Kyayonka: NSSF not opposed to pension reforms

You promised to turn NSSF into an institution that would attract savings without coercion. You also promised to lead a scandal-free NSSF which would compete in a liberalised market. How far are you close to achieving these marks?
In December 2012, we decided to rebrand—and this was not a mere change of logos and colours, but rather a renewed promise by the Fund and its management to our members that we would secure a better life for our growing membership by providing quality products, great customer service and offer competitive returns in a transparent and efficient environment.

We then developed mid and long term strategic goals that would among others, make the Fund remain a relevant player in Uganda’s socio- economic development, offer competitive returns to members, offer new value-adding products and build a customer-centric organisation. Today, a number of the targets we set for ourselves have been met with varying degrees of success. The Fund has grown in all dimensions.

So what has been some of those achievements?
We have seen compliance improve from 49 per cent two years ago to 76 per cent now. This has led to improved contributions from Shs388 billion annually to Shs600 billion today. As a result of this, the Fund size doubled over the last three years from Shs2,065 billion to Shs4,200 billion today. The assets that we own are more than adequate to cover member liabilities. Our assets stand at Shs4,200 billion while member funds stand at Shs4,022 billion. This means that we have the capacity to pay all our members what we owe them: not only their contributions, their employer contributions made on their account but also all the interest that NSSF credited to them.

We have also pursued an aggressive but prudent investment strategy. Revenues, over the last three years have grown by over 200 per cent. Costs have been managed to a very healthy 1.5 per cent of assets. The result is that this has enabled us to pay a decent return to our members. The interest rate of 11.23 per cent that we declared in 2013, is above our benchmark 10 year-inflation rate of 9.23 per cent.

Also, our service levels have significantly risen. More of our members can conveniently track their savings through email, sms or online. The level of customer satisfaction among our members has also been steadily increasing. A total of 82 per cent of the members are satisfied with our service, up from 49 percent four years ago. Our target now is to ensure all our customers satisfied with our service.

NSSF is a mandatory saving scheme, should it surprise anyone that the contributions were always going to grow irrespective of who is in charge?
That argument would hold only if mandatory contributions to NSSF only began the other day. To understand the impact of good relationship management on the growth of the fund, you need to look at the rate of change. It took the Fund almost six years to double its assets to Shs2 trillion. It has, however, taken us only three years to double fund assets from Shs2 to Shs4 trillion. It took almost four years to double annual contributions from Shs150b to Shs300b, but took us just under three years to double from Shs300b to Shs600b.

Today, NSSF is paying more people within a very short time. The benefits paid have grown by 200 per cent to Shs160b from Shs80b in 2011. The number of beneficiaries paid, is up by 22 per cent to 12,000 per year, but most importantly, the benefit turnaround time has improved to 10 days from a high of 105 days five years ago. Today, our cost to income ratio is at 15 per cent, better than 55 per cent of the banking industry average. Our administrative costs stand at 1.5 per cent, which is much better than most global funds of similar sizes, for example NSSF Kenya.

Investments have been the biggest source of trouble for NSSF. The most recent one being your board’s decision to invest in 8.1 per cent of Umeme shares, creating a storm. And before that storm could calm, you have decided to increase NSSF’s stake in Umeme to 15 per cent. What informs these decisions?
When making investment decisions, we consider the following issues. First, the investment should not compromise the safety of member funds, and second, it should provide a reasonable return to our members. It is these principles that applied when we invested in UMEME, which so far has proved to be a good investment for our members. Even before we made the decision to increase our stake, the small stake we had was already delivering good returns and was one of the best performing in the Fund`s Investment Portfolio.

To give you an idea, in just less than two years since investing in 8.1 per cent of Umeme, the Fund has enjoyed a 41 per cent return over the holding period i.e Shs11.8 billion in capital gains (share price is now at Shs340 vs Shs275 IPO price) and Shs3 billion in dividends. When we held the last AGM on May 15, Umeme declared a final dividend for 2013 of Shs16.8 per share and as a result, the Fund expects to earn a total dividend of Shs4.09 billion for the year. I am deeply convinced that the benefits of investing in Umeme greatly outweigh the risks, which is why Umeme has been able to attract other international reputable investors such as Investec and Allan Gray.

But how come no single NSSF investment passes without controversy?
I think it is just a case of too many cooks spoiling the broth. While the management of the Fund is committed to making investments that deliver good value to our members, the systems and processes the Fund has to go through to make these investments is complicated. With all due respect, while I believe these processes were put there to manage the risks around procurements, they were not intended to manage the investments. These are two different functions that need to be reviewed.

