Last week National Social Security Fund (NSSF) last week paid 11.5 percent interest on its members savings held with the Fund by the end of June.
This continues NSSF’s tradition of paying double digit
interest, which they have done in all but one year in the last decade.
They have managed these rates by adopting a conservative
asset allocation – almost 80 percent of the sh22trillion portfolio is committed
to government paper and keeping their costs under control – they report cost of
one percent of assets and a cost to income ratio of eight percent. It helps of
course that they have the law on their side and they have not been bash full in
ensuring compliance. Member contributions came in at sh161b a month in the year
to June 2024.
"NSSF is also only one of three companies – the other being MTN and Umeme, that have crossed the sh2 trillion mark in revenues...Total revenues were up 15 percent to sh2.53 trillion from sh2.2trilion in the previous year.
At an individual level the continued double digit interest
rate means that at bare minimum member savings are doubling every seven years. This
is because of the compound interest effect, that while members are earning
those monies they cannot withdraw them, they added to their savings and
subsequent interest is calculated on that interest.
While there has been some gnashing of teeth by members who
want access to these monies, it is often times the best thing that happened to
them, that this money is locked up for decades.
What is not widely known is that while the management has set
themselves the target of paying two percentage points above the average ten
year inflation rate, by law NSSF can pay a minimum of 2.5 percent. But even
with that pitiful rate savers would still be winners as their employers, contribute
double their contribution to the fund. The management commitment is a godsend
for voluntary savers who cannot get comparable rates on the market.
More on that later.
"On a macro economic level NSSF is playing a major role in ensuring macro economic stability and that government remains in business through its participation in the government bond market. This invaluable contribution to the general economy goes understated but lays the framework for us to have low inflation and predictable returns. NSSF has about sh14trillion in bond holding in the region, but most of it is vested here in our market.
In addition NSSF has major interest in the Uganda Securities
Exchange (USE) where it holds about sh500b worth of stock in local companies whose
total market capitalization is about sh10trillion. NSSF interest is more
significant however as it has about a quarter of all shares available for trading.
During a recent news conference NSSF also announced it is
looking to becoming a market maker, which would increase liquidity in the
market while being very lucrative for the Fund. A market maker is often a entity
who stands between buyers and sellers, who unlike brokers can hold on to shares
for a period as they look for buyers. With its deep pockets NSSF would be well
placed to carry out this role for the market where average daily turnover was
sh300m.
As it stands now because most of the shares are held by
institutions, who hold for the long term and have little interest in day-to-day
trading, and so there is relatively low activity on the USE.
"The USE is the ideal place to start ones investment journey, as it requires low amounts of funds to participate and provides useful education
on investment for anybody.
But probably more interesting is the growth of the unit
trust funds in Uganda. Assets under management in the last quarter, which ended
in June, grew by about sh300b to surpass the three trillion shilling mark. This
from below sh500b five years ago.
By NSSF providing double digit returns these unit trust funds are being forced to offer
double digit returns, with the additional sweetener that funds are more readily
available. One can withdraw money from most unit trusts within 24 hours
accounting for their increased popularity.
This is a lesson for other sectors that have public
participation, particularly health and education. If government services are
below par, it opens the door for private participation, which is not a bad
thing in itself, but the private players do not have a high bar to measure
against, then therefore do not feel obligated to give much better services.
If the average public school or health facility was well equipped
and staffed, they would be no room for the private sector and even if they came
in they would have to come in with much better facilities and service to
justify their fees.
If NSSF was paying below single digit interest you can rest
assured the unit trusts would not try much harder to optimizer their members
returns.
NSSF’s influence in our market extends beyond the good
interest it pays the members to stabilization of the economy, financing
government operations and moderating the private markets in which it
participates.
As a result NSSF continued success is critical and not only
for its members.
