Last week National
Social Security Fund (NSSF) announced an interest rate
of 11% on member savings, which was a let down from last year's record
15% payout.
Ironically because of
the way the Fund's portfolio is constructed with eight in
every ten shillings parked in fixed income assets, mostly government paper,
when there are fears of
inflation the rates go up and NSSF booms. But when
inflationary pressures ease,
as happened last year, yields fall and NSSF suffers.
Which is what happened
this year as average yields on their paper fell to just
above 15% from more
than 17% the previous year.
Nevertheless the
Fund's total assets grew 14% last year, a bit of a slow down
because over the previous four years assets grew an average of almost 16%
annually, but this
number grew faster than the economy's six percent.
Asset growth is
important because assets throw off the revenues, which are
used to pay interest to members but more importantly grow the asset base.
Ideally more assets lead
to high income, ploughed back into acquiring more
assets, which leads to higher
income. A virtuous cycle.
The question for me as
a saver is, can NSSF continue this double digit growth
into the future, or at
least until when I am ready to cash out?
NSSF's principal duty
is to ensure the safety of member savings, so it should
come as no surprise that whereas they are planning to reduce their dependence
on fixed income
assets, these will remain a major component of their portfolio.
As long as inflation
remains under control we can expect that this asset class
will show a real return for
members. Real return is a return higher than inflation rate.
The government budget
is currently financed 50% by debt, mostly treasury bonds,
so one can assume
that well into the future yields on this government paper will
remain in double
digits, as government looks to meet its commitments on
infrastructure, health
and education. Or until oil start gushing out of the
Albertine region. People
familiar with that situation are not holding their breaths.
Higher fixed income
yields are however a double edged sword. When these
are higher share prices
tend to suffer, why should a fund manager try to be clever
betting on the stock
market when government is offering double digit returns?
But also for the
companies, higher yields on government paper mean that lending
rates also rise, constricting expansion and growth. No wonder share prices suffer.
But NSSF is committed
to building its equity portfolio to 25% from its current 19%
as it reduces its exposure in fixed income to 70%.
In long term this
makes sense. In a growing economy like our own, the smart
money is buying shares in companies which will ride on the economy's growth.
NSSF's sh11trillion
asset base is the largest pool of patient capital we have in this
country. With more than half of its savers under 30 years of age, It can therefore afford
the
luxury of buying shares and holding these for the long periods it takes for
these
to mature.
The challenge though
is that, because of its size NSSF cant find enough sizeable
equity investments to move its needle.
But it’s well set up
to play a pivotal role in the aforementioned oil sector. NSSF like
it did in relieving UK private equity firm, Actis of its stake in Umeme a few years ago,
may very well find itself in the thick of things in contributing funds to the
refinery and
oil pipeline projects.
And finally the Fund
plans that in the next decade it will bring at least 7000 housing
units to the market, which alone will make it the biggest rea estate developer in Uganda.
This aside from the tens of thousands of square meters in commercial space they
will
be bringing online during the same period.
Granted, the cash on
cash returns on real estate are anemic, but these will serve
to swell the Fund's asset base, which it can leverage to get involved in bigger and
more
lucrative deals here and abroad.
And how all these
grandiose schemes be financed?
Over the last five
years savings contributions have been growing at annual average of
11.9% to last years sh1.2trillion. What this means that this figure will be doubling at
least
every six years.
This is before you
talk about realised income which last year came in at sh1.25trillion
and doubling every five years.
The proposed
amendments to the law that governs NSSF if passed, will only strengthen
its position to collect more and be more attractive to members by providing more
than
the existing products.
According to the
annual report released last week the management of the fund is
becoming more
efficient as measured by cost to income ratio -- 1.28% and expectations
are
that this should improve as the Fund's processes become more automated and
its
own agency service kicks in.
However, in answering
our question, will NSSF continue to grow, the one metric
that then Fund is best
placed to capitalise on is that, out of a 14 million workforce barely
two
million have any form of social security.
