Saturday January 31 2015

There are loopholes in plan to liberalise pension sector

By Adellah Agaba

There is wide public perception that the National Social Security Fund has not been run on sound governance principles and this could have a negative effect on savings mobilisation in the country plus the State-funded defined non- contributory Public Service Pension Scheme that is regulated by the Pensions Act, Cap 286 is fiscally unsustainable and hence the need to rectify the situation by enacting a law that will transform the Public Service pension scheme into a contributory one.

As valid as this could be, it’s important for the public to understand the underlying factor and niche of social security.

For many individuals, employment constitutes the only significant source of a livelihood. However, by the very nature of human beings, a time comes when an individual is no longer able to access regular income or other means of livelihood as a result of old age and for avoidance of poverty, social security comes in handy. Lack of secure and regular income for the elderly undermines the eradication of poverty and provision of social security for all.

On October 8, 2014, the Minister of Finance, Planning and Economic Development, Ms Maria Kiwanuka, informed Parliament that the text of the Bill that had been tabled in Parliament on the September 29, 2013 was different from the one that was introduced in the 8th Parliament.

In an attempt to supposedly sort out this confusion, the Minister applied to withdraw the one that was tabled in the 9th Parliament.

This application was granted and the said Bill now stands withdrawn. However, the Bill is bound to come back before Parliament and it proposes reforms that will significantly alter the way retirement income is secured for retired workers in Uganda.

The specific objectives of the Bill are: to remove monopoly of a single retirement benefits scheme over mandatory contributions that is, to allow private pension schemes to receive mandatory contributions; provide for fair competition among licensed retirement benefits schemes for mandatory contributions; allow an employee to choose a Retirement Benefits Scheme of his or her choice; provide for annuity as an alternative to lump sum payment of retirement benefits; provide for early or mid-term access of up to 30 per cent of an employee’s retirement benefits; provide for transfer of retirement savings from one scheme to another in Uganda and EAC; repeal the Pensions Act, Cap 286, convert the Public Service pension scheme into a contributory scheme and repeal the National Social Security Fund Act, Cap 222.

As much as the objectives seem good on paper, when well analysed, loop holes are discovered which could affect the workers’ savings.

Private pension schemes cannot be an effective solution to the problem of limited coverage because they are profit motivated.

Don’t be surprised if member’s savings to a private scheme may be reduced or completely eroded by losses made by a scheme which is in contrast with the current legal regime where losses made by the NSSF cannot reduce or erode a member’s contributions.

Although, the right to contribute to scheme of one’s choice will give workers control over where their money is saved, it will also leave them with a duty to take decisions with potentially high risk outcomes.

Media reports indicated that the proposed liberalisation of the pension sector has so far attracted over 385 players to get involved and Minister Kiwanuka stated that pensions will increase to Shs19 trillion in 10 years from the current Shs4 trillion when the Bill is passed into law with the collection base widening bringing more players on board.

But do the workers know what this means for their savings considering that most of the private schemes are commercially motivated?

It’s imperative on government and workers to evaluate how liberalisation of the pension sector will affect the main intention of social security.

An efficient reform is one that would lead to the delivery of social security without wasting money which I don’t see liberalisation of the sector achieving unless NSSF stays a mandatory contributory scheme and the private firms can join the jungle.

Ms Agaba works with Uganda Debt Network

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