10 June 2012

Ethiopia: Handful of Microfinanciers, One Private Bank to Handle Ethiopia's Pensions

Five microfinance institutions and one private bank are soon to be given the role of disbursing private sector pension funds, starting July 8, 2012.

Dedebit Credit & Savings, Omo Microfinance, Oromia Credit & Savings, Dire Microfinance, and Amhara Credit & Savings will serve Tigray, Southern Nations, Oromia, Amhara regional states and Dire Dawa, respectively, according to the Private Organisation Employees Social Security Agency (POESSA).

The lone bank, which the Agency is seeking to contract, will serve Addis Abeba.

The Agency had contacted Dashen, Wegagen, Nib International, United, Awash International, Abay, and Oromia International banks as well as Cooperative Bank of Oromia (CBO), but only Wegagen, Nib International, and United submitted their proposals, according to Derege Wube, deputy director of the Agency. The Agency expects to receive more proposals from the other banks.

"We picked microfinance institutions in regional towns because they have branches available in almost every wereda and are, thus, accessible to most parts of the society," Tesfaye Gashaw, communications director of the POESSA, told Fortune.

The microfinance institutions have more than 500 branches between them.

Some of these institutions are already paying pension funds to public sector retirees for a fee of 2.50 Br for each person served, according to sources at the Agency. That rate, however, could reach to three Birr, as they are currently negotiating for an increase. If they are to be paid three Birr for their service to the public sector, the POESSA may match it, Dereje told Fortune.

One of the private banks has proposed to be paid five Birr for each individual beneficiary, according to Dereje.

This will be the first time the Agency will start disbursing payments since it was established in March 2011.

All private organisation employees without prior pension benefits should be included in the national pension scheme by July 8, 2011, the government decreed, in June of the same year. The exceptions were made for domestic workers and employees of international organisations and foreign diplomatic missions.

The government had allocated a budget of 46.8 million Br for its first year, of which it has so far spent 44.4 million Br purchasing vehicles and office facilities, paying employee salaries, and renting five offices in Addis Abeba and 23 in the rest of the country, according to the Agency's Budget Office. It has hired 150 employees for its Addis Abeba offices and 550 for the regional offices.

Because it was a new organisation and needed time to establish itself private employees who became eligible this year were told to wait until July 8, 2012 in accordance with the law.

Five people have so far applied for the benefit at the head office during the 2011/12 fiscal year. If their eligibility is confirmed, according to Tesfaye, they could start getting pension payments as of the beginning of the next fiscal year.

The Agency started collecting employee and employer contributions in July 2011. The contributions start at five per cent for employees and seven per cent for employers, but both will increase by one percentage point as of July 8, 2012. In 2013 employees' share will increase to seven per cent and employers to nine per cent. From 2014 on, employers' share will be 11pc.

Around 18,020 companies have been registered, contributing around 415.4 million Br by April 8, 2012, Agency data shows. The numbers may increase, however, as more and more companies register both in the capital and regional bureaus.

In 2011, there were around 5.1 million people employed in urban areas, out of which 19.3pc worked at private organisations excluding nongovernmental organisations (NGO), according to the Central Statistical Agency.

The Agency, however, has not set a target on the amount of funds to be collected based on external data available because they tend to vary. It has instead recently established a research wing to draft a strategy and target for the coming years, according to Tesfaye.

Employees will get 30pc of their average salary for the last three years of service once they retire, if they have worked for at least 10 years. The beneficiaries and their benefits are worked out based on various criteria, such as the number of years served and the reasons for retirement. The amount can be paid as a lump sum, for those with less than 10 years of service, or as a monthly pension.

Employers are expected to notify the Agency two months prior to an employee's retirement and submit all of the necessary files. Eligibility can be determined within eight hours, according to Tesfaye.

People claiming to have been unfairly denied benefits can contest the Agency's decisions at the Agency, itself, at the Social Security Appellate Board, and finally at the Federal Supreme Court, according to an official from the Legal Department of the Agency.

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