Why retirement benefits structure must change

Three questions: should Uganda liberalise its retirement benefits sector?
Should members of retirement benefits schemes be allowed to access their accrued savings after 10 years?
Should the members be allowed to switch from one service provider to another?
Though The Retirement Benefits Sector Liberalisation Bill, 2011 has many provisions, the debate on restructuring the retirement benefits sector is whirling round the three questions.
Currently, there are two major retirement benefits schemes.
One is the Public Service Pension Scheme, a government scheme that caters for civil servants.

Second is the National Social Security Fund (NSSF), which caters for the private sector.
Between them, the government and NSSF, are 1, 946, 522 registered members, according to the Uganda Retirement Benefits Regulatory Authority (URBRA) Annual Pension Report, 2015.
Aside from the two, are occupational voluntary retirement benefits schemes that cater for 24, 174.
The government, NSSF and occupational schemes, according to URBRA, cover 11 per cent of Uganda’s 17 million labour force.
Though not in response to the low coverage, the government in 2011 came up with the Retirement Benefits Sector Liberalisation Bill, 2011.

The bill seeks to open the retirement benefits sector to many schemes.
It seeks to make it compulsory for every employee in the formal sector to register with a scheme of his or her choice as well as to make regular contributions to that scheme.
Those in the informal sector could join voluntary contribution schemes. The bill seeks to make consequential amendments to the NSSF Act to ensure they tie with the bill.
One of the arguments for liberalisation is that many schemes would spur competition. Also, the schemes would have to be efficient, ingenious/innovative, creating new products.

Monopolies can be complacent.
In the case of retirement benefits, the schemes could offer or pay their customers’ interest rates way above the subsisting rate of inflation.
They would use the returns from investments in higher–yielding products to pay the interest.
The State minister for Finance, Dr Gabriel Ajedra Aridru, vouches for liberalising the sector.
“Much of the money we borrow is from pension funds abroad,” Dr Ajedra says.

“We have to make funds available for long term financing.” Currently, the NSSF invests its members’ contributions in government bonds, treasury bills and fixed deposits in commercial banks.
For the NSSF members, the interest rate is tantalisingly high 12.3 per cent, which is higher than the members would get on their savings in commercial banks. Still, the National Organisation of Trade Unions of Uganda (Notu) is against liberalising the sector; it even wants the bill dropped.
It says social security service provision should be the preserve of the government, never mind that the government is having challenges clearing 66, 168 pensioners’ Shs561.4 billion arrears.
The ministry of Public Service argues that if the sector is liberalised, there is a likelihood of the private retirement benefits service providers fleeing with members’ contributions.

To drive the ministry’s point home, some point to the commercial banks like Cooperative and the Greenland banks that ‘collapsed’ many years ago with ‘customers’ deposits’.
However, Dr Fred Muhumuza, an economist, says risks will always be there.
“Liberalisation comes with risks; you just need a strong regulator who will curb the appetite of the thieves by keeping them out,” he says.
“Have a screening of who may set up a company, which MD they can have, do serious due diligence – the way the Bank of Uganda does on managers, chief executives and the boards of commercial banks. Liberalisation is not a problem, if you can get a good regulator.”
The bill has provisions on accountability.

To that end, clause 3 (3) provides that retirement benefit schemes which are licensed to receive mandatory contributions shall be audited at least once annually by the Auditor General.
They may also be audited by an auditor appointed by the Auditor General, and the audit reports shall be submitted to Parliament.
On the other hand, Clause 4 (2) (a) provides for a minimum deposit to be maintained by a retirement benefits scheme that receives mandatory contributions.
Clause 4 (3) (a) requires the service provide to maintain a certain minimum deposit whereas clause 4 (2) (c) requires the service provide to have a valid insurance cover to protect against liabilities that may arise as a result of activities by the retirement benefits scheme.

The second question around which debate on the bill is rotating is whether a member of a schemeshould be allowed to access his or her accrued benefits mid–term.
Clause 22 (1) of the bill says a member who has contributed for at least 10 years is eligible for mid–term access to their benefits.
It qualifies the access thus: for securing a mortgage or a loan for acquiring a residential house from any institution.
Using the mid–term benefits should be on such terms prescribed in regulations made under the Act and the Uganda Retirement Benefits Regulatory Authority Act.
The bill is alive to the fact that one might want to access their accrued benefits mid–term, but not necessarily for a mortgage.
Thus, in clause 22 (2) it provides that a member may access a mid–term benefit if the member is 45 years and has contributed for at least 10 years.

Whatever the case, a mid–term access of benefits shall be allowed up to 30 per cent of the available accrued benefits arising from mandatory contributions and interest thereof (see Clause 22 (3)).
Mr Edwin Agaba, an engineer, says the clause on mid–term access is good.
There are many people, Mr Agaba says, who do not have cash at hand to spend but have a lot of money in retirement schemes.
Such persons might midpoint through their lives or careers want to start some business projects or to expand the existing ones.
But since they might not be having collateral to leverage before commercial banks, their ideas might never be actualised.
Mr Agaba adds that at 45, unlike at 60, one is comparatively energetic and could accordingly deploy their accrued benefits to more productive ventures.

That though is not automatic.
The other contentious issue is on the subject of transferring one’s accrued benefits from one retirement benefits scheme to another.
Clause 11 (1) says a member may transfer his or her accrued benefits from one retirement benefits scheme to any other licensed scheme in Uganda or the East African Community, in accordance with this Act and Regulations made under this Act.
To that end, Clause 11 (2) says a member shall give his or her employer notice in writing, of his or her intention to have his or her accrued benefits transferred from one retirement benefits scheme to another scheme.

Clause 11 (3) of the bill says the employer shall, upon receipt of the notice under subclause (2), give the Authority and the trustee of the retirement benefits scheme from which the accrued benefits are transferred, notice in writing, at least sixty days before the transfer is made.
One of the fears is that some people could withdraw their benefits from NSSF and transfer them to another scheme, which might be offering higher returns.
It would be within the members’ rights to transfer their accrued benefits.
The fear here is that though those who transfer their savings might be few, their accrued benefits might be a lot more than the stake of the many members who would be remaining in a particular scheme.

“So if 500 Muhumuzas decide to move to pension service provide X, who is promising them 15 per cent [interest], the 500 could walk off with Shs3 trillion of the NSSF investment (Shs6.5 trillion), leaving NSSF with half a million people but who own just very little,” Dr Muhumuza says.
“So the cost of policing the 500, 000 people will overshoot their contribution and the fundwill collapse.”
Dr Muhumuza adds though that the regulator should be able to manage such market dynamics andmatch and say ‘if you are going to be in this market you must cater for the rich and the poor’.
Mr Patrick Katagata, an advocate for transformation and civil leadership, says on the face of it the freedom to transfer from one service provider to another is good.

The bill

The House Committee on Finance is currently ruminating on the bill.
Earlier, it had met some of the – the unions and ministries, departments and agencies of government.
Mr Henry Musasizi, the chairperson of the committee, says from the committee’s interactions with the stakeholders, it is clear many prefer a phased liberalisation.
“The committee has concluded the public interest hearings. The general feeling is that we should not fully liberalise,” Mr Musasizi says.