NSSF reform will not benefit contributors but managers
Aug 19, 2011
THE proposed reform of the social security and pension sector is a step backward; a case of moving from the sublime to the ridiculous.
By John B. Kakooza
THE proposed reform of the social security and pension sector is a step backward; a case of moving from the sublime to the ridiculous.
The proposals appear to be the handiwork of the omnipresent robber barons that covet NSSF’s huge cash resources and their usual local agents.
The ‘reform’ proposals appear to have been lifted directly from the discredited Chilean Model that was imposed on Chile by robber barons through dictator Augusto Pinochet in 1980. They are contrived to benefit the so-called fund managers at the expense of the supposed beneficiaries. Contributors to NSSF should worry.
To begin with, The Uganda Retirement Benefits Authority Bill 2010 creates a multiplicity of players along the chain, each with a fee to levy; custodians, administrators and fund managers. We received these proposals long time ago and rejected them. They are now back.
The proposals aim at splitting up NSSF so that it should retain only the unrewarding function of collecting money from its contributors and cede the management of that money to ‘fund managers’. The costly part of managing the fund is what we used to call compliance. This is the enforcement function. It is principally fieldwork.
It requires a large compliance staff, out of station allowances, vehicles, fuel and a lot of stationery work, even in today’s automated environment.
Compliance takes the bulk of the fund’s operational costs. The trick behind the reform is to turn the fund into the compliance function of the sector and cream away the cost-free, profitable ‘’fund management’’ function.
The money collected will be handed over to fund managers who will handle the investment function. The fund manager to be licensed by the regulator will invariably be a foreign entity who will keep the money for over 30 years because pension funds are by definition, long term savings.
In the year 2000, when this proposal came up, the operations function and administration was supposed to be done by the Ministry of Labour.
We know there will be a regulator and trustees. We should, however, note that a regulator is not a guarantor, nor will he be from heaven. The so-called other players in the market are eyeing NSSF’s ready cash. They fear to go out and mobilise the money themselves.
It is costly, which is why they want to confine the fund to the collection function only.
The next move is to liquidate NSSF’s real estate’s portfolio into cash which, too, will be given to fund managers who do not want to manage buildings or engage in construction. What they need is cash, plain and simple. Next, we shall hear that locally, there are not enough products in which to invest the huge cash, and that will be the reason for the externalisation of that cash to big economies in Europe and the US in a kind of financial osmosis. This cash will never return to the country because benefits and administration costs will always be paid out of current contributions.
We are creating a situation where we mobilise domestic savings and fail to use them to finance our development. It is hard to fathom why anyone would do this to his country.
It will not be possible to prevent a fund manager from taking the money out of the country because in a liberalised economy, you cannot put too many restrictions on investment choices especially when you have given the fund manager the task of maximising returns on members’ funds.
Trustees will have no power over the fund manager who will be a statutory institution independently regulated. The fund manager’s job will be simply to present a statement of investment objectives to the regulator.
The other proposal is to convert the fund into a pension scheme, which would be a good idea, if it were not to be a defined contribution scheme.
The pension plan should have come long time ago because private sector employees need a pension similar to the public service pension. However, contributors to NSSF should refuse the defined contribution plan which is a rip off. They should demand conversion into a defined benefit pension plan.
The difference between the two plans is enormous. The former benefits the fund managers and gives pensioners peanuts. The latter gives a fair pension based on the salary the member was earning just before retirement. The proposed private fund managers cannot accept to manage the funds for a defined benefit scheme because this puts to them a lot of responsibility.
In my view NSSF should be kept as a national scheme. It should be run by a board of trustees comprising members nominated by contributing employers and employees, plus those nominated by Government. It should be left to run all the functions in-house. Investment of members’ contributions should be the responsibility of the trustees, probably delegating that function to an investment committee manned by some of the trustees and other professionals, such as actuaries, financial analysts and legal advisors.
By way of liberalisation, the law should allow those who want to leave the NSSF to join private pension schemes, which should be regulated as proposed in the Bill. Private schemes can be occupational schemes sponsored by employers and managed by trustees named by the sponsoring employers and employee-members. These schemes may be contributory or non-contributory, fully sponsored by the employer, provided they are regulated.
Employers should be free to subscribe to both the NSSF and an occupational scheme. Even better, private schemes can be industry-based. For example, a scheme for bankers or media houses etc.
The reasons the sponsors of these reform proposals give against the defined benefit schemes are self-serving as they are not applicable to Uganda.
Liberalisation of the sector is desirable, and should be done even under the present NSSF Act which provides for contracting out. All that is needed in the appointment of a regulator. NSSF should be saved for its innumerable benefits to the country, not least job creation.
Besides its 500 direct jobs, it creates other indirect jobs. Under its real estate function, it employs contractors, engineers, architects, technicians and other workers who in turn become its contributing members. Why would a government that preaches patriotism want to destroy so many jobs and enrich the already rich robber baron? It is not true that the fund managers will give a much higher return than what the fund currently gives. That is giving false hopes to people.
