (13 per cent out of total contributions),
which is managed by the SSNIT is mandatory for all employees in both the
private and public sectors. Also, 2.5 per cent out of the 13 per cent is a levy for the
National Health Insurance scheme;
• Tier 2 mandatory occupational (or work-based) “defined contribution” pension
scheme (5 per cent out of total contribution) is “fully funded” by employees and
privately managed by approved Trustees assisted by Pension Fund Managers and
Custodians. It is designed primarily to give contributors lump sum benefits; and
• Tier 3 voluntary provident fund and personal pension schemes, supported by tax
benefit incentives for workers in the informal (blue collar) and formal sectors (white
collar).
According to the Bank of Ghana (2011), total workers’ contributions to the SSNIT
Scheme, both Tier 1 and Tier 2 increased by 88.3 per cent to GH¢61.2 million in July 2011
from GH¢32.5 million collected in June 2011. Similarly, workers contribution in July 2011
increased on year-on-year basis by 85.2 per cent above the GH¢3.0 million contributed
during the same period a year ago. The number of firms that paid contributions on
behalf of their employees to the SSNIT scheme increased by 10.4 per cent in July 2011 to
19,297 from 17,486 firms during the same period of 2010. The increase in workers’
contribution to the SSNIT scheme in July 2011 was partly due to payment of arrears by
the Accountant General’s Department on behalf of government workers as well as
registration of new firms onto the scheme. Section 103 (2) of the Act (766) allows a
member to secure a mortgage with that member’s 2nd-tier benefits for the acquisition of
a primary residence; which is the subject matter of this study. It is this provision in the
new legislation that establishes the legal background and catalyst for the proposals
outlined in this paper. The Tier 2 accumulated GH¢851.732 million (US$425.866 million)
by 23 April 2013 from 2010 when implementation commenced (Temporary Pension
Fund Account Committee/Board, 2013).
Research instrumentation
Quantitative methodology was adopted in analysing both primary and secondary data
in this study. Secondary data including minimum wage and macroeconomic statistics
was gleaned from published works and national policy documents. Primary data on
income, age characteristics and duration of working life of our sample were collected
randomly via the administration of 100 closed-ended questionnaires to members of the
national pension fund in Ghana – prospective beneficiaries of the proposals outlined in
this study. The survey was carried out in the Tema Metropolitan Assembly – a major
district of the capital city (Accra) of Ghana. The location is home to one of the fund’s
IJHMA numerous rental housing investments and, therefore, provides greater access to the
9,1 respondents of the study.
The data were analysed under three separate sections. In the first section, we provide
a description of three main variables of interest to the study, which include age, income
level and the duration of working life. These variables are informational and can help us
appreciate the nature of the pension fund, whether matured or immature. The latter is
34 expected to have a high proportion of young age structure and active members paying
money into the scheme, relative to pensioners taking money out of the scheme and vice
versa. This influences their preference for liquidity and choice of investments.
Therefore, it is expected, according to the preferred habitat theory (Modigliani and
Sutch, 1966), that pension funds usually with long-term liabilities prefer to invest in
long-term assets with better asset–liability matching prospects like housing financing.
In this regard, analysis of the age structure of members, the duration of working life and
the proportion of active and passive (pensioners) members provided information on the
maturity of the scheme. This provides an indication of the potential of the Tier 2 scheme
as a source of long-term housing finance.
The second section provides estimates of two main present value outputs of pension
contributions based on the present value technique. The present value of the Tier 2
contributions for each member considered in an investment framework is the worth of
projected cash flows (in this case, pension contributions) discounted at a rate over the
investment period. Before estimating future pension contributions, annual incomes
were projected using the compound annual growth rate (CAGR) of the daily minimum
wage component of income, estimated over a 12-year period (2001-2012). This is because
contributions will vary with income growth as estimated in Table IV.
First, we considered estimates of accumulated Tier 2 pension benefits from 2010 to
2014 – implementation started in 2010. Secondly, we considered a scenario of the present
value of Tier 2 pension benefits over the remaining working life of members, estimated
as the difference median age class and the statutory retirement age of 60 years. The Tier 2
contributions – 5 per cent of monthly income – have been invested in Government
Treasury Bills since 2010 due to operational issues, including the inability of the
National Pension Regulatory Authority to timely license the private pension fund
managers and the peculiar controversy between the Government and public sector
labour groups over the right to appoint a fund manager. Therefore, using the
Government Treasury Bill (nominal risk-free rate in the economy) at an average annual
rate of 25 per cent, estimated over a 26-year period (from 1988 to 2013 as shown in Figure 3),
we provided estimates of how much members are likely to accumulate over their
working life.
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Minimum wage 0.55 0.71 0.92 1.12 1.35 1.6 1.9 2.25 2.65 3.11 3.73 4.48
Annual growth (%) 29 30 22 21 19 19 18 18 17 20 20
CAGR 19 %*
Table IV.
Daily minimum wage Note: Exchange rate: US$1 ⫽ GH¢2.8 as of May 2014
(GH¢): 2001-2012 Source: Authors’ estimate based on material from the Ghana Trade Union Congress
60 Pension
50
asset-backed
housing
40 financing
30
Tresury Bill 35
Rate (91 day)
20
10
Figure 3.
0
Annual (December)
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
treasury bill rates of
Source: Bank of Ghana (2015) Ghana: 1988-2013
Estimates based on the 5 per cent statutory minimum pension contribution rate is
classified as the worst-case scenario. Given that a maximum of 30 per cent of income is
conventionally accepted as a measure of mortgage affordability (c.f. Joint Centre for
Housing Policy, 2010; Karley, 2009), it is possible for a member to increase the
contribution rate to 30 per cent for the purpose of servicing a pension loan or
pension-secured loan. Considering this as the best-case scenario, we arbitrarily chose 20
per cent as an average-case scenario to demonstrate the potential of the second tier as a
savings mobilization mechanism. These three scenarios are computed for three income
classes for the purpose of this study. While low income is constrained in the range of
US$0.36-US$357 (midpoint of US$179), middle income and high income falls in the
following ranges US$358-US$714 (midpoint of US$536) and US$715-US$1,786
(midpoint of US$893), respectively. Below is a presentation and discussion of results.
Results and analysis

