Monday, August 20, 2012


The Retirement Benefits Sector Liberalization Bill 2011 is winding its way through the arduous journey of becoming law.

Among the proposals in the bill are that if contributors have saved for ten years will have access to 30% of their savings to leverage to buy homes.

So if after ten years of work one has saved sh10m, the sh3m can be used to put a downpayment on a mortgage.

This and proposals to lift the NSSF monopoly for mandatory savings are part of long overdue initiatives that will go some way to raising the saving rates in the country and growing the pool of long term funds needed to fund development projects.

As it is now workers in companies that have more than five employees are mandated to contribute five percent of their salary with the employer contributing twice as much into NSSF. While not discouraged few employers have an additional providence scheme for their workers because of the costs of doing it.

Under the new proposed law employees will still be mandated to save for their retirement but not necessarily with NSSF.

The introduction of competition in any sector is always a welcome thing – there is more incentive to innovate which increases efficiencies, pushes down prices and boosts up take of the product or service.

Uganda badly needs to build up its savings rate which is less than ten percent of GDP. Beyond providing long term savings, one can expect the high lending rates we have become accustomed to, to come under pressure.

The logic is simple if we raised national savings the banks which hold this money would be under pressure to on lend it to their clients. Good banks make their money from lending, in the absence of the credible lenders they lend to government. Government while being the safest borrower, offers lower interest than the private sector and also has finite appetite. If government options are exhausted banks will have to find other ways of lending more to the public.

It is not by mistake for instance that in the last ten years there has been an explosion of lending to individuals, increased savings deposits in the bank have a lot to do with it.

The proposal to allow a portion of workers’ contributions as down payment for mortgages could act as an incentive to spur savings. Government could go even further by allowing such savings to be tax exempt and giving waivers for additional savings beyond the mandatory requirement up to a limit.

In addition this one initiative can spur a housing construction boom as the demand for house can be expected to jump progressively over the years.

It seems like a no-brainer. Increase savings and hence available capital for industry, production is boosted and more taxes are collected.

Beyond that, the economy has an urgent need to bridge the gap in power generation, transport and communication networks. These gaps are holding back continued economic growth. To finance these we need long term financing the type of which around the world is financed largely by pension funds.

It really isn’t nanotechnology, what would need a rocket scientist to decipher is why it is taking us so long to get this piece of legislation out of the way.

Economics aside, as a guarantor of national stability nothing beats a property owning population. With a long term stake in the economy, property owners are like to resort to more peaceful means of conflict resolution than war, looting and wanton destruction.

Of course regulators will have to ensure that a lot of our savings are not expatriated but are mostly used to finance domestic projects. However it might turn out to be a disincentive if you tie the investors’ hands with such provisions when there are no local investable projects.

The challenge then for our business is to be set to absorb this money when it comes.

It is hard to overemphasize the need for long term funds in the economy and how crucial a more efficient pensions sector would be in attaining this goal, but the ball is clearly in our hands  for us to run with it or drop it.

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