Focus on NSSF alone can’t build a better pension sector

Is government missing an opportunity to build a better pension and social protection sector by focusing on NSSF alone? Perhaps yes, perhaps not.

Obviously, it is difficult to have it both ways but at least there are acceptable extremes.

Ever since the NSSF (Amendment) Bill 2019 was presented in Parliament, it has been a gluing period for NSSF as it seeks to answer what the Bill offers yet there seems to be some deliberate reluctance to discuss what it does not offer.

However, many stakeholders have pointed out what the Bill failed to offer and why it is important that government focuses at a bigger picture than concentrating on NSSF, which does not solve the problems of Uganda’s social protection.

On August 14, the country was ambushed after the Children and Youth Affairs State Minister Florence Nakiwala Kiyingi presented the NSSF Amendment Bill 2019 in Parliament.

It was the first time the public would learn of the Bill, which seeks to amend the almost obsolete 1985 Act.

The apparent ambush enlisted a lot of debate and continues to with varying degree and suggestions.

Social security
Granted, the 1985 NSSF Act is obviously an outdated law. But do the proposed amendments respond to demands of members and the social protection sector as a whole?

Certainly so. The Bill has been a mixed bag of opinions but central to it has been a departure of ideas coming from different government officials, whose advice ought to have been considered before the Bill was presented to the public.

In a July 25, 2017 letter addressed to Pius Bigirimana, the then Gender Ministry permanent secretary, the Bank of Uganda Governor Emmanuel Tumusiime-Mutebile, suggested the sponsors of the amendments, which were still at consultative stage, had missed an opportunity to improve the Fund and the pension sector as a whole.

In his letter, Mutebile wrote: “The proposed amendments to the NSSF Act set out in the draft Cabinet memorandum represent[ed] a missed opportunity,” noting the proposals will instead burden employers and continue to lock out other players from the social protection and pension sector.
The governor also wondered why the amendments had sought to continue consolidating NSSF as a giant monopoly instead of seeking a viable and inclusive social protection and pension sector.

“They [amendments] fail to open up the pension market to genuine competition. Competition is necessary for a vibrant capital market to reduce the high burden of labour costs on formal sector companies. Instead, the proposed amendments attempt to impose requirements to make contributions on the informal sector, despite the huge administrative costs … and the burden on micro-enterprises,” Mutebile wrote, wondering how the proposed amendments would make NSSF responsive to open market forces in a competitive environment when they were still holding “a statutory monopoly”.

Mutebile had opined in the hope that government would be focusing on the Retirement Benefits Sector Liberalisation Bill and not NSSF alone.

The Retirement Benefits Sector Liberalisation Bill has since March 2018 remained shelved and no activity has been reported about it.

To date, Mutebile’s views, notwithstanding the pending liberalisation of the pension sector, are still shared and hold for advocates of a better and expanded pensions sector.

Pension Sector
Analysts argue that focusing on NSSF limits the discussion and crowds out alternative views that would build a better pension sector.

However, Richard Byarugaba, the NSSF managing director, argues that government should not just open up the sector for the sake of it because it has disastrous ramifications.

“At the end of the day, you don’t want the forces of demand and supply, which is the market, to disrupt a scheme. The example I have, is Chile. Chile freed its pension market, they disbanded all the schemes and gave them to the market and what the market started doing was competing. They were competing for products, interest rates and everything. In the end, it was members’ returns that were suffering,” he said recently in an interview.

He noted that a basic pension system is categorised in tiers with the first being a government national scheme while tier two and three can be private.

In amending the NSSF Act, government had sought to blend the Fund with current dynamics, key among them, expanding the Fund and making it more inclusive.

However, it instead created sticking issues for a number of stakeholders, who claim, the Bill is dealing with non-issues and ignoring the ideals.

Sticking issues
The Bill proposes a deferral of tax to a lump sum draw out imposed on savers who cannot wait until they are 60 years.

However, the tax rate remains silent. But some commentators have said it shall be applied in accordance with the enforceable rate at the time, which might be anywhere between 30 and 40 per cent.

The Bill also proposes to open up the Fund to direct government borrowing, a shift away from the current widow of treasury instruments through which government has been borrowing from the Fund.

However, it exempts NSSF’s income from taxation but introduces an annual 0.05 per cent levy on the Fund’s assets, some of which are under dispute and redundant.

Others
Other issues such as streamlining of governance, mid-term access and expanding the Fund are also contained in the proposed amendments. But focus has been mostly on taxation, direct government borrowing and making the Fund work for savers before retirement.

Recently, while appearing before a committee of Parliament, the State Finance Minister in-charge of General Duties Gabriel Ajedra, referred the committee to Mutebile’s July 25, 2017 letter, noting that whereas everyone agrees that there is need to expand coverage of the Fund, it should not be done to the detriment of the economy.

“I must say this has not been an easy Bill. Even in Cabinet, there have been disagreements … We still have reservations as Ministry of Finance,” he said, noting that issues of taxation, lending, the threshold and capping of contributions, must be spread out to the pension sector and not isolated to NSSF.

Amendments for pension sector
In here lies the bigger argument, which focuses on spreading the proposed amendments to the entire pension sector.

The pension sector is still largely closed out to competition with NSSF acting as a giant monopoly.

This, Prof. Augustus Nuwagaba, a seasoned economist, says remains the biggest single problem as he agrees that the proposed amendments are good for NSSF members but not for other Ugandans outside NSSF.

Government, he argues, must focus on liberalising the pension sector to widen social protection and make it more competitive rather than focusing on NSSF alone.

“We should do it like Kenya here you have NSSF, which is a monopoly. Normally returns from monopolistic settings are very limited. In that case people get a raw deal from their contributions,” he says.

Exits
The shelving of the Retirement Benefits Sector Liberalisation Bill, at least for now, has already had some causalities that have exited the market due to narrowing business opportunities.

Alexander Forbes and Stanlib, which had been some of the key players in the pensions and social protection sector, have quit or sold out their businesses, citing “narrowing business opportunities.”

“Their [Alexander Forbes and Stanlib] anticipation was big business. But I believe the pulling down of the Liberalisation Bill that was before Parliament … distorted market dynamics and plans of those who had high expectations in this market,” Martin S. Nsubuga, the Uganda Retirement Benefits Regulatory Authority chief executive officer was recently quoted, saying the shelving of the Liberalisation Bill, meant that “we will continue to have NSSF as a giant monopoly,” which ideally crowds out other players.

What is the fate of non-salaried earners?

NSSF has in the last five years offered returns above inflation – usually above 10 per cent - with the highest offer coming in 2017/18 at 15 per cent.

The Fund has, on several occasions, said that interest for members’ saving will always be over and above inflation.

Mr Gideon Badagawa, the Private Sector Foundation Uganda executive director, says whereas the proposed amendments are good, they focus on a narrow group of people, which won’t help the social protection and pension sector.

“We have always argued that government should as well introduce a contributory fund instead of depending on taxpayers’ money to pay pensioners. Imagine less than a million people have pooled more than Shs11 trillion. What would happen if there was a way for more people including government workers to contribute?” he wonders.

Such arguments have been shared elsewhere. However, focus has been narrowed to NSSF, which crowds out alternative discussions that can build a better pension sector.

“You have people who do not earn a salary. They are many. And the NSSF Bill is pegged on salary earners. So, what happens to non-salaried workers who are the majority in this country?” Prof. Fred Muhumuza, an economist and Makerere University lecturer, wonders.

Government, he says, should ask itself how it can pull majority of Ugandans into the social protection and pension fold instead of focusing on NSSF whose membership is limited to a certain social class.