On a daily basis, the people we are competing with in the markets can make decisions to deploy funds within minutes while for us we have to go through a lengthy internal and external process that most often ends up in missed opportunities. We are in full agreement with the recent recommendation by the taskforce working on liberalisation of the pensions sector, that a number of the laws, affecting the daily operations of the Fund need to be reviewed in light of the fact that the sector is headed for reforms and we will be playing in a fast-moving world where quick decision making is key.

Talking about the ongoing reforms in the pensions and social security sector, why is NSSF fighting these changes? Are you scared of competition?
First and foremost, NSSF is in full support of the reforms- which in my opinion are overdue. However, for these reforms to bear the intended good, we must be careful on how we go about them otherwise we may end up repeating mistakes that have been committed by other countries. We want sensible reforms that preserve and grow member savings.

What are your ‘sensible’ reforms?
It appears that the framers of the URBRA Act did not quite understand the pension industry. The Act, as it is today, does not differentiate between the type of legislation that should govern a scheme receiving mandatory contributions, like the NSSF, and the legislation that should govern schemes receiving voluntary contributions like employer-sponsored savings plans, which are private savings arrangements between employers and employees. The result was that a number of employer schemes like the CAA closed rather than live on with the onerous requirements that the law was imposing. So rather than expanding savings, the law was killing savings. NSSF argued and said, let there be sensible reforms and ensure that legislations developed meet the intent and are cognizant of the various industry practices. I am glad that there has now been an attempt to correct these earlier mistakes and create more functional reforms.

The purpose of any reforms in the pension or social security sector is primarily to ensure that the reforms enhance the security of member funds, expand coverage, and promote the effectiveness of the sector. A joint task force set up to review the Retirements Benefits Sector Liberalisation Bill 2012, concluded that the Bill in its current form does not enhance social security, expand coverage and promote effectiveness of the retirement benefits sector in Uganda.

The current NSSF Act in place protects members from scheme losses. The current Bill does not. This is because it allows losses of a scheme to flow to the member balance. It is not sensible to take away a stronger law and replace it with weaker law. So, even when opening up the sector, it is important that a mandatory national scheme, geared towards enhancing social security and expanding coverage is maintained. The truth is that only national schemes have the capacity to expand pension coverage to cover even those within the informal and under privileged segments.

There are some good proposals that have been made in the Bill, such as a proposal to allow midterm access to 30 per cent of ones savings for purposes of securing a loan or a mortgage; however this is not adequate for that purpose. This is why NSSF has proposed that midterm access be increased to 50 per cent of the available accrued benefits arising from mandatory contributions and the interest thereof. This is line with some of the regional best practices; for example Kenya permits 60 per cent.

I still see elements of protectionism. Your proposals give NSSF an edge over the other schemes.
According to the Constitution, it is the responsibility of government to provide social security to its citizens. In order to guarantee a minimum adequate level of benefits, a substantial portion of mandatory contributions should be committed to fund the basic retirement benefit provided for in the bill. Exposing a large portion of the mandatory contribution to risks of market forces, could easily jeopardize the adequacy of the minimum basic retirement benefit.

It is for this reason that a bigger part of the contributions should go towards the guaranteed level of benefits. The bill has also opened up opportunities for voluntary contributions. So on top of a guaranteed benefit, a member could also save more by contributing voluntarily to a scheme of their choice. This is the global practice. For example it is the practice in Kenya, Malaysia, the USA, Singapore, and the UK.

Secondly, every nation needs pools of long-term local savings that are centrally managed, that can be tapped into to finance growth. Kenya, Tanzania, Rwanda all have this pool of savings in their respective local national pension schemes, in which mandatory contributions are made. This pool of funding is being used to drive national development: for example, Tanzania NSSF has funded Dodoma University, Chalize Dual Carriage way, and Mkurunga Power plant. Kenya NSSF has funded the construction of the Thika Highway and Nyayo/Embakasi Housing development (largest housing development in Kenya).
The advantages offered by economies of scale when funds are pooled together will be lost when these very funds are dispersed into smaller chunks held by different entities.

The proposed reforms provide for four clear roles; administrators, custodians, fund managers and trustees. NSSF, however, is opposed to outsourcing for fund management. What are your reasons for this?
First of all, even before the law was passed, we did and still have fund managers as part of our investment team. So, we are not against Fund managers. They possess investment skills that are very pertinent to certain asset classes. Because of this skill set, they are quite expensive. So the point is: How do you deploy these skilled resources to get the most value for the cost that one can incur? We believe that is a sensible approach. The stakeholders recommended that external fund managers should not be imposed on schemes that have the capacity to manage investments in-house.

