It was recently reported that the bill to reform Uganda’s pension sector is due to be discussed by the relevant parliamentary committee this month, having been returned to the house following the end of the term of the 9th parliament. It is essential for Parliament to consider reforms in our national pension laws if Ugandans are to retire – assured of a respectable pension that keeps them financially independent of their relatives.Indeed, the absence of a social safety net has sometimes been sighted as one of the factors fueling corruption in the public sector. I am using the word ‘reform’ because ‘liberalization’ has been implied to mean privatization of the National Social Security Fund (NSSF) which is misleading and unnecessary.
Voluntary savings never drive the growth of a country’s savings considering the short term existential fears of many people. For retirement savings to be sufficient, savings must be driven by law. This is the case everywhere in the world where savings exceed 30% of GDP (Uganda’s formal savings, with the bulk being the funds managed by NSSF, are only 9% of GDP)
As the debate resumes, I would like to make four proposals for inclusion in the pensions law. In summary, pension reform should focus on increasing mandatory savings – one of which must be the public service pension scheme; limiting the full withdrawal of employee savings when they change employment; increasing the mandatory savings from a total of 15% to 20% with NSSF retaining a combined total of at least 10% of total savings; and, making it mandatory for savings to be paid out monthly rather than as a lump-sum on retirement. I will explain each of these points further.
First, the public service pension scheme and any defined benefit scheme must be reformed into a defined contributory scheme. A defined contributory scheme is one where members contribute a portion of their income by law towards a segregated fund which is managed by trustees, who are approved by the pensions regulator. In a defined benefit scheme, members do not contribute a portion of their income into a scheme, but rather, their pensions are paid out of the revenue generated by their employer. The conversion of the public service pension scheme into a defined contribution scheme will improve the sustainability of pension payments and avoid the accumulation of pension arears.
Secondly, pension reform must block the withdrawal of “all” employee savings upon change of employment, and this should apply to those joining employment going forward. Complete withdrawal should only happen when employees attain the legal retirement age. However, as a compromise, employees maybe allowed to withdraw up to 50% of their total savings when they change employment. This ensures that the concept of saving for retirement is not undermined. Of course it helps if the management of employee savings is done professionally in order to build confidence and trust in the pension management and regulation system, which is the reason the pension regulator exists.
Thirdly, employees should be given the option to reduce the proportion of income that they save with NSSF in order to free up additional funds to be saved with another mandatory contractual saving fund. Ultimately,the goal should be to ensure that employees have a combined (employee and employer) saving increased from 15% to at least 20% in one or two mandatory schemes.
Creating an additional mandatory scheme or two will increase capital raising options amongst Ugandan businesses seeking to raise patient capital for expansion, debt refinancing or seeking to reduce their shareholders’ stake in their business. It will also help strengthen investment decision making when these pension funds are undertaking joint investments in large projects.
Lastly, upon retirement, employees should receive no more than a third of their final savings as a lump-sum, and the other two thirds through monthly pension payments. Eliminating, or reducing the portability of voluntary pensions will increase the pool of long term savings in the country there by facilitating the creation of long term savings products (of more than fifteen years) with the assurance that the largest investors (typically pension funds) are able to invest in these products. This way, we will see Ugandans’ savings being utilized to build the soft and hard infrastructure needed to create jobs, increase exports and reduce imports, thereby driving the growth of our economy. No one will do this for us!
Over the past eighteen years, Uganda’s annual average inflation has been 7.2%, and the annual average rate of depreciation of the Uganda Shilling to the USD has been 6.5%. This suggests that the Shilling is a relatively credible store of value. The annual average equity and debt investment returns over this period have been 17.5% and 13.9%, hence a real or net return of 10.3% and 6.7% per annum respectively. Where in the world would one generate returns like this passively?
The growth of Uganda’s equity capital markets should be driven by domestic savings. Currently 70% of this market is dominated by foreign pension funds and other institutional savings, which form about 10% of the debt capital markets. However, this trend should be reversed, with more domestic participation in the equity capital markets and more foreign participation in the debt capital markets.
The author is the CEO of Capital Markets Authority. The views expressed here are of the author and do not necessarily represent the position of the Authority.