Age, income distributions and duration of working life of sample
In this section, we consider the age, income distribution and duration of working life of
our sample. The analysis shows that there is a positive correlation between income level
and age and between income level and duration of working life (assumed to be equal to
the length [years] of pension contribution). The Pearson correlation reports coefficients
of 0.262 for income level and age and 0.387 for income level and duration of working life.
This suggests that income tends to increase as our sample ages and the duration of
working life increases. For instance, none of the respondents within the 51-60 age cohort
earns less than US$358 per month; on the other hand, 50 per cent of respondents in the
same cohort earn between US$715 and US$1,429 per month – which is the highest
income in the sample. Conversely, none of the members of our sample in the 20-30 age
cohort earn between US$715 and US$1,429 per month. About 85 per cent of the
respondents fall in the 20-40 age cohorts, of which about 47 per cent each earn around
US$536 and US$179 per month, and 6 per cent earning approximately US$893 per
month. According to Karley (2009), a minimum income of US$536 is required to afford a
mortgage to purchase a GH 128 40,000 (US$14,286) affordable house in Ghana, given the
macroeconomic conditions at the time. Notably, while these conditions have not
IJHMA changed much, house prices continue to increase. According to the (CAHF) Centre for
9,1 Affordable Housing Finance in Africa (2013), the cheapest house in Ghana is now going
for about US$17,000, which requires an income of US$638 to afford.
The analysis also shows that given a statutory retirement age of 60 years, the
majority of the sample, representing almost 85 per cent have about 25-30 years to work
and contribute towards retirement, which confirms two findings. First, it is an indication
36 of a young working and growing middle class (National Housing and Population
Census, 2010). Second, it suggests the immaturity[6] of the national pension fund and the
less need for liquidity. As a result, there is less pressure to pay out pension benefits in the
short-term because pensioners constitute only about 8 per cent of the total membership –
that is, 112,522 of the 1,390,945 ((SSNIT) Social Security and National Insurance Trust,
2011). This is also consistent with findings of the 2010 Population and Housing Census
report. According to this report, the proportion of Ghana’s population aged 65 years and
older declined slightly from 5.3 per cent in 2000 to 4.7 per cent in 2010. This analysis
points to the high prospects for growth in the pension fund industry. The age
distribution in addition indicates that the Tier 2 scheme has long-term liabilities in the
range of 25-30 years and, hence, could be a source of long-term mortgage finance, all
things equal, as a way to reap a liquidity premium on its investments. Figure 4 shows
these results.
Tier 2 pension savings so far: 2010-2014