The cost implication can be massive. For example, if NSSF outsourced its entire portfolio of Shs4.2 trillion, say at 1 per cent fund management fee, the cost would translate to Shs42 billion! This cost would be incurred, without any reduction of the investment risk. Today, an investment department that costs only Shs1.6 billion to the Fund manages this same portfolio. It is important to realise that any fees paid to fund managers will eat into interest that can be credited to members. So our recommendation is that for those investments where external Fund Managers do not add specific value e.g. investing in Government Treasury bills and Bonds, we should continue to manage these in house. And for investments in Equities on the Stock Exchange, we will consider using external Fund Managers. It also ought to be noted that while external fund managers charge administration fees, they do not bear the risks associated with losses arising out of their investment decisions; they will still earn their fees regardless of whether they make profits or losses.

So in your view, how would you love NSSF to play out in the new environment having other players?
Given my experience both as NSSF Board Chairman and as a CEO in Uganda, my recommendation is that we should preserve NSSF as a national mandatory scheme that will retain a minimum 10 per cent mandatory contribution. As a national scheme, the Fund would have other mandates to promote the sector including: coverage, security, and innovations, without necessarily focusing on only returns. This is the global practice in Kenya, Tanzania, Rwanda, and other countries such as Ghana, Malaysia, Canada, USA, and Singapore.

Members can then place the other 5 per cent in other schemes of their choice and this can be reviewed in say five years with a view of assessing whether another mandatory scheme can be allowed into play. At the same time, governance over NSSF should be strengthened. As already expressed by other stakeholders, the NSSF Act should be amended to remove governance bottlenecks that delay investment decisions. The NSSF Act should also be amended to allow NSSF reach out to the informal sector and employers with less than five employees as well as provide additional benefits to members that complement retirement.

You have one year left as board chair, what will be your focus?

First of all, I would like to ensure that we quickly fill the vacant post of managing director so that we can be able to re-focus and continue our good journey. Going forward we continue being committed to our target of guaranteed return to members at an interest rate of 10-year inflation +2 per cent. We look forward to providing new products and services to members in the new environment. We also want to grow our Net Return on Assets to 13.4 per cent as well as manage our costs to expense ratio of 1.4 per cent. Overall we want to further bring down the benefits turnaround time to five days from the current 10 days.
I would also like to resolve the challenges we have faced in our real estate projects by recruiting a Real Estate Fund Manager. This will hopefully unlock the Pension Towers project and also launch the Lubowa and Temangalo Housing Estates.

Finally, we are keen on maintaining “Satisfactory” compliance and audit ratings, improving staff satisfaction to 90 per cent and automating a 90 per cent of all our core business processes.

The retirement benefits sector liberalisation act, 2011

The Bill seeks to provide for liberalisation of the retirement benefits sector; to provide for fair competition among licensed retirement benefits schemes for mandatory contributions; to provide for mandatory contribution and benefits;to provide for voluntary contributions and voluntary schemes; to regulate occupational retirement benefits schemes; to provide for licensing of umbrella retirement benefits schemes; to provide for the portability and transfer of accrued benefits, to provide for innovation of new retirement products and services; to repeal the National Social Security Fund Act Cap 222 and for related matters.
In 2011, the National Social Security Fund (NSSF) opposed the total liberalisation of the pensions sector, saying there was still need for a mandatory government retirement benefits scheme for all employees.

In their submissions to Parliament over the Bill, the NSSF board argued that there was need for sufficient state safeguards which private schemes lack. The Bill seeks to liberalise the pensions sector by providing for a regulatory authority that will oversee the private players. It obliges employers to pay contributions for their employees into any scheme licensed under the Act.

It also obliges all existing retirement benefit schemes (including NSSF) to apply to the Authority for a license within three months of the coming into force of the Act.

It cites the case of a famous business man, Robert Maxwell of England, who fraudulently diverted his company’s pension fund to cover company losses and eventually committed suicide, leaving no recourse for his employees. They gave the examples of Greenland and the Cooperative Bank that collapsed with savers money despite the presence of Bank of Uganda, a regulator.

Ssekono argued that the Bill empowers the Authority to revoke the license of a retirement benefits scheme including NSSF, yet the NSSF Act says its statutory mandate to operate cannot be revoked by a regulator. The Bill, they argued, should be simultaneously debated with amendments to the NSSF Act to address all cross cutting and transitional issues affecting NSSF.

The board expressed concern that NSSF shall be required to compete with other licensed schemes, yet its range of benefits is limited by the NSSF Act to five age, withdrawal, invalidity, emigration and survivors benefit.

Compiled by Monitor team