Lately, there have been a number of commentaries in the media to the effect that the ongoing liberalisation of the pension sector is aimed at killing the National Social Security Fund (NSSF).
Those who hold this view about NSSF are its very enemies or they are the current beneficiaries of a non-transparent and poorly-governed pension system. There is also a possibility that they do not adequately comprehend the issues the reforms are trying to address. These issues are not unique to Uganda.
Avoiding addressing them now, by tying to prevent reform, will not take away the issues of poor governance or lack of trust in the system. It will not take away the extremely low coverage of retirement benefits social protection, and poor investment of funds with very low or negative returns to savers which translates into very low pensions or replacement income.
The proposed legislation aims to open up the operating space to allow more players compete alongside the NSSF, and also complement the NSSF. Historically and for many years, the NSSF has faced governance challenges just like was the case with Uganda’s banking sector in the 1970s and early 1980s, and the telecom and postal sectors. This continued until reforms which opened up the sectors to allow more players were introduced.
This significantly improved the operations of these sectors in terms of corporate governance, efficiency, responsiveness to customers, and innovation, among others. This philosophy needs to be applied to the pension sector in order to benefit savers and the country as a whole.
Therefore, the proposed law does not kill the NSSF it aims at improving its operations in order to grow the fund. Facing the prospect of competition over the last six years of reform, the NSSF is already responding to the pressure of competition.
The fund is making efforts to improve services to its members albeit the challenges. Real investment returns for instance averaged zero per cent between 2000 and 2010 and have now marginally improved to an average of 1.5 per cent in the last three years.
New players will complement the NSSF in reaching out to potential savers in the formal and informal sector, and the potential for retirement benefits savings after reforms is huge.
The sources of new savings as a result of the reforms will include (a) what the NSSF is not able to collect (which is currently about 67 per cent of what is eligible under the NSSF Act)
(b) the collections that will be made available by removing the threshold on companies or entities employing five and more workers so that everyone in formal employment is eligible to contribute for their retirement benefits insurance
(c) savings under the private occupational schemes which are currently invested abroad
(d) those voluntary contributions from the informal sector (which are not quantified at this point) and
(e) savings arising from establishment of a Contributory Public Service Pension Fund which was approved by government in 2004.
Many Ugandans agree that the country needs a social protection retirement benefits system beyond the five per cent coverage of the workforce. However, it is important for us to know that the NSSF is a provident fund and not a pension. It is also not a social security organization as trade union leaders have tried to argue, likening it to the Social Security Administration of USA.
These are completely different things. A provident fund which pays a 100 per cent lumpsum is simply another savings vehicle which is paid out when one reaches the eligible age. Such a fund does not provide a replacement income or social protection income insurance.
So, the NSSF provident fund, in its current form, is not a social protection mechanism as such. Therefore, because NSSF in, its present form, does not provide pensions that would be paid out periodically (usually monthly), it does not provide old-age replacement income.
The bill proposes to introduce pension products giving a choice of either annuities, programmed withdraws or income drawdown, in addition to a portion paid out as a lumpsum. Ironically, trade unions, which are aocating for social protection, are opposed to pension arrangements! This is a contradiction. The only government-supported system that provides a pension (old-age replacement income) is currently the Public Service Pension Scheme.
The author is interim chief executive officer of the Uganda Retirement Benefits Regulatory Authority (URBRA).
Source : The Observer