While reading the budget for 2014/2015 financial year, Uganda’s Minister of Finance Planning and Economic Development, Maria Kiwanuka announced that Retirements Benefits Sector Liberalization Bill currently in Parliament would be enacted into law with immediacy. The bill is aimed to provide for liberalization of the retirement benefits sector; to provide for fair competition among licensed retirement benefits schemes for mandatory contributions; to provide for mandatory contribution and benefits; to provide for voluntary contributions and voluntary schemes; to regulate occupational retirement benefits schemes; to provide for licensing of umbrella retirement benefits schemes; to provide for the portability and transfer of accrued benefits, to provide for innovation of new retirement products and services – and most of all; to repeal the National Social Security Fund Act Cap 222.

In effect, the  bill seeks to put workers money on open market – with the usual seductive assumption that workers will have unfettered freedom to save their money in a scheme where they get ‘higher return’ on their savings. Yet looking at global experiences, this argument is flawed and seeks to accentuate shadow markets. For example, these fancy ‘high return’ investments literally collapsed the United States and European Economies in 2009, requiring Government bail outs of their leading banks using taxpayer’s money. The US and EU were unable to protect savers from systematic failures of their sophisticated securities markets that sought to make higher returns without creating value until the bubble burst.  The biggest losers were pension funds that held the biggest investments on those markets.

Will the minister deliver on her promise in her budget speech for 2015/2016 financial year- five months from now? I really don’t think so- because there are many unanswered questions in this contentious bill that I tackle chronologically in this article. For example, does the bill entrench transparency through disclosure and access to information? Free information flow is critical in the highly sophisticated retirement benefits/pension sector. Members can only enforce their retirement benefits if they have access to timely and simplified information on scheme policies and operations. Information disclosure also enables members to make informed choices and to participate in scheme affairs that affect them. This enhances transparency and accountability which are all key tenets of good governance for any successful business entity. 

For these reasons, it is important for schemes to disclose to existing and potential plan members information on plan investment policies, current investments, scheme expenses, tax implications, actuarial reports, assets owned by the plan, financial position, effect of inflation on benefits and; the formulae for computation of benefits. Unfortunately, beyond the requirement for plans to display annual statement of accounts, the proposed law lacks sufficient provisions on access to material and relevant information.  The law if passed as is will expose unsuspecting plan members to rogue investment policies and decisions which undermine the whole essence of retirement benefits namely- to provide old age replacement income.

Secondly, does this liberalization bill enhance the security of the pension sector? Security means that the promise made to the worker will be fulfilled when that worker is eligible to receive his/her benefits. It has two facets: Strong governance of the sector and Sustainability which refers to whether the sector will have funds to pay beneficiaries when due. NSSF is fully funded, and can pay all member obligations. Why change this? The problem is the Public Service Pension Sector which is in arrears. According to the World Bank study of 2011, the arrears are to the tune of $2.6bn or 16% of Uganda’s GDP. The bill in current form excludes Public Service Pension Sector. This indicates the bill is not keen to enhance security of Uganda’s pension sector.

Third question; does this liberalization bill enhance the coverage of the pension sector? The bill lowers employee threshold from 5 to 1 employee. That will automatically bring in more people whether in a liberalized environment or non-liberalized environment. Do we need a new bill yet this can be accomplished by amending the NSSF Act. The experience of other economies that have liberalized their economies is more telling: Uruguay coverage fell from 55% to 51% - 8 years after pension liberalization reform. Argentina coverage fell from 45% to 40% - 12 years after reform, Bolivia coverage fell from 19% to 15% - 5 years after reform, Columbia coverage from 24% to 22%.- 5 years after reform.  In fact, 6 of the 8 Latin American countries that tried liberalization had either flat or reduced coverage. Liberalization bill, in its current form, is not needed to enhance coverage of the pension sector.

Forth question; does this liberalization bill enhance the effectiveness of the pension sector? Effectiveness refers to the ability to reach members in terms of value, products, and service points, i.e. making actual differences in member lives. The bill opens up new benefits that hitherto, had been excluded including health, education and homeownership. However, these can achieved by amending the NSSF Act. Furthermore, an argument is made that competition will force retirement funds to offer better service and products to members. While there is merit in this argument, we can all agree that Uganda Revenue Authority has improved its services over the years. So has Kampala Capital City Authority and same with Uganda Peoples Defense Forces. Have the foregoing institutions been liberalized to be efficient? What matters is leadership and proper governance. Our members of Parliament should therefore pursue reforms that strengthen governance and efficiency of NSSF instead of seeking to exterminate it.

Fifth question, Does Liberalizing the pension sector increase portability? The issue of portability is being discussed at the East African regional level. The consensus at that level suggests that rather than go for harmonization of laws, reciprocal arrangements are more practical. NSSF Kenya, NSSF Uganda and NSSF Tanzania Acts already have these provisions.We must all understand that occupational schemes are not retirement funds. These are private arrangements between employers and their staff as human resources terminal benefits. They are not transferable to other schemes--neither in Kenya nor in Uganda.

Moving forward, our Parliament should do first things first. i.e. pass the Social Security Policy, from which meaningful reforms of the subsectors can then be made. Secondly, most countries have set a mandatory contribution that is held and invested by national schemes e.g. Malaysia, USA, Kenya, Tanzania, Singapore and South Africa. These national schemes, provide, a basic safety net that is not exposed to the perils of market forces. The mandate of national schemes, include among others, expanding coverage to otherwise unreachable parts of the society- This helps countries meet the International Labor Organization objectives for security and coverage.  Ideally, the law should maintain mandatory contribution of 15%, through existing scheme-NSSF. At a minimum, the basic safety net can be funded with 10% contribution from the employer. 

By and large, Uganda should provide for the amendment of the NSSF Act by incorporating elements of the bill that are good instead of seeking repeal the NSSF Act. Parliament should move quickly to remove bottlenecks that curtail productivity of NSSF e.g. amend NSSF Act to include coverage of the informal sector, harmonize the laws with the rest of the region and provide for a more practical mechanism that will enable retirement schemes participate fully in the long term development of the country using safe instruments that provide reasonable returns to members. For example, Malaysia- Roads, the Port, Housing; Tanzania- Dodoma University, Dar es Salaam - Chalinze Dual Carriage way, Mkuranga Power Plant; Singapore-Roads, Kenya: Housing: Nyayo Embakasi. All the foregoing was done through direct borrowings, equity investments and infrastructure Bond. Uganda can pick lessons from this.

If NSSF Act is repealed, what happens to worker safeguards that are built in the Act, e.g. interest rate guarantee? Our Parliament should reflect on this and other many questions. In spite of challenges that have dogged NSSF over the years, a clever option would be to strengthen its management and close gaps in NSSF Act. In fact, a 2013 Actuarial Valuation by M/s Callund Consulting of UK confirmed that NSSF is fully funded, with sufficient resources to discharge its liabilities to all its members, with zero expense to the tax payer. If it isn’t very broken- why overhaul it? Just repair it. The Economist (Jan 11th 2014, Page 59) reported that because New York’s funds do not manage any assets themselves, they paid $472m to outside managers and consultants last year—about $269m more than Ontario Teachers' Pension Plan, which manages about 80% of its assets in-house. Are Ugandan workers ready to go New York way?

By Morrison Rwakakamba

Chief Executive Officer – Agency for Transformation, an independent think and do tank based in Kampala, Uganda- http://www.agencyft.org/