Surely the Government cannot surrender the future of its citizens to private providers who may not be there in say 20 years. Private companies collapse even when they are regulated.
THE proposed reform of the social security and pension sector is a step backward; a case of moving from the sublime to the ridiculous.
The proposals appear to be the handiwork of the omnipresent robber barons that covet NSSF’s huge cash resources and their usual local agents.
The ‘reform’ proposals appear to have been lifted directly from the discredited Chilean Model that was imposed on Chile by robber barons through dictator Augusto Pinochet in 1980. They are contrived to benefit the so-called fund managers at the expense of the supposed beneficiaries. Contributors to NSSF should worry.
To begin with, The Uganda Retirement Benefits Authority Bill 2010 creates a multiplicity of players along the chain, each with a fee to levy; custodians, administrators and fund managers. We received these proposals long time ago and rejected them. They are now back.
The proposals aim at splitting up NSSF so that it should retain only the unrewarding function of collecting money from its contributors and cede the management of that money to ‘fund managers’. The costly part of managing the fund is what we used to call compliance. This is the enforcement function. It is principally fieldwork.
It requires a large compliance staff, out of station allowances, vehicles, fuel and a lot of stationery work, even in today’s automated environment.
Compliance takes the bulk of the fund’s operational costs. The trick behind the reform is to turn the fund into the compliance function of the sector and cream away the cost-free, profitable ‘’fund management’’ function.
The money collected will be handed over to fund managers who will handle the investment function. The fund manager to be licensed by the regulator will invariably be a foreign entity who will keep the money for over 30 years because pension funds are by definition, long term savings.
In the year 2000, when this proposal came up, the operations function and administration was supposed to be done by the Ministry of Labour.
We know there will be a regulator and trustees. We should, however, note that a regulator is not a guarantor, nor will he be from heaven. The so-called other players in the market are eyeing NSSF’s ready cash. They fear to go out and mobilise the money themselves.
It is costly, which is why they want to confine the fund to the collection function only.
The next move is to liquidate NSSF’s real estate’s portfolio into cash which, too, will be given to fund managers who do not want to manage buildings or engage in construction. What they need is cash, plain and simple. Next, we shall hear that locally, there are not enough products in which to invest the huge cash, and that will be the reason for the externalisation of that cash to big economies in Europe and the US in a kind of financial osmosis. This cash will never return to the country because benefits and administration costs will always be paid out of current contributions.
We are creating a situation where we mobilise domestic savings and fail to use them to finance our development. It is hard to fathom why anyone would do this to his country.
It will not be possible to prevent a fund manager from taking the money out of the country because in a liberalised economy, you cannot put too many restrictions on investment choices especially when you have given the fund manager the task of maximising returns on members’ funds.
Trustees will have no power over the fund manager who will be a statutory institution independently regulated. The fund manager’s job will be simply to present a statement of investment objectives to the regulator.
The other proposal is to convert the fund into a pension scheme, which would be a good idea, if it were not to be a defined contribution scheme.
The pension plan should have come long time ago because private sector employees need a pension similar to the public service pension. However, contributors to NSSF should refuse the defined contribution plan which is a rip off. They should demand conversion into a defined benefit pension plan.
The difference between the two plans is enormous. The former benefits the fund managers and gives pensioners peanuts. The latter gives a fair pension based on the salary the member was earning just before retirement. The proposed private fund managers cannot accept to manage the funds for a defined benefit scheme because this puts to them a lot of responsibility.
In my view NSSF should be kept as a national scheme. It should be run by a board of trustees comprising members nominated by contributing employers and employees, plus those nominated by Government. It should be left to run all the functions in-house. Investment of members’ contributions should be the responsibility of the trustees, probably delegating that function to an investment committee manned by some of the trustees and other professionals, such as actuaries, financial analysts and legal advisors.
By way of liberalisation, the law should allow those who want to leave the NSSF to join private pension schemes, which should be regulated as proposed in the Bill. Private schemes can be occupational schemes sponsored by employers and managed by trustees named by the sponsoring employers and employee-members. These schemes may be contributory or non-contributory, fully sponsored by the employer, provided they are regulated.
Employers should be free to subscribe to both the NSSF and an occupational scheme. Even better, private schemes can be industry-based. For example, a scheme for bankers or media houses etc.
The reasons the sponsors of these reform proposals give against the defined benefit schemes are self-serving as they are not applicable to Uganda.
Liberalisation of the sector is desirable, and should be done even under the present NSSF Act which provides for contracting out. All that is needed in the appointment of a regulator. NSSF should be saved for its innumerable benefits to the country, not least job creation.
Besides its 500 direct jobs, it creates other indirect jobs. Under its real estate function, it employs contractors, engineers, architects, technicians and other workers who in turn become its contributing members. Why would a government that preaches patriotism want to destroy so many jobs and enrich the already rich robber baron? It is not true that the fund managers will give a much higher return than what the fund currently gives. That is giving false hopes to people.
Surely the Government cannot surrender the future of its citizens to private providers who may not be there in say 20 years. Private companies collapse even when they are regulated.