Despite social security being the best retirement savings vehicle world over, majority of Ugandans do not have social protection plan to provide a revenue stream during old age. Uganda’s working population is estimated to be 14 million. But only about five per cent are covered by the National Social Security Fund (NSSF), the public service pension scheme and a few voluntary schemes.
A few Ugandan savers are estimated to put away less than two per cent of their annual income for a rainy day in future. This is not because Ugandans do not have enough money to save for their retirement, but due to lack of trusted saving vehicles that would ensure safety of their savings.
NSSF, the only statutory provident fund that collects the 15 per cent compulsory monthly contributions from firms that employ five and more people, has in the past suffered from erosion of public trust and confidence due to several incidents of mismanagement of contributors’ savings.
It should also be noted that while NSSF has about 1.45 million registered contributors, only 487,653 actively contribute to the Fund.
NSSF performance for past five years
Not until about three years ago, NSSF, like was the case with many government parastatals before liberalisation, was not immune to cases of mismanagement and under-performance.
The Fund’s performance reports show it had been under-performing until about three years ago.
NSSF’s acting managing director Geraldine Ssali Busuulwa, however, says the Fund grew by more than 150 per cent over the last five years, with the Fund size now standing at more than Shs4 trillion while the cost income ratio stands at 17 per cent.
Although NSSF maintains that its cost of administration is less than 1.5 per cent, a highly placed source who asked not to be named because of the sensitivity of the matter told Prosper magazine recently that the Fund’s administrative costs are about 1.85 per cent of its total assets, which were estimated at Shs3.9 trillion as at December 2013.
This is far higher than the global average of between 0.6 and 1 per cent, although NSSF says comparing NSSF Uganda’s administration costs to that of big global funds is misleading.
“A comparison of administrative cost ratio across pension funds should be made with funds of similar sizes because the larger the asset base, the lower the administrative cost ratio,” Ms Busuulwa says.
Also important to note is that NSSF’s average real returns on investment (interest earned minus rate of inflation) between 2000 and 2010 was less than one per cent, although it has now slightly improved to about 1.5 per cent.
Stagnant investment projects
This is not to mention the many stalled investment projects especially in the real estate sector, which are costing savers billions of shillings as they yield no income, and dent the Fund’s financial health.
For instance, more than Shs22 billion was sunk in the Nsimbe and Temangalo land which is not generating any income to savers due to controversies emanating from the alleged violation of procurement procedures. This is not to mention billions of shillings sunk into Lubowa land and a prime plot at Lumumba Avenue among others.
The Fund’s investment on the stock market, for long considered a safe and profitable investment option, has suffered a major hit as the stock market recently suffered sluggish activity. Some of the listed companies in which NSSF is a major shareholder have suffered a slump in their share price, skimming off billions from savers.
In the case of Uganda Clays Limited, the Fund has indicated it could write off a Shs10 billion loan as a bad debt after the roofing materials producer reported losses in its operations over the last two or three years.
Ms Busuulwa, however, denies the money is being written off, saying it is being listed on the bad debts column in accordance with “prudent accounting standards, until the company is able to make good their loan servicing.”
While the Fund has made strides to enforce contribution thereby increasing compliance rates, it has faced consistent image battering resulting from governance challenges and a myriad of scandals especially linked to procurement, lack of transparency and corruption scandals.
Mr Stephen Kaboyo, Alpha Capital Partners managing director, says while NSSF assets have grown tremendously over the years, the investment policy has remained conservative and is skewed to fixed income investments and deposits in commercial banks.
The Fund’s fixed assets portfolio – treasury bills, bonds and fixed deposit accounts in commercial banks –accounts for 80 per cent of the total investments, 10 per cent in real estate and 10 per cent in equities – shares on the Uganda Securities Exchange.
This portfolio mix brings about over concentration of investments in short term fixed income which yields low returns and exposes savers’ money to higher risks as it is not cushioned against inflation.
A sector analyst, however, notes that despite NSSF taking measures that have turned around the fortunes of the once under-performing Fund into a profitable one over the last three years; a lot needs to be done to make it a better.
“With majority of Ugandans being under 50 years, the best way to invest is not in fixed income; you should diversify your portfolio to maximise returns by investing long term so that you are able to overcome short term fluctuations and give a better and reliable return,” says the sector analyst.
