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Tuesday, April 24, 2018


A few weeks ago the cabinet set aside plans to fully liberalise the pensions sector and opted for amendments to the National Social Security Fund(NSSF) Act 1985.

The development has stalled a determined effort by private sector players to wrestle away mandatory savings from NSSF, which has grown into a sh7trillion behemoth over the last decade or so.

The cabinet decision while not final, parliament has to debate before it becomes law, means the promoters of a full liberalisation of Uganda’s pension sector have to retreat and regroup.

The initial drive for the sector’s liberalisation was initially helped by the general drive towards opening up of the Ugandan economy and the perennial mismanagement of NSSF.

Pension sector liberalisation proponents argued that NSSF constituted a monopoly and carried with it the inefficiencies that come with that status, namely lower returns to members, ineffectiveness in expanding coverage and that this same monopoly has led to a lack of vibrancy in capital markets.

"They argue that by allowing other players access to these mandatory savings, would not only widen the choice that members have, but also drive up returns for members, increase savings mobilisation and generally bring greater efficiency to the industry...

However supporters of the cabinet position argue that the liberalisers have no empirical evidence to back their claims and argue that full liberalisation, where it has happened, has actually reduced coverage, put people’s savings at risk and as a result there is strong momentum to rollback pension liberalisation following these failures.

First, of all cabinet supporters, argue that fully liberalising the sector loses sight of the principal goal of providing social security, which is to ensure a decent retirement for the citizens in old age and would therefore be an abrogation of government’s obligation.

In line with that they argue that giving a competitive return, building the capital markets and other reasons for liberalisation are all subsidiary to the principle of giving an adequate social safety net for workers.

However, while recognising the important role of dynamic capital markets, they argue too that in more developed markets – USA, Canada, UK and Australia, mandatory savings are invested largely in the safer government paper or securities. Never the less those capital markets have thrived and in fact the voluntary contributions, double the mandatory ones in the US, have driven market activity very well.

In these countries long term savings often have a state backed pensions fund, over which is layered a state or company provident fund and then voluntary individual savings. They argue that it is these last two categories that often find their way into the equities market and which then may create the much desired dynamism in the capital markets.

As all market players are aware shares can go up or down. And in the shelved pension liberalisation law this was provided for – meaning that if your choice of fund had a bad year in the markets it would be reflected in your statement.

However, the NSSF act provides for a minimum of a 2.5 percent return on members savings per year regardless of the portfolio performance. In effect guaranteeing a return on member savings regardless.

The risk of loss of member savings is a real one.

In the 2008 financial crisis, funds exposed to the equity markets lost 37 percent of their value while those in the state funds showed remarkable resilience throughout the crisis.

"That being said the NSSF Act, defenders point out, actually guarantees more than a 2.5 percent return at its lowest.  Under the current legislation, which will remain unchanged in the new act, members contribute five percent with their employers adding an additional 10 percent of the workers’ gross pay locking in 200 percent return from the word go...

As if that is not enough in the last five years NSSF has paid an interest on savings  -- between ten and 13 percent,  higher than the ten year moving average of  inflation, which was as high as 8.5 percent five years ago.

As it is now of the 15 million strong workforce only two million are covered by NSSF, so not only are there enough people to go around, but under the new amendment it has been proposed that social security contributions will now be tax free, meaning even the two million may very well be able to save with other schemes too.

The need for long term affordable funds cannot be overemphasised. The need for a credible robust pensions sector too cannot be overstated.

On a macro level the question of the future mobilisation and deployment of long term funds for deployment in the economy.

At stake in this contest is not only NSSF’s trillions but billions more still sloshing around looking for safe haven, not to mention many business plans that have been premised on a full liberalisation of the sector.

Cabinet does not have the last word. The battle lines will now shift to parliament where the amendments to the NSSF Act are due for debate soon.

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