What you need to know:
Despite some progress, the country’s pension sector still needs some fixing. In an interview Mr Fred Waswa, a pension sector expert, explains to Prosper’s magazine Ismail Musa Ladu why there is need to reach out to the population - majority of whom are either self-employed, in agriculture or plying their trade in the informal sector. Excerpts below...
Uganda has a working population of approximately 15 million people, most of whom are in the informal sector and agriculture. How can this population benefit from pension sector?
The economies of Africa are generally run by the informal sector. Uganda is no exception. If you look at the statistics you will realise that micro, small and medium enterprises contribute about 40 per cent to the GDP yet almost 80 per cent of the informal sector players are not registered.
Further, you will notice that out of 10 employed people about seven of them are plying their trade in the informal sector. So this means out of 10, only three people are a target for pension because of the organised nature of their employment.
The challenge is it has taken longer to think about the seven people employed in the informal sector. For example, in Kenya, there was a deliberate focus on co-operations.
Efforts to ensure co-operative schemes are organised and in compliance with the law was a priority. This gives employees a sense of security and encourages saving for retirement. This has over the last 20 years been working very well.
Is this the magic wand to turn around the informal sector players’ love for pension?
As Octagon, we started a scheme for the informal sector in 2009. The challenge was how do we charge them? How do we reach them?
With time, we are now seeing more people accessing banking services through mobile banking.
Due to this innovation, we are now getting to see the opportunity to reach the informal sector. For example, we have set up personal pension plan. We cannot get the informal sector in one room so we need to deploy innovative ways to reach them.
The other thing is to continually educate people that it is important to save no matter how small but for a long period.
The current pension system comprising of National Social Security Fund (NSSF), the Public Service Pension Scheme and occupational voluntary savings cover less than 5 percent of Uganda’s workforce. Is this an indication of a stagnated pension sector?
The five per cent is a disturbing statistic but it does not necessarily show stagnation. Actually, the pension sector is picking up.
The Uganda Retirement Benefits Regulatory Authority (URBRA) was only set up just about a decade or so ago.
I can see this number going up because there is going to be more demand for savings and with that pension comes in as part of the bargain.
You keep talking of how important this sector is in terms of mobilising capital for growth. How is that done?
The pension sector has immense potential in terms of putting together capital for growth of the country. This is how.
In Singapore, pension funds are used to build schools, hospitals, public places and so on.
The government borrows from the pension fund savings to do most of their infrastructure. This can be emulated here.
The challenge in Uganda’s pension sector is that there is one dominant player and that doesn’t help the capital markets to grow in a way it should. For instance, when Retirement Benefits Authority (RBA) was set up in Kenya in 2001, it opened up the sector. Now, there are almost 30 administrators, 22 fund managers and 15 custodians.
Now, all these are employing people. They also provide services such as financial literacy which is critical. NSSF’s dominance in Uganda should be reduced.
A starting point can be cutting the 15 per cent contribution to maybe about 10 per cent. Expertise and competition should be allowed.
When that is done, the stock and bond market will grow and I can tell you more investment will come through.
It is also important to consider advancing some incentives to allow the private sector set up retirement benefits schemes and drive it to its logical conclusion – reaching out to the market that needs it the most.
If you want to invest in the pension industry today, there are no tax advantages in Uganda. Without such incentives, it is hard to grow capital.
If we have our own capital to tap from, then we will not have to go to China to borrow money to build roads and other infrastructure. On its own, NSSF with about 2.8 per cent coverage cannot carry the responsibility alone.
There is need for the other huge segments of the market to be covered and by so doing, a large capital base will be up for grabs especially for infrastructure development.
For all that to happen, what should be done?
We looked at NSSF liberalisation Bill and it was set for failure because it is foolhardy to assume that people will withdraw from NSSF just like that to invest.
Going forward, we should reduce the contribution to even 5 per cent and the other 10 per cent should be taken to retirement benefits schemes that are private and managed within the regulations.
Then create a level of trust. This means we will have to get a culture change. In other words, we should trust each other if we are to confidently drive up the savings culture.
In your view, what are the attributes of a well-managed pension system?
A well-managed pension system should have three tires. Tier one should compromises of NSSF type of pension, but shouldn’t be overbearing. NSSF is supposed to be the widest in terms of coverage and not necessarily contributions.
Then there is tier two which is an employment pension schemes provided for by the employers whether formal or informal.
Tier three which should take care of basically the Micro, Small and Medium Enterprises. So, I believe that is a proper system in terms of structure.
In terms of governance, the schemes must have trustees and managed properly. In Uganda, I am aware the regulation has tried to address the issue of trustees which is a good thing.
The only thing that needs to be addressed is the issue of service providers.
There is a separation between services providers, custodians, fund managers, and the administrator. That operation needs to be sorted out to give confidence to the saver.
The other thing that needs sorting out is the involvement of insurance. We still have insurance companies that are involved in investment management because the law doesn’t have that provision.