Hybridization of the Multiple Decrement Model and the Markov Process Model to Estimate the Benefits of the Micro Pension Scheme in Ghana

Abstract

The hybridization of the Multiple Decrement Model (MDM) and the Markov Process Model (MPM) has been explored to estimate the Actuarial Present Value (APV) of benefits for a micro-pension scheme designed for Ghanaian commercial drivers. The challenge of extending pension coverage to the informal sector, characterized by irregular income and limited access to formal financial systems, was addressed. The MDM was applied to decrement causes such as retirement, disability, voluntary withdrawal, and death. At the same time, the MPM was used to model the transient state, which is the involuntary withdrawal state. Demographic and economic data from Ghanaian agencies were employed, and actuarial principles were utilized to construct decrement tables, project pension benefits, and estimate annuities. A linear growth in pension benefits was observed, increasing from Gh 7,200 at age 18 to Gh 23,040 at age 64, while the total APV steadily rose, peaking at Gh 114,937.29 at retirement. The robustness of the model was confirmed through sensitivity analysis under varying discount rates, replacement rates, and survival probabilities. The findings ensured the sustainability of micro-pension schemes, offering valuable insights for policymakers and actuarial practitioners.