29 June 2014

Uganda: Liberalise Pension Sector Now - World Bank


The World Bank recently launched the Fourth Uganda Economic Update that takes stock of the country's economy by identifying challenges and proposing solutions to facilitate more inclusive economic growth. The Economic Update specifically explores changes the country can make to its existing pension system. Patrick Kagenda talked to the World Bank Uganda Country Manager Moustapha Ndiaye about the proposals.

What is your assessment of Uganda's pension sector currently?

The current pension system in Uganda is very limited in its coverage - with only around 2% of the population receiving any form of retirement benefit. Those covered come from the higher income workers in public service and formal sector employment. The vast majority of the workforce in the informal sector remains uncovered and many elderly in low income households remain vulnerable. The pension schemes that do exist have faced governance challenges in the past and the government pension costs are only set to rise.

What makes the pension sector important to a country's socio-economic development?

Pensions can impact on socio-economic development in two main ways. Firstly, they are an important element of any social protection system, which, when properly implemented, can serve as drivers for the achievement of inclusive, pro-poor and equitable growth. In addition, pension funds can be an important source of long-term, domestic capital, which can help to raise savings rates and finance economically productive projects.

So in your view, what is the economic cost of Uganda's rather underdeveloped pension sector?

The underdeveloped pension sector means that many vulnerable elderly are not protected against poverty in old age. For example, 65% of those over 60 years suffer from old age disabilities. Efficient pension systems enable ageing members of society to face their future with realistic expectations and a certain level of security, without placing an unbearable burden on government finances or younger generations.

In addition, there is an economic opportunity cost from under-utilizing pension assets. For example, the NSSF holds Shs 4 trillion in assets, representing 5% of GDP. Even improving the return on these assets by 1% can generate a significant sum to reinvest in productive projects and support members when they retire.

What would you say are the missing links in Uganda's pension reform process?

Rather than missing links, the current pension reform process represents a foundation of building blocks after which further work will have to be done. The aim of the government's reforms is to place the current pension schemes on a sound financial and governance footing. After that, more work will be required to extend coverage to more Ugandans. This will involve implementing the broad ranging plans outlined in the social protection framework and developing suitable, innovative products to help and encourage informal sector workers to save over the longer-term.

How would you describe Uganda's pension reform process ?

The government needs to be commended for tackling pension reform early - using the country's favourable demographics to put a robust pension system in place. The experience in other countries has shown that pension reform is always challenging and controversial but if not addressed in time countries can 'grow old before they grow rich.'

Some stakeholders are opposed to the liberalisation process that will see NSSF lose its monopoly. What is your take on this?

The NSSF will still play an important role in the pension system going forward. Introducing competition for social security contributions gives workers choice - and indeed many may will choose to keep their contributions with the NSSF. However, providing a benchmark of other funds to compare the NSSF with should drive improved performance and transparency and indeed it can be argued that this is already happening as the NSSF have reduced their costs, improved their service level and started to diversify their portfolio, which should lead to improved returns.

Which examples of liberalizing the pension sector can Uganda emulate ?

Other countries in Africa have taken a similar route to Uganda, opening up social security contributions to competition to allow choice, increase transparency and with the aim of improving returns. For example, a tier of contributions to the national social security fund in Kenya can be contracted out and managed by a scheme which has been approved by the pension regulator. In Ghana, 5% of contributions to the national social security system can be managed by occupational pension schemes.

Where do you see Uganda's pension sector in the next few years?

In a few years' time, it is hoped that the government's planned social protection reforms would provide a basic protection for all vulnerable elderly citizens in Uganda. In terms of the pension funds into which private sector workers are contributing to build savings for their retirement, the key will be to ensure that the new regulator, Uganda Retirement Benefits Regulatory Authority (URBRA) is resourced to sufficient capacity and authority to oversee the new competitive market.

It would also be good to see some innovative schemes that can help informal sector workers participate in the pension system introduced - maybe along the lines of the Mbao scheme in Kenya. The Mbao is utilizing the growing mobile money sector by allowing for savings to be made via mobile phone accounts. For civil servants, it is essentially that the government's administrative reforms are implemented successfully in order to clean up the pension records. This should prevent the repetition of the ghost pensioner problem as the new public service scheme is launched.

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