Why Uganda should continue with pension sector reform

By Miriam Ekirapa Musaali

The roadmap for reform of Uganda's pension sector was drawn more than a decade ago.  

In 2003, the Minister of Gender, Labour and Social Development constituted the Stakeholders Transition Group (STG) to assist the Government with the development of a comprehensive legal, regulatory and financing framework for social security reforms. Following the STG recommendations another taskforce was established, the Pension Sector Reform Task Force, Chaired by Ministry of Finance, Planning and Economic Development (MOFPED). The main role of this task force was to prepare a clear and practical policy framework to serve as a road map for the reform of the pension sector.

The taskforce created the sub-committee on liberalisation and regulation (SCLR), which was mandated to make proposals on the liberalisation and regulation of the pension sector. In the taskforces and working groups there was consensus that the pension sector needs to be regulated and liberalised.

In 2011, the Uganda Retirement Benefits Regulatory Authority (URBRA) Act was enacted and soon after the regulatory authority, (URBRA) was established. This was a great mile stone for Uganda. 

The MOFPED submitted the Retirement Benefits Sector Liberalisation Bill to Parliament for consideration in 2011. The Bill is core to the pension reform agenda for Uganda and is key to development of the pension sector.

Liberalisation is not a new phenomenon in Africa. In countries like Ghana and Nigeria pension reform ushered in healthy competition in provision of pension services and products to the populace. In Ghana, the reforms started in 2008 with the decision of the government to put an end to the monopoly of the Social Security and National Insurance Trust (SSNIT).

In Uganda, only employers with 5+ employees are required to make mandatory contributions to the National Social Security Fund (NSSF). According to the Uganda Economic Update 2017 (World Bank) only 5% of Uganda's work force is covered by or participating in a pension scheme. The 2011 Liberalisation Bill seeks to increase coverage to all formal sector workers (removing the 5+ cap).

For Uganda to mobilise domestic savings, reforms geared towards mobilisation of domestic savings are necessary. The Liberalisation Bill seeks to mobilise domestic savings through voluntary savings by both the formal and informal sector. Currently Uganda's pension sector contributes only 12% of Uganda's GDP.

To mitigate against old age poverty, portability of pensions should be encouraged among employees. With portability an employee can transfer his or her pension savings from one employer to the other. The current practice among working class Ugandans is to leave an employer and utilise the accrued retirement benefit for immediate needs. This behaviour makes one prone to old age poverty as the retirement income has not been preserved. The 2011 Liberalisation Bill seeks to preserve the retirement income of an individual who moves from one employer to another within East Africa. This is a positive step towards alleviation of old age poverty among Ugandans.

Encouragement of savings goes hand in hand with incentives such as tax credits. The Liberalisation Bill seeks to provide a better taxation framework that will encourage savings and curb consumption. The tax model proposed in the Liberalisation Bill will enable mandatory tax free contributions to a pension scheme as well as up to 30% of voluntary contributions in occupational schemes. Only the investment income will be subjected to tax and the final benefit at payout will remain untaxed.

The Bill seeks to achieve the third objective of Uganda's pension reform agenda which is to reduce the fiscal deficit to government. This will be achieved by converting the public service pension scheme from a defined benefit scheme (where no contributions are made by the civil servant) to a defined contribution scheme (where both the government and the civil servants make contributions to the scheme). This transition will in the long run assist in reducing the fiscal deficit to government.

The passing of the Liberalisation Bill by the Parliament is essential for healthy competition within the pension sector, better returns on contributions to pension schemes and growth of Uganda's economy.

The writer is the COO Alexander Forbes Financial Services Uganda