Here, we provide estimates of accumulated pension savings in the Tier 2 scheme since
2010, when the new National Pension Act was implemented. At the current minimum of
5 per cent, a 30 per cent maximum of payment-to-income for housing debt servicing
shows the considerable latitude at the disposal of households and individuals to increase
their savings by taking advantage of the tax benefits associated with the Tier 2
contributions.
Scenario analysis: pension contribution rates

From Figure 5, we estimate that the worst-case scenarios for the three income classes are
quite minimal over the past 4 years (from 2010 to 2014) considered. While low-income
70
Percentage of Respondents (%)
60
50
40
≤US$892.86 (High-income)
30
US$535.89 (Middle-income)
20
≥US$178.57 (Low-income)
10
Figure 4. 0
Age and income 20-30yrs 31-40yrs 41-50yrs 51-60yrs
distributions of
Age Range of Respondents
sample SSNIT
contributors, Source: Survey (2014)
$12,000 Pension
$10,000 $9,550
asset-backed
housing
4 Years Pension Savings
$8,000
$7,959 financing
≥US$197
$6,367 (Low-
income)
$6,000
$4,775 $5,783 US$536 37
$4,819 (Middle-
$4,000 income)
$3,183 $3,855
≤US$893
$1,592 $2,892 (High-
$2,000
$1,928
$1,680 $2,016 income)
$964 $1,344
$1,008
$336 $672
$- Figure 5.
5% 10% 15% 20% 25% 30% Estimates of
accumulated pension
2nd Tier Pension Contribuon Rates
savings: second tier
Source: Authors’ Estimates scheme
members are likely to have accumulated about US$335.93, middle-income members

may have pension savings of US$963.84 and US$1,591.74 for high-income members at
the current 5 per cent statutory minimum Tier 2 pension contribution rate (ignoring all
costs and fees). If the cheapest developer-built housing unit in Ghana is US$17,000[7],
then these estimates are very small to be borrowed as a pension loan. Expressed in terms
of pension savings-to-house price ratios, they are 2, 6 and 9.4 per cent, respecively. The
average-case scenario at 20 per cent pension contribution rate provides better estimates
as expected. High-income members could have increased their pension equity to about
US$6,367; middle-income members could have made US$3,855; and low-income
members making US$1,344 in pension savings. These are equivalent to pension
savings-to-house price of 37.5, 23 and 8 per cent similarly. Compared with the former
scenario, these amounts could support improvements including extensions to existing
housing. Thus, the case for housing microfinance may be supported by the PBHF
system, which is the case in South Africa.
In the best-case scenario, we further observe from the estimates that at 30 per cent
pension contribution rate, accumulated pension savings could have been increased
substantially over the same period. For instance, high-income members could have
accumulated about US$9,550; US$5,781 by middle-income members; and US$2,015 by
low-income members. These hypothetical savings are substantial and could form a
considerable down payment for a mortgage. These estimates constitute approximately
56, 34 and 12 per cent of the cheapest developer-built housing unit correspondingly.
Given that mortgage down payment requirements hover around 20 per cent of the house
price, quite a number of members could have qualify for mortgages. This is hitherto
unlikely through savings in commercial bank accounts, owing to lower deposit interest
rates, averaging less than 10 per cent per annum (Bank of Ghana, 2013), while pension
savings invested in at least Government Treasury Bills could return about 25 per cent
per annum (average of 91-day bills from 1988 to 2013). Didactically, this estimates
suggest that instead of being restricted with the cheapest developer-built unit, members,
precisely those in the middle-income and high-income classes could get onto the housing
IJHMA ladder[8] – for first-time buyers – or go up the housing ladder (homeowners), because
9,1 they may be able to afford a relatively expensive house, given the pension
savings-to-house price ratios provided above.
These estimates typically depict the potential of the Tier 2 as a tax-efficient saving
mobilization mechanism. Clearly, these accrued pension savings over the past 4 years
are inadequate to purchase even the cheapest house in Ghana outright – for the
38 high-income class according to our classification. We believe, however, that the
estimates in the average- and best-case scenarios could be leveraged to raise additional
finance from either the pension fund or co-financed by the pension fund and a third
party, perhaps, a bank as is the practice in Mexico and Brazil. Through housing
provident funds such as the INFONAVIT in Mexico and the CEF in Brazil, pension
funds through the co-financing option team up with commercial banks and other
financial institutions to deliver housing finance. In effect, any mortgage scheme
developed in this respect should consider the availability of potential sources for the
additional finance that may be required, lest the full element of mortgage financing may
not be workable, although housing microfinancing may be possible.
The potential of pension savings over 30 years

