Our article titled, “NSSF on the spot,” (The Independent,
March 02- 08), which was based on the Auditor General’s report of 2011,
pointed out a range of issues mainly revolving around the Fund’s
performance. The Independent sought out the Managing Director Richard Byarugaba to get a response to the issues raised. Excerpts.
Are NSSF members losing more than they are benefiting from their savings or not?
NSSF investments are long-term and should be evaluated on a long-term basis (long term is generally considered to be more than five years. For NSSF, the investment cycle is typically 5-10 years: for example, real estate cash inflows will generally begin in year 5). It is thus unreasonable to compare the return declared by NSSF to annual inflation rate.
Over the
past 10 years, the Fund has paid a positive real return on the members’
savings, contrary to the article’s illusion that member value is not
increasing. Ten year inflation rate from July 2001 to June 2011 averaged
6.7% while NSSF 10 year interest rate averaged 6.8%.
It is
erroneous to compare the NSSF declared financial year (FY) 2010/2011
interest rate, to the 28% monthly inflation rate of September 2011, and
not to the actually inflation for the financial year FY 2010/2011 which
was 6.4%.
It also
erroneous to say that is only in 2008 that the Fund paid an interest
rate that was above inflation. The fact is that in five of the last ten
years, NSSF paid rates that were above the respective annual inflation.
Why are members not able to utilise part of their deposits for mortgage deposits, or be covered for medical by the Fund?
The NSSF
Act limits the products NSSF is allowed to offer to its members. The
eligible products are; Age, Withdrawal, Survivors, Invalidity, Exempted
Employment and Immigration Grant benefits. The current Act does not
cover mortgage or medical coverage.
The good
news is that the proposed pension Bill has provisions for Mortgages,
Education and Medical coverage. NSSF is eagerly waiting to roll out
these products when the Bill becomes law.
How come that NSSF made capital gains worth Shs 26 billion in 2010, yet it declined to just Shs 5 billion in 2011?
Return on
equity investments depends on the stock market performance. In FY
2009/2010, the Uganda Securities Exchange as measured by the ALSI gained
28%. NSSF made significant unrealised gains on its equity investments
that year. However, in FY 2010/2011, the growth in the stock market
declined by 19%. Notwithstanding the decline and tumultuous movement in
the market, NSSF made a Shs 5 billion gain! It must be noted that this
was just a capital gain on equities, and not the Fund’s profit.
Administration
costs shot to Shs 44 billion from about Shs 32 billion in 2010 while
total expenditure rose to Shs 58 billion from Shs 47 billion. Why?
A simple
analysis of the administrative expense reveals that the main increase
between 2010 and 2011 was Shs 12 billion reported under legal expenses.
Further inquiries show that Shs 11 billion of the Shs 12 bn was due to
provisions for the ongoing cases in the court. That is, it was not
expenditure to satisfy current administration consumption, but rather a
prudent and necessary provision for the Fund’s historical problems.
Without
these provisions, overall administration costs and total expenditure
would have been at the same level as last year FY 2009/2010 - Shs 32
billion and Shs 47 billion respectively.
One
measure of efficiency is what is referred to as cost income ratio, which
is the percentage of gross revenue that is utilised. In 2010, this
ratio was 29%. In 2011, this ratio, including the provisions was 37%.
Without the provision, this ratio would have been 30%. 2011 was the
first year of restructuring and the exercise included one off costs.
The
increase in liabilities was primarily driven by the provisions for the
legal cases. Part of the provision was impacted by a depreciated Uganda
Shilling. Secondly an increase in liability, especially, short term
liability demonstrates a good cash management strategy.
How come the Fund spent more than Shs 438 million on its 10-member board; an average of Shs 43m per person per year?
The board
expenses are in line with the structure of the Fund. Coming from a
chequered history, the Board prudently dedicated an extraordinary amount
of time in the affairs of the Fund, meeting on average at least twice a
month. The results of these efforts were a better Fund at the end of
2011.
Wouldn’t
a decline in the Fund’s surplus for the year from Shs 132 Billion in
2010 to Shs 81 Billion imply that there will be less in the basket for
members to share in terms of interest?
Included
in the Shs 132 billion for FY 2009/10 is Shs 64 billion of unrealised
gains coming from revaluation of property and changes in stock market
prices. The Board wisely adopted a policy to only revalue Real Estate
investment assets once every two years (unless circumstances warrant
more frequent revaluations). No revaluation was performed in 2011.
Revaluation will be performed in 2012, which means members do not lose
out in the “basket” because it is recovered in the long term.
The
Fund’s assets have grown by 25% in 2011 while revenue grew by 8%, yet
the benefits accruing to members continue to decline. Why?
It is
erroneous to assume that additional assets resulting from a 25% growth
means these assets are available for investment for the entire fiscal
year. The reality is that assets are invested as they are received.
At any point, the return on investment is impacted by the dynamics of
the prevailing economic environment. For example, treasury rates dropped
in the early part of the year with assets invested during that time
yielding lower interest income. It is a credit to the Fund that despite
the FY 2010/2011 turbulence in the economic environment, it was able to
provide members a competitive return.
Also, the
Minister of Finance declared an interest return of 6% in September 2011.
