Today, Uganda has 15 million people in its workforce. Out of these, 2.5 million are employed in formal wage jobs.
Around 750,000 employees (all in formal jobs) qualify for retirement benefits under the country's current pension system. The rest age at their own peril, surviving on family support if their families are able and willing to provide for them, or toiling away in subsistence activities, particularly in agriculture.
On June 17, the World Bank launched its latest Economic Update. These reports take stock of the economy and propose solutions for challenges to shared growth and elimination of extreme poverty. The fourth Uganda Economic Update focuses specifically on how pensions can reduce vulnerabilities at both individual and macroeconomic levels.
Titled "Reducing Old Age and Economic Vulnerabilities: Why Uganda should Improve its Pension System", the report comes at a time when Uganda is planning to build a comprehensive social protection system. This includes setting up systems aimed at ending extreme poverty and reducing vulnerability of Ugandan citizens.
The report argues that a more efficient pension system that serves Uganda's public at large can be a crucial component of this system. If efficiently managed, a pension system can also support other broader macroeconomic goals. It will allow Ugandans to receive a reasonable return on their savings, avoid the fiscal pressure that normally arise as the number of public pension recipients grow, and it will contribute to the development of financial markets and long-term finance for investment.
With only two per cent of the population above 60 years of age, Uganda's population is still young - but it too will grow. Uganda currently has a demographic window of opportunity to build such a system while the population is still young. The government has begun to implement a series of reforms to the pension sector, with the objective of improving coverage, adequacy, security, sustainability and efficiency.
It has established a regulator to oversee the operations of the sector, proposed the liberalisation of the private pension system to allow more competition and choice by workers, and also proposed reforms to the public pension system to improve its efficiency and to ensure its sustainability. Going forward, there are still a number of challenges to be addressed:
First, there are risks related to fraud and corruption. If the proposed schemes for both public and private sector are not managed properly under strong, independent, regulated and transparent institutions, they will not provide an effective pension system for workers.
To address this, the newly established Uganda Retirement Benefits Regulatory Authority (URBRA) must be made functional and effective to ensure strong oversight.
Second, even though competition is expected to lower costs, the reverse could arise as many pension operators incur costs of marketing, among others. This has been a problem in many countries, and hence needs to be addressed with appropriate transparency, regulation and managed competition, such as through cost caps.
Third, limited development of the financial market may restrict the benefits from a liberalised pension system. A concise financial sector development plan needs to be pursued hand in hand with the planned pension reform to widen and deepen the market, while providing additional financial instruments for investment of the pension funds.
Fourth, transition costs could triple fiscal spending on public pensions before it would eventually decline, as the public sector scheme is converted into a contributory system. These transitional costs will occur as the government will be paying the existing pensioners' benefits while starting to contribute to the new public service pension fund.
This cost would have to be properly planned for within the national budget. And last, informality of the labour markets and the high cost of universal pension systems may constrain extending coverage.
The pension system still needs to cover more than 75 per cent of workers in the formal wage sector who are not yet contributing to pensions. However, by 2010, 84 per cent of the working population was employed in the non-wage, informal sector, particularly in agriculture.
Therefore, innovative approaches, such as the Mbao Scheme in Kenya, will be needed to extend coverage to the many people employed in the informal sector. On the other hand, universal pension systems that cover all elderly people need to be carefully planned as they can be costly.
Experience from other countries, including those in the African region, shows that, although never easy and often controversial, successful reforms can be implemented to build efficient pension systems. For Uganda, it would make good economic sense to do this while the population is still young. By waiting, the costs will only increase. Ahmadou Moustapha Ndiaye is the Country Manager of The World Bank in Uganda.