How good governance can help Tanzanian pension funds overcome premature withdrawal

Good governance is of crucial importance if the existing pension funds are to overcome the challenges such as the existing pre mature withdrawals of pension contributions being faced. The pension fund situation in Tanzania, has worsened in the last few years due to the effects of the global financial crisis.

Public pension funds are established by various Acts passed by law makers who are members of Parliament of United Republic of Tanzania (URT) and asserted by President of URT Public pension funds are financed by both employer and employee facilitate and organize the investment of employees' retirement funds contributed by the employer and employees. The public pension fund is a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement.

Among the most impactful effects have been the increase rate of premature pension contribution withdrawals and therefore as a result of decline in contributions by pensioners and as a direct result of unstable employment and lower real wage growth. Essentially, more persons have been withdrawing their pension contributions and at the same time are earning the same or less, which in deed affect their ability to contribute to pension funds. This is further compounded by high levels of unemployment and a shift from formal to informal activities, as more persons attempted to conduct side small and medium businesses to either supplement their income or replace that which they had lost in the hostile job market.

To combat these factors, that have been debilitating to an area this should be referred to as the channel for retirement which links households, financial institutions, the government and the world, the only way out here is the good governance within public pension organisations to be seen as the solution. Good governance should be in the context of public pension funds' success being of importance to both the clients and the broader economy.

Within good governance, focus should be given to the covering all aspects of this concept including financial policy and regulatory framework. Transparency improves governance and inspires confidence in the product and company alike. To achieve this, the consistent review of policies which guide pension funds is important, as is the public dissemination of accounts and quality reports.

Country wide, there are several challenges that pension funds face and which must be dealt with if they are to return to pre-crisis levels of achievement. These challenges are an aging population, lack of diversification in investments, inadequacy of funds and the inability to predict contributions and benefits by pensioners. The number of premature withdraws have tremendously increased due to the prevailing socio-economic factors.

Lack of aggressive efforts on public education  to educate members to retain their contributions once the employment ceases so as to benefit from the pensions offered by the Fund. Non performance of the loan portfolio due to the non complying borrowers and the prolonged legal action procedures once the defaulters are taken to court.  The existing of unfair competition in the process of registration of new members whereby some social security funds use unethical means to induce registration of members. And tax on Fund’s income which is said to reduce the financial capacity to pay meaningful benefits to members.

There is a need in collaboration with social security regulatory authority (SSRA) to come out with deliberately achievable targets to bring back the hope for the existing public pension funds and the investment market as reforms, though difficult, are very possible. These reforms must tackle governance, regulations and the sustainability of pension funds.

For governance, public pension funds should assess the performance persons managing pensions’ funds, conduct regular reviews of employee compensation mechanisms, identify, monitor an correct conflicts of interests, implement adequate risk measurement and management system and be proactive in dealing with the major risks facing funds.

Consideration should be given to regulations, excessive reliance on current market values when determining pension contributions should also be avoided, limiting contribution holidays and excessive waiver of pension contributions, stability of long-term contribution patterns and incorporating flexibility into funding should strongly be encouraged.

Achieving sustainability can be done through by the generation of adequate returns to meet business daily obligations, improving efficiency in public pension products and service delivery, increasing capacity through enhanced training opportunities and building credibility and expertise.

The responsibility of standard setting should not remain solely with the newly established Social Security Regulator Authority (SSRA). The existing public pension schemes such as Parastatal Pensions Fund (PPF), National Social Security Fund (NSSF), Local Government Pensions Fund (LAPF), Public Service Pension Fund (PSPF), national health insurance fund (NHIF), and Government Employees Provident Fund (GEPF) should continually attempt to improve governance beyond what is stipulated and try to surpass even industry best practices, as regulation is too often reactive in a business that requires one to successfully act proactively in a fast-paced and stochastic environment.

Pension Matters: Why extension of social security coverage to be excluded

Of serious concern is the fact that public pension in Tanzania through its limited coverage contributes to social differentiation. Public pension system is therefore often seen as serving the interests of the working elite, and not reaching out to those most in need of coverage. Public pension systems in the country by and large restrict their coverage to those who work in the formal sector. Yet it is clear that the general picture in Tanzania reveals an increase in the informal sector and in unemployment, while the formal sector is generally shrinking.

Concentrating attention on reforming that part of the public pension system which covers only a small part of the labour force at the expense of the informal sector and those who are unemployed is inherently unequal, as it directs the attention of government and other stakeholders away from a huge segment of the population with no or little social security coverage.

There is, therefore, a need to investigate ways, means and modalities of extending coverage to these excluded categories. For those who are unemployed, social assistance support needs to be provided through the budget. Yet, the amounts spent on universal or targeted budgetary programmes in most African countries are meagre, with the exception of countries such as Kenya Gabon, Mauritius, Namibia, Botswana and South Africa.

Furthermore, social assistance usually lacks a constitutional and statutory basis, with the result that social assistance is often seen as a matter of discretion, and not of right. In particular as far as those in the informal sector are concerned, several options are available and need to be considered. Experience from other countries suggests that it is possible to extend coverage to informal sector workers. Two approaches have been used in India, namely bottom-up and top-down approaches. The Self-Employed Women's Association (SEWA) India, is a good example of a bottom-up approach. In Africa, the micro-insurance model has been used to extend health care to informal sector workers.

