19 April 2017

Uganda: Reforms - Will Pensioners Benefit From NSSF's Loss of Monopoly?

Photo: MIchael Kakumirizi/Daily Monitor
Jimmy Lwamafa (right) andChristopher Obey (centre) listen as Mr Kiwanuka Kunsa (2nd right) consults with their lawyers led by counsel Nsubuga Mubiru (3rd left) in Kampala before they were found guilty of a Shs88 billion pension fraud.
analysis

Kampala — The Finance Committee of Parliament has been receiving views on the proposed plans to liberalise the pension sector in Uganda. And what has been the dominant topic is ending the monopoly of the National Social Security Fund (NSSF).

Indeed, a closer look at the Liberalisation Bill, there is a clause that recommends the repeal of the NSSF Act.

Among the many things faulted in the country's economy is the low level of domestic savings. The low savings have been blamed for the lack of access to affordable long-term funds, which has created a mismatch in the needs of borrowers and the available money.

One of the key ingredients is for regulation of voluntary saving schemes in the informal sector and also removing the minimum of the five employees provision for the employer to start contributing.

The major focus of the Bill seems to be NSSF and that is why it has failed to receive the full support of President Museveni. In 2015, at one of the NSSF celebrations, the President said: "Some people have been coming to me with this idea that the sector will be more efficient when private players are allowed in, but I just kept quiet. I have never opposed or supported the proposed reforms." He continued: "Unless these people who are pushing for liberalisation are saying that NSSF is being mismanaged, they will really have to convince me more." At the same function, he observed: "Having one player has one good advantage that we have money available for any useful capital development projects."

His last statement probably makes President Museveni somewhat right. The architects of the Bill seek to repeal the NSSF Act and allow other private players to compete for those savings.

Increased savings

Mr David Bahati, the State minister of Finance, points out the ambition of the Bill is "to reform the pension sector and grow the pool savings in this country."

In its January 2017 report, Uganda Economic Update, the World Bank was biased towards access to affordable financing. The report reveals that the pension sector coverage in Uganda is only 2.1 per cent of the total Ugandan population and about 5 per cent of the working population. These figures are substantially low. As a solution to the low savings and access to affordable financing, the World Bank recommends reforming the pension sector.

"Measures must be put in place to ensure that pension savings are invested well to provide a good return to savers whilst minimising potential risks. In this respect, the proposed Pensions Liberalisation Bill to strengthen the capacity of pension funds to meet their liabilities, to improve the administration of the sector, and to provide a policy and legal framework to increase participation in retirement savings schemes, is a move in the right direction," the report reads, in part.

The Bill, in its current form, does not address the issue of regulating competition. For instance, Section 14 that refers to trustees is considered too generic. Trustees, according to the provisions of the Bill, Uganda Retirement Benefits Regulatory Authority (URBRA) has the responsibility of governance of retirement benefits.

However, while appearing before the committee, URBRA chief executive officer, Mr David Bonyi, stated that "the section is too generic and does not reflect the responsibility of scheme trustees." The Uganda Law Society (ULS) had already raised the red flag around trustee governance and if the law does not clearly define roles and responsibilities, that leaves loopholes for unscrupulous people to exploit the savings of Ugandans.

Is liberalisation bad?

From the ULS, the Workers' Unions, the Workers' MPs and the NSSF, the message has been one: Amend the NSSF Act but do not repeal it. The Bill, in its controversial form, has been in and out of Parliament since 2011 and it is only until this year that some progress is being made with it at the Committee.

In its current form, even the proponents of reforms in the pension sector are being forced to revise their positions on the paper.

Appearing before the Finance Committee, Mr Francis Gimara, ULS president, cautioned any planned liberalisation by comparing it to the 1990's liberalisation of the economy, which has posted mixed results.

"We know what is going on in other sectors such as utilities like electricity because of privatisation. We have learnt from the history of liberalisation that we are always in a hurry to liberalise. This time, we have an opportunity to think," he told the committee.

He also noted that with liberalisation, people's savings will be exposed to market-driven and profit-hungry fund managers who may end up being reckless in their operations.

Mr Gimara also pointed out that the source of the laws should be scrutinised in order to know whose interests the ministry of Finance is pursuing.

The accusation has been that the International Monetary Fund and World Bank are the actual organisations behind the Bill.

It is without doubt that in terms of providing technical support, the two entities have been providing some insight into liberalising the pension sector.

It is understood that their focus is, however, mainly on reforming the Public Service Pension Scheme and making it contributory and providing assistance to URBRA.

