Pension schemes missed out on returns in equities last year because the largest share of their investments were held in government debt. Photo / Edgar R Batte
The pension sector continues to play it safe - betting on government debt - and it's paying off handsomely.
Data from the pension sector regulator - Uganda Retirement Benefits Regulatory Authority (URBRA) - shows that lending government money for returns remains the top investment strategy, boosting both assets under management and savers’ net income.
Financial statements of regulated pension schemes - now 65 – give a clear picture – with gross investment income sky-rocketing by 38 percent to Shs3.62 trillion in the year to June 2024.
The windfall was fuelled by multiple factors, key among them growing number of savers in retirement benefit schemes from 3.1m to 3.4m, which translated to higher net member contributions and an increase in value of assets under management.
URBRA attributes this to ‘growing confidence in the sector, as more employers and employees sign up for umbrella schemes.’
Total member contributions rose by 8 percent, from Shs2.2 trillion to Shs2.38 trillion, with employers shouldering 65 percent of the load and employees 35 percent.
This saw assets under management surge by 18 percent to Shs25.4 trillion by June 2024 from Shs21.41 trillion due to an increase in net income of Shs3.1 trillion and net member contributions of Shs986.8 billion.
However, on average, schemes declared an interest rate of 10.97 percent, a return that was considerably below what unit trusts gave - 13 percent, bonds (13 percent), NSSF (13 percent) and fixed deposits (11.9 percent).
“There are operational efficiencies we can still achieve to improve returns, especially in profitable years. If we manage costs well, we can preserve more of the investment earnings,” Benjamin Mukiibi, the URBRA head of research and strategy, said in a recent discussion on an X Space, formerly Twitter.
A staggering 78.15 percent (Shs13.5 trillion) of total investments are tied up in government debt, while a modest Shs1.2 trillion (9.81 percent) is invested in equities - primarily in companies listed across East Africa, with Uganda and Kenya leading the charge.
And for pensioners, this translated into real benefits: payouts to retirees, midterm claimants, and withdrawals totalled Shs1.4 trillion, while average balance per member account rose from Shs9 million to Shs10.2 million.
All in all, it’s a solid run for the pension sector - steady growth, bigger payouts, and a lot of trust in government bonds.
But with such a heavy reliance on state-backed investments, one can’t help but wonder: what happens when the winds shift?
Diversification concerns
URBRA says in the year to June 2024, market conditions were favorable, particularly for schemes with profitable mandates in government debt and other fixed-income investments, with a staggering 90 percent of their income generated from fixed-income securities.
“This highlights the strong returns available in the fixed-income space but also raises concerns about the sector’s concentration in this asset class,” Mukiibi said.
While government debt offers a compelling value proposition, he noted, there is need to diversify to mitigate risks.
“The big question is: what happens if these mandates become less profitable in the future? While the bias toward fixed income is currently beneficial, we must push for diversification to manage potential risks,” he said.
The challenge is that limited investment vehicles within the region have largely contributed to a shift in pension fund allocations that are now largely invested in government debt, which offer more stable and attractive returns, unlike equities that are usually volatile.
Shunned equities
Although pension schemes have a relatively small equity portfolio, some investors generated capital gains and dividends for them, increasing their overall returns.
However, this is something that URBRA and capital markets stakeholders are concerned about.
Investors looking for a sweet spot in the financial markets last year didn’t have to search far - dived deep into securities - with stocks such as MTN, Bank of Baroda, Quality Chemical Industries, formerly Cipla, Umeme and Stanbic Bank, giving back some good returns.
MTN (Shs20.5) and Umeme (Shs104.20) led the dividend party, while equity prices for Quality Chemical, Bank of Baroda, and MTN soared by 39.05 percent, 48.33 percent and 57.39 percent, respectively.
All these, delivered returns exceeding 25 percent on paper at least, with David Bateme, the Crested Capital team lead, new business, saying: “2024 was a good year”.
Of course, this would be a good push factor for increasing pension fund investments in equities but individual scheme members cannot dictate specific investment allocations, as the sector still operates on a pooled framework.
“For now, schemes treat members as a collective group rather than tailoring investments to individual risk profiles. This approach reduces duplication, lowers costs, and broadens access to diverse asset classes while improving risk management. So far, individual investment choices within schemes are limited, but in the future, schemes could consider profiling members based on factors like age, gender, culture, and longevity,” Mukiibi said.
This would allow members to be grouped according to their risk profiles and investment preferences.
“Currently, investment styles do not take age or cultural factors into account, but as the sector matures, schemes could offer members some degree of choice in asset allocation,” Mukiibi said.
Investing outside East Africa
While global equities have delivered some of the best returns - such as Nvidia’s stock surging over 170 percent last year on NASDAQ on top of a 240 percent increase in 2023 - Ugandan pension schemes are restricted to investing within the East African Community.
Under the URBRA Act, retirement funds can only be invested in EAC markets. However, before the Act’s enactment, there were proposals to allow a certain percentage of investments beyond East Africa.
Neighboring Kenya, for example, permits up to 15 percent of pension fund investments outside the region.
“The concern from trustees has been: how do we monitor investments beyond East Africa? As a result, schemes have only allocated between 4 percent and 5 percent of their funds to markets like South Africa,” said Cosmos Senyange, the URBRA manager of market conduct.
However, he said, there have been “multiple requests from pension funds seeking permission to invest beyond East Africa, given the limited asset classes available locally.
“This is something we may consider in the future as we explore ways to expand investment options,” he added.