In Dakar, Senegal, the Wer Welé micro-insurance scheme provides health insurance services to people in the informal sector. Micro-insurance is also in use in Tanzania and the most well known scheme is the Mutual Society for Health Care in the Informal Sector (UMASIDA) in Dar-es Salaam. The same applies to Ethiopia. The top-down approach extends social protection to informal sector workers. A good example is the introduction of welfare funds by the Government of India at both the national and provincial (state) level. These funds, which cover around 10 million out of an estimated 370 million workers in the unorganized sector, are funded from levies on employers and manufacturers.

There is no one solution to the fundamental problem of extending social security coverage to informal sector workers. The first option would be to extend the social assistance system to as many as possible of those who are poor and vulnerable. To the extent possible, steps should be taken to strengthen the social assistance framework of support for those who were not able to make other provisions. It is true that, as a matter of general experience, the economic and fiscal situation is such that in most of Africa the prospects for the introduction of a tax-based social safety net either on a universal or a means-tested basis are poor.

Yet there are encouraging signs of how such a public funded safety net regime can progressively be introduced. An example of this is the overwhelmingly positive direct (individual) and indirect (household) impact of a carefully targeted means-tested old age grant in South Africa. A similar kind of regime has been introduced in Lesotho, where a basic old age pension is made available to poor people over the age of 70.

Promoting the entrepreneurial spirit and skills among young people

THE young entrepreneurs skills should strengthen economic know-how and business skills. Besides imparting sound economic knowledge, the young entrepreneur skills also acts on personal characteristics. It should aim to promote a positive attitude towards the Tanzanian economy and to encourage entrepreneurial attitudes among young skilled people. It should also aim to develop start-up skills in a modern and practice-oriented way. The objective is to see starting up a business as an attractive option in one professional career. As it leads to a young entrepreneur skills, therefore the program should provide an additional asset for young skilled workers.

ORIGINALLY AIMED AT STUDENTS IN VOCATIONAL SCHOOLS THE YOUNG ENTREPRENEUR SKILLS SHOULD NOW BE SPREAD TO KINDERGARTEN, PRIMARY SCHOOLS, SECONDARY ACADEMIC SCHOOLS, AND UNIVERSITIES, WHERE TRAINEES SHOULD COMPLETE THEIR THEORETICAL TRAINING IN PARALLEL WITH APPRENTICESHIP TRAINING IN COMPANIES.

 

Developing centers for young entrepreneurship in vocational schools and promoting the entrepreneurial spirit and skills among students from these schools project should be a jointly be performed together the Ministry of Education and Vocational Training and Junior Achievement in Tanzania (JAT). There is a need to set up centers in several different sectors of industry such as an architecture and construction; food and food technologies; textile and clothing; and forestry and wood processing. As part of the project, students shall be required to form a mini-company pre school and operate and run it for one year; the course to be offered is required to be as an elective to all students.

A BUSINESS CLUB WITH REPRESENTATIVES FROM THE LOCAL BUSINESS COMMUNITY AND EXPERTS FROM THE RELEVANT INDUSTRY WILL BE NEEDED TO BE SET UP TO FOR THE PURPOSE OF SUPPORTING DELIVERY AND FOR PROVIDING PRACTICAL EXPERIENCE. STUDENTS, SCHOOLS, AND THE LOCAL COMMUNITY WILL BE REQUIRED TO COOPERATE SO AS TO ORGANISE AND PROMOTE EVENTS SUCH AS TRADE FAIRS, COMPETITIONS, AND JOINT PROJECTS.

This model can be received extremely well, as a sustainable public-private partnership that actively involves the business community and is innovative in several ways. Firstly, the students?f involvement should raise awareness and support for the promotion of young entrepreneurship in the local communities. Secondly, it should link the real workplace with education and makes education much more market-oriented, i.e. developing the new skills needed for the globalised economy. Thirdly, the teacher should act as a consultant (mentor), and non-traditional methods of learning will be adopted.

TEACHING METHODS SHOULD BE SUCH AS BRAINSTORMING, TEAMWORK, CASE-METHOD, PROJECT-BASED LEARNING, AND INDIVIDUAL TASKS. RELEVANT STUDY MATERIALS, TEACHER MANUALS AND USER GUIDES FOR PROJECT-BASED LEARNING IN THE NEW MODULES SHOULD ALSO BE DEVELOPED AND DELIVERED TO PILOT SCHOOLS DURING THE PROJECT PERIOD. THE USE OF SIMULATIONS AND VIDEOS SHOULD ALSO BE IMPORTANT COMPONENTS OF THE PROJECT. THESE SHOULD INCLUDE THE MANAGEMENT OF A SIMPLE PIZZA RESTAURANT OR HAMBURGER RESTAURANT AND A VIDEO OF INTERVIEWS WITH YOUNG AND OLDER PEOPLE ENTREPRENEURS.