Tuesday October 11 2016

‘Making public service pension contributory is long overdue’

Civil servants attend a meeting in Wakiso

Civil servants attend a meeting in Wakiso district recently. Photo by JOSEPH KIGGUNDU 

By Mark Keith Muhumuza

The government appears to be inclined towards reforming the Public Service Pension Scheme. At what stage are we in the process of making the scheme contributory?
I think the government has now realised that they must reform the public service pension scheme. There has been some communication between the ministry of Public Service and Ministry of finance. The talks have already taken place, meaning what needs to be done is to come up with a legal framework, basically, a Bill to revise the Pensions Act or come with a new a law. The option, I am not sure yet but there has to be a new legal framework. I think they have agreed on rates of contributions for the civil servants who will be joining this scheme.

What are the benefits of making the public service pension scheme contributory?
The impact of reforming the PSPS can be seen in two ways. They are likely to hold a huge asset base in the pension sector. Those will be new assets coming into the pension sector now. Up-to-now, it is not funded. So this money will have to come to the market, be invested and reported each year in terms of assets in that jurisdiction. There are about 300,000 civil servants out there, so with the rate of contribution, you’ll have a lot of money coming into the market.

The current, public service scheme has not been short of controversy. How will the new contributory scheme be regulated?
The regulation is not in dispute. It is already in the act now. The regulation and supervision of pension schemes are already in the URBRA Act. So, we shall now be having an extra responsibility of supervising the management of those assets in as far as where it is invested, the options of investor choice. The current scheme is not regulated by URBRA.

The government has had troubles paying up some of its pension arrears. In the proposals to reform the public service scheme, the government will be required to contribute a certain percentage for each civil servant. Will they be up to this task?
The working assumption is that the government will pay its fair share of the contributions. The government must guarantee that they will pay this share. It is easier for the employee in government to have their contribution deducted. But you see for the government, they must withdraw a contribution from the Consolidated Fund. That is the only area you can worry about if the government defaults depending on their financial position at any one given time. If the government has agreed to the reforms, it means it will budget every year for this and make its contribution. The expectation is that this money will be invested and over some years, it will start reducing the government liabilities in terms of pension.

The government officials in the ministry of Finance have often complained about the challenge of paying pensioners on time because sometimes they chose to prioritise. How will the reforms contribute to reduced liabilities to the government?
Over time, as the reforms take shape, the government liabilities will also reduce. That will not have an immediate impact because they have to run with the implicit pension liabilities which they already have and also make a contribution. This means that in the initial years, they will have to put aside more money. That means the impact for the government will not be felt now but if contributions are sustained and run well over a number of years, then, the government will start reducing the cost of pension liabilities. What it requires is patience over time because the impact won’t be immediate.
There are pensions that have to be paid because they were never part of the contributory scheme. Until the government has built sufficient reserves through the pension savings, then this will allow gradual exit from the existing Consolidated Fund by way of getting money to pay pensions. We expect a Bill in the next financial year and the budgetary implications to the government.

National Social Security Fund (NSSF) still remains the largest player in the market, is there still room for growth?
We expect more people covered, that is how we can deal with poverty in old age and dependency. The challenge NSSF has in terms of coverage is enforcement of the eligible employers. I don’t think all the eligible people have been registered. And if they have, I don’t think they have been contributing as required because it is a question of enforceability, which is NSSF’s responsibility. A more robust enforcement structure is required at NSSF.
Additionally, the legal framework also has restrictions on eligible contributors to NSSF to five employees. The larger bulk of small enterprises is at that level of less than four staff. All these multitudes of employees in many of the small enterprises are not covered because of the legal structure. That should have been corrected if the pension liberalisation Bill had been passed by Parliament because it removed this restriction of capped employees being the only contributors. The current asset base of Shs6.6 trillion could be much larger than it currently is and we could not only be talking of 600,000 active contributors, we would be talking of Shs2 million at NSSF.

Pension sector
Mr David Nyakundi Bonyi, CEO URBRA
Bill in the offing. A proposed public service pension Bill seeks to encourage public servants to contribute 5 per cent of their earnings while government tops up 10 per cent.