Ghana has relied on the International Monetary Fund (IMF) for financial assistance since gaining independence. However, in recent times, the debt has ballooned to unsustainable levels, with a debt stock of about $63 billion as of the end of 2022, representing about 88% of GDP. The debt unsustainability is a key contributor to the country’s current macroeconomic instability. In response to the escalating debt crisis, the President of Ghana sought for support from the IMF on July 1, 2022, prompting a Debt Sustainability Analysis (DSA). The results indicated debt distress from a high risk of debt distress status since 2014 as a medium debt-carrying country.

The results of the DSA necessitated a debt restructuring, recognizing the inadequacy of relying solely on fiscal adjustments and structural reforms to restore sustainability by 2028. Consequently, the government initiated the Domestic Debt Exchange Program (DDEP) on December 5, 2022, with an initial exclusion of the pensions sector. However, a consensus was reached with pension bondholders on September 7, 2023, with a 95% participation rate on terms markedly different from the non-pension holdings. The programme involved exchanging bonds for new ones with lower interest rates and maturities set for 2027 and 2028.

The DDEP appears to have limited impact on the pensions industry at face value, given the arrangement’s maintenance of an effective coupon rate for pension funds similar to the original bonds. However, the interconnectedness of the pensions sector with the broader financial sector introduces potential risks. Pension funds, primarily Tier 2 and Tier 3 schemes, have a substantial portion of their investments directly or indirectly tied to government securities. Consequently, the DDEP has had a rippled impact on these pension funds. The debt restructuring also has implications for pension funds’ liquidity, deferring principal payments until 2027 and 2028. This delay may significantly reduce projected cash flow, which is particularly risky for Tier 3 schemes that require high liquidity to accommodate frequent client withdrawals. Additionally, the risk of debt default is heightened, given the substantial volumes of principal repayments due in the specified years, thereby affecting the sustainability of pension funds.

The Ghanaian pensions sector, despite its strides in providing a structured framework for retirement savings, requires a thorough examination of investment allocation rules in light of the DDEP. This scrutiny must ensure sustainability and reduce exposure to adverse shocks.

This study offers recommendations to enhance the effectiveness of investment operations for pension funds and mitigate potential risks.