National Social Security Fund (NSSF) recently declared a 13 per cent interest rate for members in the 2015/16 financial year. The rate, which is the fourth consecutive double digit increase in the last four years, reflects a remarkable transformation since 2010.
In the four years to June 2015, NSSF total assets, income and costs have grown by an average of 27.2 per cent, 52.9 per cent and 6.3 per cent respectively with members’ paid up benefits increasing from Shs101.4b in 2011 to Shs186.6b in 2015.
But even with such achievements, the Fund’s investment strategy continues to be portrayed as easy, focussing on investments in treasury bonds and fixed deposits, ignoring investing in private equity and domestic infrastructure.
Protecting members savings
NSSF is a retirement benefits scheme that was structured by law as a provident fund, which means members save for an average of 20 and 30 years and withdraw their savings as a lump-sum once they qualify.
The long saving period gives NSSF a long-term investment horizon with the objectives of protecting members’ savings from erosion by inflation.
This is a global expectation for any pension fund and to achieve this, we examine every opportunity putting in mind its safety and risk.
NSSF does not seek the highest return on the market, but looks at investments which when combined are safe and reward members commensurate with the risk undertaken.
These investments have to be within accepted East African existing regulations.
At the moment, NSSF has determined that the best way to achieve this is by investing 73 per cent in fixed income, 21 per cent in equities and 6 per cent in real estate.
The major contest has been on why NSSF invests in bonds and fixed deposits with banks instead of allocating money to infrastructure and private equity or directly lend to members and local businesses.
It is true majority of NSSF’s assets are held in bonds with close to Shs3 trillion in government papers.
This is not unique to NSSF as it is typical of any retirement scheme. World over retirement schemes have investments skewed to government paper as they offer desired safety and asset liability matching objectives.
In the case of Uganda, NSSF currently participates in bond auctions with maturity of at least five years. These bonds are issued by the Central Bank with proceeds going to the construction of roads, power dams and schools, among others.
As the largest domestic government lender, we foster our support to economic development through engaging government to issue infrastructure bonds just like Kenya as well as developing private public partnerships.
It is risky to undertake an active and direct investment role in infrastructure projects but the we are willing to co-partner with government on large infrastructure projects that require domestic financing.
On the side of fixed deposits, which are used as treasury management tools, NSSF holds about Shs300b against a high of Shs800b in 2010.
The Fund issues short-term fixed deposits of between three days and one year maturity periods as a way of building liquidity for long term investment programmes.
Let us assume the Central Bank is issuing a five-year Shs120b bond on November 5, in which NSSF would participate with Shs80b. The Fund will start building liquidity immediately through deposits until our appetite for November 5 is satisfied.
But we do not have a say on how banks invest these deposits. Therefore we cannot dictate the interest rate at which banks lend out such deposits.
At less than 2 per cent, NSSF’s deposits are a small proportion of the total holdings in the banking sector which are estimated at about Shs14.5 trillion.
NSSF also invests in equities and real estate with significant stakes in Umeme, Safaricom, Housing Finance Bank, Uganda Clays, Stanbic Bank, Equity Bank, KCB, Bank of Baroda, Serena Hotels, and The New Vision among others, and they are a major investment vehicle that supplement safety attractiveness of fixed incomes.
Currently our strategy is to increase exposure to equities driven by well-grounded research and due diligence.
Our strategy is to establish a private equity fund that will undertake small ticket investments in SMEs by nurturing them to mature with exit through the Stock Exchange.
We also have interests in real estate with key holdings in Lubowa, Temangalo and Yusuf Lule Road. Already some projects have been earmarked and others ongoing on Lumumba Avenue and Mbuya.
However, there are risks associated with real estate investments but we seek to counter them through the offtaker concept, where well-established developers invest in projects and then sell them slowly.
We believe by creating a wholesale market for housing and developers we will incentivise them to invest in property development as it will be relatively easy for them to obtain financing. We have a well-established investment strategy and an open process for selecting investors supported by a long-term perspective.
Therefore short-term changes in interest rates and prices can not dictate the overall investment strategy because if interest rates jump from 12 per cent to 20 per cent, we cannot liquidate current holdings to invest in higher interest earning assets.
NSSF remains a key supporter of economic development but as managers, we have a fiduciary duty to members by paying them an interest rate that is commensurate with long-term inflation.
We are also trying to convince policy makers not to tax pension savings in order to enhance returns and growing a saving culture among Ugandans.
For instance, if NSSF had been exempted from taxes we would have declared a 15.7 per cent interest instead of 13 per cent.
This will lift us out of the list of countries with the lowest saving rates in the world.