Most Ugandans join the formal job market at about 23 years and can only get their savings with NSSF at 55 years.
INTEREST PAID TO SAVERS
NSSF’s over concentration of investments in short-term fixed income that is not even cushioned against inflation has affected its ability to generate enough money to pay impressive interest to contributors. For instance, in 2009/10, NSSF paid only 7 per cent interest on members’ savings, against the annual headline inflation of 10.9 per cent in December 2009.
It later fell to 6 per cent in 2010/11 on the back of an expensive court case and the global economic downturn. At the time, annual headline inflation was 3.1 per cent in December 2010.
In 2011/12, the Fund paid 10 per cent interest despite headline inflation being at 27 per cent in December 2011.
In the last financial year, NSSF’s interest to savers was 11.23 per cent against headline inflation of 5.5 per cent in December 2012.
Although NSSF says it has been paying higher interest rate compared to inflation, it should be noted with exception of 2011/12 and 2012/13, the Fund paid interest that was below inflation for the other years. This eroded the value of people’s savings.
NSSF urged to rethink investment tactics
Mr Kaboyo, however, says while high yields in government securities have provided a consistent and reliable cash flow stream for the Fund, equity participation has not been as strong given the perceived risks by the stakeholders.
He adds that while returns have been slightly above inflation, it is still not good enough given that there are investment opportunities that provide a risk adjusted return that NSSF could pursue.
“NSSF needs to take a fresh look at their investment strategies, pursue more diversification by exploring opportunities that may not exist in the domestic market,” he advises.
“Active portfolio management should also be encouraged where professional Fund managers are engaged to invest the assets to enable the Fund to benefit from the investment philosophies and expertise of these asset managers who comb different markets that offer a wide range of sectors,” he advises.
He adds that there is also need to allow NSSF to directly invest and participate in specific productive investment such as government related infrastructure projects that provide a respectable return with the caveat that the projects provide a risk adjusted return.
Ms Busuulwa, however, notes that the Fund’s consideration is to ensure safety of members’ savings while growing savings in real terms.
“The principle that informs our investment strategy is balancing risk and return,” she says, adding that the Fund is currently exploring options of going into private equity and investing into more fixed income within the East African region.
“We review our investment on a regular basis with a view to rebalance and diversify the portfolio to asset classes that will consistently earn higher returns depending on the market dynamics actual and predicted over time,” she says.
She, however, acknowledges that its legible investment opportunities are not enough to absorb its investment potential, adding that there is need for strategic domestic long-term investments that can absorb this.
Improved NSSF performance over the last three years is attributed to improved compliance levels – from 47 per cent in 2009/10 to 84 per cent as at April 2014, prudent investments, efficient cost management and robust customer service.
Improvement in compliance rate saw members’ contributions grow from Shs245 billion in 2008/09 financial year to Shs559 billion in 2012/13.
Benefits payment to members is also said to have grown by 200 per cent to Shs140 billion annually while benefit turnaround time has improved to 10 days from about 105 days three years ago.
Reforming the pension sector
Recognising the need to reform the pension sector in order to restore trust and confidence in the retirement benefits and widen coverage, government, through the ministry of Finance is spearheading reforms that will, among others, put an end to the NSSF monopoly in the provision of pension services and also address the looming pension crisis in the country.
“Reforming the pension sector is crucial because without reforms that will introduce competition, NSSF will still invest 90 per cent of savers’ money in fixed investment which is a disincentive to savers,” Mr Moses Bekabye, the interim chief executive officer at Uganda Retirement Benefits Regulatory Authority, a body that was established a year ago to regulate the pension sector, says.
The reforms will also build a sustainable pension system; broaden coverage not only to the private sector but also to the self-employed. They will also shift the burden of pension provision from the state for civil servants to be shared by both the employer and the employee.
The reforms also seek to ensure protection of workers’ savings, introduce competitive pressure in order to improve governance in the sector and bring about innovation in collection methods, products and new investment vehicles.
They are also expected to offer savers higher returns on their savings.
It should, however, be noted that liberalising the pension sector has faced resistance from various corners including trade unions and NSSF, partly explaining the delay to pass the Bill into law.