How pension funds should be invested

Uganda’s Retirement Benefits sector is one of the fastest growing at about 20 per cent annually. The sector’s total asset base has risen to about Shs11.8 trillion by the end of December 2018. In many aspects Uganda Retirement Benefits Regulatory Authority (URBRA’s) licensing of new schemes, scheme administrators, custodians, fund managers and trustees, was the enabler of the growth.

URBRA has so far licensed 450 trustees and 65 retirement benefits schemes, including the National Social Security Fund (NSSF). The sector’s total asset base has been on an upward trajectory and it is by all accounts still growing. With plans to have all informal sector workers saving for retirement, the future looks promising. As a regulator, URBRA requires every trustee to make sound investment decisions. The Authority has a robust and carefully planned investment strategy to ensure that all Retirement Benefits Schemes reap a decent return on investment.

It is in that regard that the Authority requires all Retirement Benefits Scheme to have a written Investment Policy Statement (IPS). The IPS document drafted between a portfolio manager and a client, which outlines general rules for the manager, specific information on matters such as asset allocation, risk tolerance and liquidity requirements, lays out client goals as understood by both the manager and client, including timelines for goal achievement and asset growth needed. It also outlines the portfolio strategies to be employed by the manager, the rules and constrictions preferred by the client and the portfolio review process.

Besides, the IPS document should outline the risk tolerance of the client as understood by both the manager and client, discuss a target rate of return for the client portfolio based on their goals and outline a target asset allocation.
The Investment Policy Statement is dynamic and should, for good measure, be reviewed every three years or as when the situation changes; taking into consideration new developments as they occur because it determines the success or failure of a scheme.

URBRA recognises that while pension funds investment is one of the most important roles of a Trustee, it is also one of the most challenging. That is why the Authority put in place the investment of scheme funds regulation 2014; stipulating the permissible investment vehicles and the proportion of investment for each, to ensure prudent investment of members’ money to deliver adequate rates of return. This sought to ease the Trustee’s investment decision-making process by allocating how much funds ought to be invested in a particular investment vehicle.

The regulations stipulate that schemes shall not invest more than 5 per cent of total assets or funds in cash and demand deposits, a maximum of 30 per cent in fixed deposits, time deposits and certificates of deposits and not more than 80 per cent in government securities in East Africa. Schemes should also not invest more than 30 per cent of assets in immovable property, real estate investment trusts and units in property unit trust schemes, 15 per cent in Private Equity in East Africa.
The regulation prohibits Retirement Benefits Schemes from investing more than 30 per cent in commercial paper, corporate bonds, mortgage bonds, etc.

Emmanuel Luganda
emmanuel.luganda@urbra.