Corporate governance: a key requisite for pension sector growth

May 27, 2019

The country’s private sector is predominantly driven by Micro, Small and Medium Enterprise

 By Andrew D Kasirye

Good corporate governance is key in strengthening the retirement benefits sector.

According to financial experts, pension funds if well managed, represent an important share of the assets in any country's financial systems.

Many Ugandan private enterprises have been collapsing in a very short period of time due to poor cooperate governance.

Some defunct companies like Ssembule Group of Companies and ALAM Group among others played a central role of the private sector with a strong footprint in the financial services sectors but later dissolved.

If one carefully examined how those businesses were managed by the founding families, the common strand cutting across would be the absence of the principles of corporate governance that are currently being cherished and practised globally. I refer to that period of private sector growth as the Pre-Corporate Governance era.

However, today the Companies Act 2012, introduced a code of corporate governance, which should be embraced by all Ugandan enterprises.

In this era of cooperate governance, the "Buy Uganda-Build Uganda" (BUBU) policy is expected to boost the private sector to play a pivotal role in the country's economy.

According to statistics, the country's private sector is predominantly driven by Micro, Small and Medium Enterprise, accounting for approximately 90% of the entire private sector. The sector comprises about 1,100,000 enterprises which makes the sector one of the largest employers in their country.

The statistics also show that MSMEs contribute approximately 75% to the Gross Domestic Product (GDP) and employs 90% of total non-farm sector workers more than 2.5 million Ugandans.

In a 2017 research paper by Chatham House or the Royal Institute of Internal Affairs in the UK titled: "Developing Businesses of Scale in Sub-Saharan Africa: Insights from Nigeria, Tanzania, Uganda and Zambia", it was observed that the prevailing business culture in Uganda tends to act as a hard cap on the growth of a business and with often a steep decline in management competence on the retirement or death of the head of a small enterprise.

It implies that many owners of small firms (Small Medium Enterprises) frequently do not differentiate between profit and working capital, and so prioritise short-term spending on education, housing or even luxury goods over re-investing in the business.

The government's MSMEs Policy objectives is to build the entrepreneurial, managerial and business skills of MSMEs backed by a positive mindset, which calls for the application of the cooperate governance principle to transform MSMEs.

Corporate governance practitioners must interrogate the existing weaknesses of the private sector and prescribe practical avenues to reverse a trend in which we see no company listed on the stock exchange for the last three to four years.

Out of the top 50 companies listed among the top taxpayers, 50% are classified as non-Ugandan with corporate control being based in jurisdictions where there is strict adherence to principles of corporate governance.

Besides business, the same cooperate governance principles can build a vibrant pension sector if applied.

Some of the issues affecting the performance of the pension sector globally include; fund governance, policy relating to the investment of the funds, fund manager's accountability, fund management and the exercise of member rights.

Corporate governance of pension funds and how the funds are managed to have an impact on fiscal policy and financial markets in the country.

Many people think that the pension sector is about individuals who are retiring from service; which is not the case.

A country that does not pay attention to the management of pension funds paves way for their mismanagement leading to their failure to attain the long-term objective of fighting old age poverty, which also affects the development of the financial market.

Pension funds fulfil an important role in the economy by channelling the current pension savings into investments in financial assets and subsequently transforming the various assets into a predictable post-employment income for many people around the globe.

Pension funds represent an important share of the assets in Uganda's financial system (10% of GDP as of end June 2017).

Government appreciated this and found it prudent to put in place a robust regulatory environment for the retirement benefits sector with rich content of corporate governance.

The URBRA Act of 2011 requires all Retirement Benefits Schemes to be established as an Irrevocable Trusts.

The trustees, who represent the interests of the scheme members, are responsible for the operation and administration of schemes in compliance with the URBRA Act and other established Regulations and laws. Whereas Trustees appoint service providers for the custodian, fund manager, administrator; and auditors, they still retain the fiduciary responsibility to ensure that scheme funds are prudently invested and managed in the interest of members.

As a result, the sector has steadily registered exponential growth over the last 5 years resonated by the growing confidence in the sector.

The future of the schemes is more certain with the regulatory framework and the robust oversight by the Regulator.

The writer is a lawyer and a managing partner of Kasirye, Byaruhanga & Co. Advocates and also the chairman board of directors, URBRA

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