As pointed out earlier, the interest declared was for FY 2010/2011 and
should therefore be compared to the FY 2010/11 inflation rate of 6.4%
and not the monthly inflation of September 2011.
The
Auditor General’s report expressed concern about the Shs 27.7 billion
which lies unallocated to members’ accounts. What is your explanation
for that?
In the
same report the Auditor General stated the cause of the balance that had
not been allocated, the effort that the Fund is doing to allocate these
funds, and this balance represented a significant drop of the balance
that had been outstanding at the beginning of the year (Shs 53 Billion).
All
Members’ savings whether allocated or not unallocated earn the same
interest as declared at the end of the financial year in July. It is
not true that the unallocated accounts do not earn interest.
What is your comment on staff loans to acquire/ build houses over a period of 15-20 years?
The
products eligible to be offered by the Fund are stipulated in the NSSF
Act (Age, Withdrawal, Survivors, Invalidity, Exempted Employment and
Immigration Grant). All these benefits are currently offered by the
Fund. Only parliament can amend the Act and increase the product range.
The NSSF
Staff Housing Loan Scheme is not a Fund’s product. It is a benefit to
staff, just as salary is. All employees worldwide have benefits, both
direct and indirect by virtue of employment with their employers. For
instance, most bank employees in Uganda have similar loan structures
that allow their staff to buy or build personal homes. It is highly
misrepresentative to confuse staff benefits and with Fund products. But
anyway the Fund withdrew that facility.
The accounts of many members have not been updated for the last six months. Why?
The Fund
is upgrading its Management Information System (MIS) to make it more
efficient and support automation of business processes to reduce
turnaround time. All system upgrades go through a transition process and
this is what happened between September and December 2011. As of today,
the system is successfully running and members’ accounts are being
updated. It is not true that the accounts are not updated for 6 months.
The current target for updating members’ accounts has been set at 2 days
upon receipt of members’ contributions. Further, there is no strand off
between management on whether to purchase a system (the system was
already purchased) or outsource data management to banks (has nothing to
do with systems). Robust internal debates are encouraged whenever the
Fund has to make a significant decision.
In
light of previous allegations of corruption and poor management, some
analysts say NSSF would be paying out an interest rate of not less than
25% to its members?
The
current management NSSF has not been involved in any corruption scandal.
But also, worldwide, the investment objectives of pension funds are to
ensure safety of member savings and a provision of an optimal return
within an acceptable and reasonable risk profile. These remain the
primary investment objectives of NSSF. It is widely recognized that
return and risk move in the same direction; the higher the return, the
higher the risk. Pension funds are long-term investors. They (Pension
Funds) thus take on long-term assets to match their liability
structures. Currently, the longest treasury instrument in Uganda is the
10-year government bond, which yields 13.23%.
For the
calendar year 2011, the stock exchange had declined by 27%. Real estate
by its nature, takes a long time to come on board. With careful
planning, real estate may provide meaningful long-term returns.
Professional
asset management requires that a portfolio be diversified to minimize
risks and maximize income. Therefore, the Fund cannot invest all
members’ funds in only one asset class, be it real estate, equities or
fixed income. The Fund has to have an appropriate portfolio mix.
Believing
that the Fund should deliver a 25% return in this market while
safeguarding member savings is fallacious and indicates an
unsophisticated view of portfolio management. Return and risk are joint
investment decisions that should never be considered in isolation.
The
audit report shows that withdrawal benefits paid out in 2011 rose by
four times to a record Shs 63 billion from just Shs 16 billion in 2010.
Why?
Once a
member meets a given criteria, and upon application, the Fund is
obligated to pay benefits to that member. The Act has prescribed six
ways in which members become eligible to get their benefits. Withdrawal
benefits are paid members who reach the age of 50 years and have been
unemployed for 1 year. The fact that Withdrawal Benefits increased, is a
reflection of the economic situation i.e. level of unemployment had
increased drastically. The Fund pays every member who qualifies to
receive their benefits. As a result of the efficiencies that the Fund
implemented, in 2011, the Fund paid Shs 80 billion in benefits compared
to Shs 64 billion in 2010.
Your last word?
Rather
than extravagance, this administration has been very prudent in the way
it manages member funds. A key question governing each spend has been
“show me value” before we spend. That philosophy then looks at not only
the level of spends, but rather the value of each spend. So, does 2011
spend show that there was value for that spend?
An
‘unqualified opinion’ in the financial report for the first time 10
years! This opinion, reflects, the amount effort and resources that has
gone into improving the overall Fund’s internal processes; including
cleaning of member data, improving on the fiscal operations of the fund.
So was there value? Yes, there was.
New
channels that serve our members including: NSSF Go, Online access to
accounts, SMS access to balances. Was there value? Yes, there was value.
Significantly, reduced benefit processing time from one time high of
105 days to an average of 12 days. Was there value? Yes there was.
Increased benefit total payout from Shs 64 Billion to Shs 80 Billion.
Was there value? Yes, there was. There is a new upgraded IT operating
system that will further improve processes for our members. Was there
value? Yes, there was. Overall, realised income between the two years
increased by 8%. This increase was achieved, excluding provisions, with,
approximately, the same level of costs. Was there value? Yes there was.
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