The last piece of analysis under this section makes an attempt to estimate the present
value of Tier 2 pension savings over a potential 30-year working as derived from the
earlier analysis of income, age and duration of working life. The three case scenarios are
again considered here. We observe that in the worst-case scenario, high-income
members could accumulate US$2,916; US$1,871 by middle-income members; and
US$825 by low-income members, at 5 per cent contribution rate. These are equal to
potential pension saving-to-house price ratios of 17.2, 11 and 5 per cent, respectively.
The average-case scenario produces potential pension-savings-to-house price of about
19 (US$3,301), 44 (US$7,482) and 69 (US$11,663) for low-, middle- and high-income
members, respectively. The best-case scenario is even better with ratios in the region of
29 (US$4,952), 66 (US$11,223) and 103 per cent (US$17,475). According to UN-Habitat
(2011), many Ghanaians can only afford houses in the price range of
US$10,000-US$18,000. We observe that in the worst-case scenario, none of the income
groups is able to raise a 20 per cent required down payment using their pension savings
over the 30 year period. Both the average-case and best-case scenarios appear
favourable and promising as shown in Figure 6.
These estimates are only observable under ceteris paribus effect, which may be less
realistic. Considering that the average Treasury bill rate of 25 per cent over a 26-year
horizon from 1988 to 2013 could be excessive and may not be sustainable in the long run,
declines in this rate would rather have the effect of increasing the present values of these
pension savings – lower discount rate. Hence, it is possible to lend against future pension
contributions (receivables) supported by payroll deductions, which, in this case, could
provide access to PBHF to about 53 per cent of our sample, comprising 47 per cent
middle-income and 6 per cent high-income members, over varying terms. For the
low-income members, this is also workable in housing microfinancing, which is
currently attracting research attention in many developing countries, especially in
Sub-Saharan Africa and Latin America. Although these estimates appear promising,
they confirm the largely constrained macroeconomy in Ghana; for which reason, an
$20,000 Pension
$17,495
$18,000 asset-backed
$16,000 $14,579 housing
≥US$19 financing
30 Years Pension Savings
$14,000 7 (Low-
$11,663 income)
$12,000
$10,000 $8,748
$11,223 US$536 39
(Middle
$9,353
$8,000 -
$5,832 $7,482 income)
$6,000 ≤US$89
$5,612 3 (High-
$4,000 $2,916 $4,952
$4,126 income)
$3,741
$3,301
$2,000 $2,476
$1,871
$1,651
$825
$-
5% 10% 15% 20% 25% 30% Figure 6.
Estimates of pension
2nd Tier Pension Contribuon Rates
savings over 30
Source: Authors’ Estimates years
argument for affordable housing development and financing is sine qua non to
sustainable development.
A brief pension loan affordability analysis assuming a 30 per cent pension
contribution rate shows that about 17 per cent of our sample within the 21-40 age cohort
are likely to afford a pension loan of US$17,000 secured by their future pension
contributions at a fixed annual interest rate of 25 per cent. This is equivalent to about
236,460 members of the 2011 total pension fund membership of 1,390,945 ((SSNIT)
Social Security and National Insurance Trust, 2011). For the middle-income members,
pension loans of US$17,000 at 25 per cent per annum could be effectively serviced in 26
years and quite less for high-income members. Two observations can be made from this
analysis. First, increasing the 5 per cent Tier 2 contribution to 30 per cent could enhance
the ability of a considerable number of members of the national pension fund to save and
access housing finance through PBHF. Second, this could be a source of long-term funds
(potentially about 25 years) for middle-income members, which is longer than the
maximum term of 15-20 years for mortgages originated by mortgage-lending
institutions in Ghana currently. This subtly confirms two hypotheses by Afrane et al.
(2014):
H1. The Tier 2 MOP could be a source of long-term mortgage finance.
H2. Pension loans and pension-secured loans could provide a better asset-liability
matching (in terms of length of investments needed to mitigate liquidity risk
and the maturity gap problem involved in lending long with short-term deposits
in Ghana.
It is important to note that incomes used in this assessment are individual incomes and
not household incomes. The use of the latter, which is usually the standard in mortgage
underwriting has an upside, which could be maximized to improve affordability. The
IJHMA marginal effects are, however, not known to us but will require a comprehensive study
9,1 to unravel.
The way forward: policy reform

