Sunday June 1 2014

Pension reforms: Where are funds more secure?

By Simon Mulima

A debate has been going on for a while about reforms in the pensions sector. Different impressions have been created about the Bill, some of which have been misleading. But the question remains; Do we need a liberalised regulated pensions sector or a reformed sector?

The pensions sector in Uganda has not been non-existent. Several schemes have been in existence either by virtue enactments by Parliament, company provision for employees or by private personal plans. Changes so far have brought into place a retirement benefits authority for regulation purposes and the expectation is that a new law will be passed and amendments will be made to others.

In our country, where the culture of saving has not been at its best, such a debate can go on unnoticed by the majority. However, given the nature of the population changes, the outcome of whether there is change or no change will affect a huge proportion of the society that is seemingly unaware of the proposed changes.
So, is there need of having a reformed regulated pensions sector?

The liberalisation of the sector is meant to provide more options of schemes for the savers to use for the mandatory savings, the increase in choices would also improve on the quality of the services provided and the returns on the savings. This applies to the 15 per cent that is paid to NSSF.

It would mean that NSSF ceases to be the sole provider of the savings avenue for the 15 per cent proportion of the salary as stipulated by the NSSF Act. The greater aim though is also to encourage more people to save for retirement and reduce on the dependency tendencies of senior citizens on the younger members of their families.
It is true that additional voluntary retirement savings are already being made to private providers like insurance companies and others being managed by committees set up in trust by companies for the sake of their employees.

Insurance companies like Insurance Company of East Africa (ICEA) and others, for example, provide these services for both individuals with personal retirement plans and for companies. The benefit is that schemes with very small funds, investment of funds in a pool presents an opportunity for a better return and smaller charges.

In cases where schemes have not opted to use the services of a professional third party provider say an insurance company, opportunities for fraud and embezzlement exist in abundance.

This is where the need for a regulated environment sets in.
The regulator is not here to take people’s retirement savings as many have been convinced to believe, but to secure these savings.

It is not uncommon for the news to bear such stories related to fraud and embezzlement of retirement monies. Stories of would-be pensioners camping at former employers demanding for their “packages”. And who is the voice for such cases, not even the unions come to the help of such individuals, but it is their own fight to make; as helpless as they may seem to be.

The Authority who is the regulator is responsible for the security of contributions and to minimise incidences of swindled funds. The practice as of today is that each provider has their own way of doing things, but then there needs to be a standard way of going about the whole retirement saving process.

A check on the practices is necessary to achieve good outcomes for employees to retire comfortably.
How comfortable one is to retire is determined by how much they have contributed for retirement and the returns on such savings, not forgetting the prevailing economic times at the time of retirement and the security of their savings.

This Bill, if passed into law, will have the added advantage of tax benefits in form of tax concessions. At ICEA, for example, a simple monthly contribution of Shs100,000 into a personal retirement plan for a 25-year-old person, who wants to retire at age 65, can yield almost four times the total amount contributed over the same period.

But then it’s only human to want quick things and many may not be willing to save for the 40 years if not assisted by the employers.

Let me share experiences common to many Ugandans. I noted that my niece’s nursery school fees compete with what we used to pay at university. Hospital bills have tripled in size and the situation is worsened by the sort of illness we suffer these days; I don’t remember ever suffering from a bacterial infection while growing up!

Expenses are generally higher and at each pay cheque, there is hardly anything left to pass to my parents; the societal norm was that children take care of their parents in old age, but will my children be able to spare anything for me if I do not do it myself? Most unlikely.

So we do really need to have the Retirement Benefits Regulatory Authority to ensure that our savings are protected?

The author is a student at the Pensions Management Institute - UK