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Pension liberalisation, a bag of mixed nuts

By Vision Reporter

Added 5th December 2014 10:25 AM

Only about one million people out of a 13.4 million total labour force in Uganda are formally saving for their old age.

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Only about one million people out of a 13.4 million total labour force in Uganda are formally saving for their old age.


By David Mugabe

Only about one million people out of a 13.4 million total labour force in Uganda are formally saving for their old age.

Of this, only about 350,000 (3.5%) employed in civil service are covered by public pension schemes, while just over 500,000 (or 3.5%) are contributors to the National Social Security Fund (NSSF), according to the Uganda Retirements Benefits Regulatory Authority (URBRA).

Together with the public sector pension schemes, the NSSF and occupational schemes, total social security coverage is only about 7%, leaving out 12.4 million people, according to URBRA.

The situation presents the enormous opportunity available to grow the savings base, expand the social security net and spark businesses to engage in social security services.

Most of those without social security are in informal employment.

The statistics, which were partly revealed in the preliminary 2014 population census report, form the basis for the liberalisation of the pensions sector.

“It will pave way for increasing coverage of social protection to an increasing number of the working population and also ensure improvement in the governance of funds,” notes Moses Bekabye, the interim chief executive officer of URBRA.

According to URBRA, from November 13 to 15, the parliamentary committee on the economy scrutinised the Retirements Benefits Sector Liberalisation Bill, 2011 and considered it.

A draft report of the Bill is ready and URBRA expects it to be presented to plenary of Parliament in early next year.

This new law will open up the sector and attract new firms into the social security sector waiting to partake of the several roles created. These include custodians, trustees, administrators and fund managers.

To date, 63 retirement benefits schemes (custodians, trustees, administrators and fund managers) have been licensed from 52 earlier in the year.

URBRA, however, estimates that there exists 800 occupational schemes providing benefits, but almost 90% of the funds (over three trillion shillings) under the occupational schemes are invested abroad, beyond East Africa.

Why liberalise?

Benefits include removal of NSSF’s monopoly as the sole largest mandatory fund, ushering in competition, which will set the stage for higher returns to members, efficiency and better service delivery.

Rita Nansasi, the URBRA legal services manager, notes that out of the 30,000 firms (employing more than five people) supposed to remit worker’s contributions to NSSF, only 9,000 comply.

This translates into a coverage performance of only 30% of eligible contributors.
 

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Liberalising the social security means more players in the market. Some of the players could easily mismanage people’s lifetime savings like it happened during the credit crunch in the West


The administrative costs of NSSF are also high, ranging between 1.7% and 1.85% of the total assets (or sh65-71b per year).

The global range is 0.5%-0.8%, according to Nansasi. The other benefits are efficiency in the public service pension scheme, speedy settlement, checking corruption and ghost workers.

Liberalisation also presents enormous opportunity for capital markets development, savings mobilisation, reducing dependency on donor funding and availability of affordable funding for infrastructure development.

Currently, Uganda’s savings to GDP ratio is at 11% while Kenya’s is over 20%.

Other countries

The World Bank notes that between 2001 and 2008, Kenya, Nigeria, Ghana and Tanzania instituted reforms to liberalise their social security sectors.

In Kenya, under the MBAO arrangement, between the Kenya pensions regulator and SMEs, workers contribute $6 towards retirement every month.

Introduced in 2011, it is the largest individual pension plan in Kenya today. Alexander Forbes alone, for instance, administers 22 funds in Uganda with a membership of just 9,000 and worth over sh100b by 2013.

In Kenya, Alexander Forbes manages 190 funds worth sh2.4 trillion with a workforce of 126,000.

What can go wrong with liberalisation?

Busani Ngwenya, the managing director of Alexander Forbes, notes that the pace of liberalisation has been slow for almost a decade even after the regulator was set up.

In between, colossal sums of money have been lost, mostly in NSSF and public pension schemes. Also, private sector wants the restriction not to invest only in East Africa lifted.

Yet analysts worry that the region needs this money to meet its development needs while investment schemes in the West have proven risky which partly led to the global financial crisis around 2008.

People against liberalisation argue that creating separate roles of fund managers, trustees and others will see a rise in administrative costs over and above what NSSF is currently spending.

Ngwenya says there is still lack of clarity on who should take benefits in families while having schemes where savings are taken away defeats the logic of social security.

Ngwenya admits that there is also the possibility of collusion, which a strong regulator can check

Pension liberalisation, a bag of mixed nuts

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