NSSF monopoly still on

The government, upon the popular pressure from all over the place, has shelved plans to end NSSF's monopoly. In its current form, the Bill would allow other private players to compete for the mandatory contributions, which NSSF currently takes at 100 per cent.

However, the ministry of Finance is now saying this will be abandoned and instead they will be looking at amending the NSSF Act in order to make it more efficient and remove the clause that sets a minimum number of employees.

Mr Bahati told the committee that they were no longer interested in repealing the Act.

According to the NSSF Act, companies employing five or more people are required to remit 10 per cent to NSSF on behalf of their employees. The employee is then also required to contribute 5 per cent.

The ministry of Finance is now considering a proposal that would see NSSF retain the 10 per cent; but still compete for the 5 per cent with other new players.

In this area, there are also disagreements as some finance officials propose to, instead, have the 10 per cent left for other players and NSSF to compete.

Nonetheless, if the ambition of the government was to trim NSSF's wings, it appears to be failing. While appearing before the committee, NSSF Board chairman, Mr Patrick Kabarenge, emphasised that they were not opposed to any of the reforms but rather disagree on the issue of having to lose the mandatory contributions to private players.

How strong is URBRA?

What has come out from the proceedings in the committee is a concern about how a sector will be competitive and left to reckless risk-takers that will end up losing their money.

There seems to be limited understanding of the role of the regulator, URBRA.

"How many banks have been closed by Bank of Uganda? Who owns these licensed retirement benefits schemes? Where will workers run to in the collapse of business by the schemes? Who will be responsible for any reckless business decisions that may be made by the management of these retirement benefits sector schemes?" reads part of the letter submitted by Workers' MPs to the Finance Committee.

However, even the World Bank has recommended further strengthening of URBRA for it to meet the exact demands of the sector in a competitive economy.

"The stronger regulation of the pension system which has been initiated by the Uganda Retirement Benefits Regulatory Authority needs to be supported by stronger laws and regulations. Once completed, the reformed pension sector should support competition in the financial sector," the economic report further reads.

Some of that strengthening will come from the Liberalisation Bill. For instance, URBRA is proposing to have firms that are looking to compete with NSSF for the 10 per cent or 5 per cent to be registered as companies.

The regulator is looking at setting minimum capital requirements to work as a buffer that insulates workers' savings.

The Bill was read for the first time on September 19, 2014, and referred to the committee for further scrutiny. This same Bill was first tabled in the 8th Parliament and was never withdrawn yet the government brought another draft in the 9th Parliament.

In the process of scrutinising the proposed pension reforms, the Finance Committee wrote to the Speaker on July 7, 2014, citing the technical glitch.

The Speaker wrote to the committee on July 27, 2014, ordering the government to withdraw the Bill. The Bill is now back in the same committee.

One of the other requests from members of NSSF has been the ability to secure a housing loan by using their savings as collateral.

According to the proposals in the Bill, members who have been saving for at least 10 years can use about 50 per cent of their savings as collateral for a mortgage.

NSSF quick facts

NSSF is a quasi-government agency responsible for the collection, safekeeping, responsible investment, and distribution of retirement funds from employees of the private sector in Uganda who are not covered by the Government Retirement Scheme. Participation for both employers and employees is compulsory.

According to its financial statements for the year ending June 30, 2014, NSSF had Shs2.65 trillion in government Treasury bonds (with yields ranging from 10.25 to 14.35 per cent), Shs682.1 billion on deposit with commercial banks, Shs251.3 billion in equity investments at fair value through profit or loss, Shs250.2 billion in capital work-in-progress,Shs193.7 billion in investment properties, Shs143.2 billion in corporate bonds (with yields ranging from 11.03 to 17.00 per cent), Shs73.3 billion in equity securities held-for-trading by fund managers, and Shs14.6 billion in cash and bank balances.

Informal sector

If Uganda is going to grow the level of savings in the country, the informal sector should also be able to access long-term savings options such as the retirement benefits scheme. The informal sector is also barely mentioned in the Bill, especially the details in terms of how they will operate.

The Bill surprisingly stipulates percentage contribution amounts according to Section 10(1) (b) for the informal sector, yet this is the sector that doesn't have defined stable income levels.

"This section doesn't support expanding coverage to include the informal sector.

Workers in the informal sector do not have a regular income requiring setting a contributions percentage while mandatory obligations on informal sector workers will not enhance coverage in that sector," Mr Bonyi told the Committee.

Public service reforms

The Public Service Pension Fund is also up for reform. In its current form, it is not funded. In otherwords, the government gets money from the Consolidated Fund every financial year to pay retiring civil servants. The ministry of Finance had proposed a complete overhaul of this and turned it into a Defined Contributory Scheme.

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