Why Uganda must expedite reforms in pensions sector

It was recently reported that the Bill to reform Uganda’s pension sector is due to be discussed by the relevant parliamentary committee, 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 fuelling corruption in the public sector. I am using the word ‘reform’ because ‘liberalisation’ has been implied to mean privatisation of the National Social Security Fund (NSSF). This is both 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 per cent of GDP (Uganda’s formal savings, with the bulk being the funds managed by NSSF, are only 9 per cent of GDP)

The proposals
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 per cent with NSSF retaining a combined total of at least 10 per cent 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 arrears.

Block full withdrawal
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 may be allowed to withdraw up to 50 per cent 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 per cent in one or two mandatory schemes.

Additional scheme
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 thereby facilitating the creation of long term savings products (of more than 15 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 utilised 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 18 years, Uganda’s annual average inflation has been 7.2 per cent, and the annual average rate of depreciation of the Uganda Shilling to the dollar has been 6.5 per cent.
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 per cent and 13.9 per cent, hence a real or net return of 10.3 per cent and 6.7 per cent 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 per cent of this market is dominated by foreign pension funds and other institutional savings, which form about 10 per cent 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.

NEED For Pension funds
Why save for retirement
Pension funds perform important economic functions, such as mobilising and managing savings, providing income stability, making labour markets more efficient and providing exposure to systemic risk in the financial markets.
As people develop through their lifetime they have an expectation that a time will come when they will be able to retire. To some people the mandatory NSSF pension is enough to provide the basics of life.
Others may have accumulated wealth without using pension schemes - perhaps through their business ventures or other assets. But most people will be better off supplementing what they have with some form of pension money.

Many employers also take the view that, while their employees are working, they should be building up an entitlement to a pension when they retire.
When people retire they experience a reduction in income, thereby making pension necessary at this time of their life.
Pension can provide protection in the form of lump sums and pensions to dependants in the event of a member’s death.