In Ghana, like many African countries, there is a dearth of formal housing financing, i.e.
40 mortgage financing. The dominance of cumbersome customary land-owning systems
complemented by inefficient formal land registration systems and weak legal systems
render the use of land and property as collateral for credit impracticable, as lenders right
of recourse is at risk. Coupled with low income and unstable macroeconomic
fundamentals, the marginal propensity to save has been minimal. Credit information
asymmetries also remain a major constraint to deal with. Land reforms over the past two
decades to improve the property rights systems and unravel property collateral risk
have yielded little results. Great benefits will arise from solving this conundrum, but
there appears to be no quick solution in sight. Some researchers are, therefore, parading
proposals for non-collateralized lending like housing microfinance, which has also made
very little impact on the continent. However, there are those researchers who also believe
that pension assets hold great potential as an alternative form of collateral, a better
savings mobilization mechanism and a potential depository of information that might
be useful to the lending process. For instance, it might be possible to develop alternative
credit analytic systems using the contribution behaviour of pension fund members, at
least for PBHF lending. In this case, default and delinquency in the remittance of pension
contributions could be helpful in assessing credit default risks which hitherto is difficult
for commercial lenders to do with a reliable degree of confidence. Further, the Collateral
Registry, established by the Bank of Ghana could play a major role in this vain. The
development of this mechanism nonetheless lies outside the scope of this paper.
In Ghana, the national pension fund prior to 2010 was typified by the SSNIT, which
has 24 per cent shares in HFC Bank, 34 per cent in Cal Bank and 9 per cent in Ecobank
Transnational Incorporated. Besides its prominent role in direct real estate development –
both residential and commercial – the SSNIT through these banks indirectly finance
mortgages as investments (c.f. (SSNIT) Social Security and National Insurance Trust,
2011). Members of the scheme have, however, benefited the least, as the majority cannot
afford the mortgage rates of these same banks they partly own. Worsening the case,
their pension benefits are also low, usually depreciated away by high inflation, which
discounts the need to save towards pension. By implication, it is only rational to invest
these pension contributions in inflation-hedging durable assets, like housing through
PBHF for members while they are economically active, because of an elusive future, full
of uncertainties and moral hazards (Afrane et al., 2014). At least, housing financing
backed by pension assets could also serve as a viable retirement planning option for
members (Sing, 2009).
The Tier 2 scheme could serve as a savings mobilization mechanism and should be
deliberately promoted through appropriate schemes. The tax exemption enjoyed by this
tier could be the catalyst that could encourage savings, although not guaranteed, as
evidence in the UK depicts. Albeit, not the best, this goal was achieved in Singapore
mandatorily. The contribution rate is used for controlling money supply and savings in
the economy. We do not recommend such dictatorial measures but would prefer
members to wilfully increase their savings rate through this mechanism. Traditionally,
most African countries including Ghana have not had formal policies that promote
savings mobilization. This has resulted in the inability of most people to raise the Pension
required down payments for mortgage financing. The concept could be a breakaway asset-backed
from the rhetoric that can effectively increase access to mortgage finance. Without an
option for members to reallocate their pension savings to asset classes of their choice
housing
with potentially higher benefits to them, any increase in the savings rate through the financing
pension scheme due to the tax exemption could actually be a “substitution effect”, and,
therefore, may not be welfare maximizing. There is also a “distortionary effect” created 41
in the savings system when citizens are forced to contribute to a pension fund without
the option to alternate savings to higher yielding investments. This effect could be large
in Sub-Saharan African countries where pension pay-outs are very low usually as a
result of the high incidence of mismanagement, moral hazards and adverse selection.
The PBHF option would expand members’ investment asset allocation choice and
enable them to utilize their deferred pension equity to meet current pressing needs like
housing financing.
As the majority of Ghanaians can only afford housing costing between US$10,000
and US$18,000 (UN Habitat, 2011) as confirmed by our analysis, we contend that based
on experience from Singapore, Mexico and Brazil, that the lack of supply of affordable
housing, which is the case currently could mar the success of PBHF. In Ghana, there is
no sustainable policy for delivering affordable housing. It has been supplied on a
piecemeal basis, and in most cases, government projects have been abandoned and
uncompleted by succeeding governments. Going forward, we recommend government
to provide incentives such as tax credit and sites and services beside others to attract
private developers into the provision of affordable housing within the above price cuts.
