NSSF bill will boost social protection coverage — experts

Out of 14 million working Ugandans, only two million have retirement savings.

This means, only about 14% of working Ugandans have retirement benefits to fall back on — both National Social Security Fund (NSSF) and the public sector.

However, if one is to look at this number in terms of the entire national pollution of 40 million people, it means only 5% of Ugandans have some form of retirement benefit.

Apart from the contentious clauses on the 20% mid-term payout and dual supervision of the fund, insiders say, the NSSF amendment Bill offers a number of groundbreaking provisions for workers, especially the proposal to remove the threshold restricted mandatory savings to only those companies with more than five employees.

By opening up the saving space to any Ugandan whether, in the formal or informal sector, pension analysts say the proposed Bill will spur the enhancement of social protection coverage which is in line with the objectives of the International Labour Organisation (ILO).

Will the proposed Bill enhance the coverage and effectiveness of the NSSF? Domestic savings The proposed Bill allows flexibility, meaning that someone can save on a voluntary basis and even top up on their mandatory savings.

 

This also gives them flexibility in getting into the NSSF and leaving when they have emergencies. It will even allow one to open an account for their child," Patrick Ayota, the deputy managing director of NSSF, told New Vision, adding that widening the saving coverage will also increase the pool of long-term domestic savings of the country. Uganda's GDP stands at $34b.

This means that the NSSF Fund, which currently stands at sh13.2 trillion, represents about 11% of the country's GDP. "One of the factors that jump-started the economies of countries such as South Korea, Malaysia, and China, was the availability of longterm domestic savings.

These countries were able to fasttrack their economies when their long-term domestic savings hit 30% of their GDP," Ayota said, defining coverage as the inclusion of as many citizens as possible in the safety net of social protection.

"A simple analysis of the proposed Bill, which contains tax incentives for one to save, shows that now, if you have got increased coverage, it means that the country can accelerate the rate at which we can hit that 30%.

Our projections indicate that within the next 10 years, if contributions just increased by 10% due to the savings within the Bill, we can hit that 30% mark," he noted, underscoring that this will trigger the growth of domestic saving which can become an alternative source of financing rather than relying only on foreign funding.

"Therefore, the Bill is a good thing for the economy," he added. Clause 7 of the proposed Bill calls for the expansion of social security coverage by providing for mandatory contributions from all workers regardless of size of the enterprise or number of employees.

Voluntary contributions

The clause also provides for voluntary contributions to the fund, with an incentive of mid-term access to voluntary benefits under clause 10 of the proposed Bill.

Clause 10 states: "A member who has made voluntary contributions to the fund shall be allowed mid-term access to his or her benefits on such terms and conditions and in a manner prescribed by regulations."

However, MPs and workers representatives have called for mid-term access to apply to even mandatory savers who have clocked 45 years or are under 45 but have saved with the fund for over 10 years.

According to experts, by seeking to expand the saving coverage, the proposed Bill gives every Ugandan an opportunity to save with NSSF whether they are in the informal or formal sector.

Currently, one can only access their savings when they clock 55 years or when they are 50 years and are out of employment or too sick to work, when one moves from the private to public sector, leaves the country permanently or when they die and their money is passed on to their family.

"What COVID-19 showed is the fact that people need to save and we need to increase the coverage of the saving scheme. The current law has no provision for a pandemic such as COVID-19.

However, the proposed law has a general provision that would enable the board and the minister to design a product that suits and caters for Ugandans should there be such a need," NSSF's deputy managing director added.

The Bill, then not only enhances coverage, but it will make NSSF more relevant to members in their time of need. Clause 8 of the Bill has also enhanced whistleblowing mechanisms on non-remittance of the money, a provision that is likely to encourage saving.

Rogue employees

"We have many cases where some rogue employers deduct money from employees but never remit these funds to NSSF, in other words stealing from their workers. It is a cumbersome legal process for workers to regain this stolen money. By the time the legal process has run its course, such employers have closed companies and even moved on.

The proposed law strengthens NSSF in dealing with this aspect," Ayota said. The New Vision has seen documents that show that the Bill was the result of wide consultations that included, among others, the finance ministry, Bank of Uganda, Workers and Employer representatives, Uganda Retirement Benefits Regulatory Authority (URBRA), Uganda Law Society and NSSF.

There were some controversies, but on the whole the Bill does meet the two key requirements of enhancing coverage and effectiveness of the social security system in Uganda.

Financial experts argue that the controversy regarding dual reporting of the fund, (whether finance ministry or Ministry of Gender) and the 20% mid-term payout, have overshadowed the bigger picture and intention of the proposed Bill.

The rationale behind President Yoweri Museveni's warning to MPs, State House officials said, is the negative effect on the money due to the savers if there is a reduction as a result of the 20% mid-term withdrawals for all savers.

"You should first apply ekibalo (calculations), weigh and analyse what will happen to the fund if members withdraw their savings.

It may not be wrong to withdraw, but you need to study it," Museveni said, advising MPs to analyse the benefits and losses to the fund before interfering with it. "If you withdraw the money early, the fund will not grow.

The more the business, the more the savings and interests. So, please look into that," the President told MPs, adding that the NSSF fund, whose value is about sh13 trillion, has grown to that level because of the Government's wise decisions.

However, a look at clause 19 of the Bill indicates that the proposed 20% mid-term access to benefits is not for all savers, but a conditional provision that limits the payout to a member who is 45 years and above or has saved with NSSF for at least 10 years.

To encourage saving, experts argue that the Bill, under clause 19, seeks to reform the tax regime when it comes to the benefits.

Under the current law (the NSSF Act), contributions are taxed, income at NSSF scheme is taxed but the benefits are not taxed.

"However, the Bill had to turn this around by proposing that there be no tax on the contribution and scheme income but the benefits be taxed. However, this was misunderstood.

So, the committee of Parliament is proposing that there should be no tax on the contributions but you can tax the centre when NSSF is re-investing.

This means the income on the investments can be taxed and then the benefits are not taxed. It is not a problem doing it that way," Ayota said. 

MANAGING FUND

Sources told New Vision that the other battle underpinning the proposed NSSF amendment Bill is the reduction of the cost of fund management.

While the proposed Bill is rooting for inhouse management of investments, another well-positioned group in Cabinet and Parliament is agitating for external management of the fund's investments which will attract a 1% charge for their services yet their investment plan is not different from that of the fund's management.

With the fund at sh13 trillion, this 1% payment translates to about sh130b in fund management expense for a year and yet NSSF can ably use its in-house investment expertise at no extra cost.

It does not make sense to pay an external firm sh130b per year to manage the investments of the fund when the total annual budget of NSSF is sh160b," a source within Cabinet told New Vision.

Countries such as Australia, Canada, Malaysia, Singapore, among others, all manage their investments using inhouse expertise.

For example, in 2014, New York's saving fund paid $472m to outside managers and consultants, which was $269m more than what the pension fund in Canada paid, for it manages 80% of its assets in-house.