Pension: Uganda could go hybrid

One of the properties of NSSF in Kampala. The World Bank is still pessimistic about the impact of unfunded pension liabilities, fiscal consequences of the new scheme and its supervision. Picture: Morgan Mbabazi 

By BERNARD BUSUULWA

Posted  Monday, June 29  2009 at  00:00

 

The World Bank wants a hybrid system for Uganda’s public pension scheme, where both members and the government contribute — a recommendation that is consistent with the government’s earlier proposal.

This is coming at a time of reforms in the country’s pension sector targeted at reducing its pension deficit besides introducing a regulator for the sector.

According to the Ministry of Public Service, the new pension system will be a combination of defined benefit and defined contribution structures of pension management.

A defined benefit pension model is based on the value of privileges allocated to pensioners. Its costs are met by the employer while benefits under the contribution model are commensurate with individual members’ payments.

Under the new system, civil servants will contribute 5 per cent of their salary into the pension scheme while the government will give 10 per cent.

Contributions from eligible employees earning below a given threshold shall be paid into the defined benefits fund while those from employees earning above the threshold will be split between the defined benefit and defined contribution funds.

However, the World Bank is still pessimistic about the impact of unfunded pension liabilities, fiscal consequences of the new scheme and its supervision, among others.

Increased public awareness is also considered necessary for the successful implementation of the new pension system, mainly because of widespread ignorance about the benefits of pension among ordinary Ugandans.

Introduction of a new pension system is expected to ensure timely payment of benefits and a reduced burden on the national budget while deepening the financial sector through higher capital flows in the equity and debt markets.

The total value of private occupational schemes is estimated at $60 million.

The proposal does not discuss some crucial parameters, such as the eligibility and accrual rules of the new contributory defined benefit or the threshold determining whether an employee contributes to the defined contribution pillar or not, reads a new World Bank report titled Making finance work for Uganda.

According to the report, the current Public Service Pension Scheme (PSPS) is accumulating significant unfunded pension liabilities at a rapid rate, making it financially unsustainable.

Government records indicate that the PSPS incurs $65.5 million in pension expenses annually while its deficit stands at $57.7 million.

The rate of accrual is estimated at 2.4 per cent per year and it offers old age, contract, death and disability benefits. It boasts of 300,000 members excluding military personnel and 52,000 pensioners excluding those under local government service.

In order to minimise the huge deficit, the report recommends separation of the official retirement age in the civil service from the age of eligibility for withdrawing pension money. It also recommends use of career average earnings in computing pension payments as opposed to the members final salary.