We reckon that a great deal of collaboration and planning between the government and
the private sector would be required to create a market in affordable housing to meet this
need. An exemplar is the FOVI (Central Bank) of Mexico, which provides incentives in
the form of construction finance to private developers of low-income and middle-income
housing according to its criteria. In Singapore, the HBD has this onerous responsibility,
which it has delivered successfully to a greater extent. We envisage that a similar
scheme could engender innovation through competition in the delivery of affordable
housing in Ghana.
Conclusion
In this study, we make an attempt to consolidate the concept of PBHF, as practiced
internationally with evidence from Southern Africa, East Africa, Latin America and
South East Asia. PBHF enables members and sometimes non-members of pension funds
to utilize their deferred pension benefits for housing financing. This is organized in
many forms including borrowing the accumulated benefits, securing a mortgage with
the benefits and using the accumulated benefits as down payments and paying for the
cost associated with housing acquisition including stamp duty, legal fees beside others.
Apart from its potential as a tax-efficient savings mobilization mechanism, pension
funds have long-term liabilities which make long-term investment assets such as
housing financing attractive to them. Moreover, pension equity could be used as
collateral for mortgage financing in countries where land and property cannot be used
as collateral because of weak property right systems. Despite these benefits, PBHF has
attracted little research attention, which we attempt to give. Further research is required
to look at the pricing, tax treatment, scalability and collateral efficiency of pension
IJHMA asset-backed housing finance as well as factors that could affect the exercise of the
9,1 PBHF option.
Notes
1. Sinking fund is a fund established by an economic entity by setting aside revenue over a
period of time to fund a future capital expense or repayment of a long-term debt. Pension
42 contributions to service the balloon payment of pension loans are technically sinking funds.
2. Put option is a financial option contract giving the owner the right, but not the obligation, to
sell a specified amount of an underlying security at a specified price within a specified time.
3. The term in the money describes the relation of the strike price of an option and where the
underlying futures market is currently trading.
4. Run is used in this paper to refer to as potential situation where pension funds guaranteeing
pension-backed loans for their members may be forced to divest pension investments to meet
margin calls from third party investors upon default. It could also happen internally as a way
to improve their (pension fund) liquidity positions in meeting pension pay-outs when
borrowers default on pension loans.
5. Loss spirals is a type of “liquidity spiral” (see Brunnermeier, 2009) applied in this paper to
refer to a decline in the value of collateral assets which erodes the investors’ net worth and a
reduction in the ability of the collateral to service outstanding debt.
6. An immature pension fund has a high proportion of active members paying money into the
scheme, relative to pensioners taking money out of the scheme.
7. In their review of housing finance in Africa, CAHF in Africa (2013) estimated among other
parameters that the cheapest developer-built unit in Ghana is about US$17,000.
8. The housing ladder is a term widely used to describe the relative differences in constant terms
from cheaper to more expensive housing (Ho and Wang, 2009). This metaphor suggests that
an individual or family’s lifetime progress can be travelled equally from cheap houses for
younger first-time buyers who are typically at the bottom of the property ladder, and
expensive houses are at the top. “Getting on to the housing ladder” is the process of buying
one’s first house and holding a place on the volatile property market.
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Corresponding author
Kenneth Appiah Donkor-Hyiaman can be contacted at: kwakuhyiaman@gmail.com
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International Journal of Housing Markets and Analysis

Another look at housing finance in Africa: The anatomy of pension asset-backed

References: this document contains references to 70 other documents.

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International Journal of Housing

unstable macroeconomy, underpinned by large and erratic movements in inflation rates,

Determinants of mortgage market development in Africa

Region No. of days % of property value

Sub-Saharan Africa 116 14.4

Singapore South-East Asia 1968 DC X X X

South Africa (2011) SA

Pension-backed housing finance: conceptual framework

Some expected model risks 29

Administration Pension Loan

Investors Interest-Only Repayments

option[2]” implicit in a non-recourse mortgage by abandoning the property to the lender

Pension-backed housing finance in practice

Materials and methods

Results and analysis

Tier 2 pension savings so far: 2010-2014

Scenario analysis: pension contribution rates

members are likely to have accumulated about US$335.93, middle-income members

The potential of pension savings over 30 years

The way forward: policy reform

of the Business and Economics Statistics Section, American Statistical Association,

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