WE write in reference to the recent articles entitled “The proposed pension sector reforms are aggressive” and “NSSF reform will not benefit contributors but managers” by J.B Kakooza in the Daily Monitor and the New Vision newspapers of August 9, and August 19, respectively, in which he (among others) referred to fund managers as “robber barons”.
The purpose of this article is to address some of the assertions by the author and hopefully leave the reader more enlightened about the investment management profession and retirement benefits in Uganda and internationally.
In his articles, Kakooza states that the Uganda Retirement Benefits Authority Bill creates a multiplicity of players, citing custodians, administrators and fund managers as duplication of effort.
We would like to explain the important role service providers play in scheme governance. Retirement benefits are typically housed in defined benefit or defined contribution pension schemes or provident funds.
Given their social security importance, it is essential that certain structures and risk management tools are in place to efficiently manage and safe guard these funds to meet member obligations in the future. To ensure the process is efficient and robust, segregation of the various roles and duties is recommended to mitigate risks associated with conflict of interest, mismanagement and fraud.
The investment manager (or advisor) provides investment advice to manage the assets of the funds in accordance with the retirement benefit schemes’ Investment policy statement
The custodian records, reconciles & safe guards documents of title to all assets bought in the name of the pension / provident fund. The main function of the custodian is to collaborate information provided by the fund managers to scheme trustees.
The administrator keeps and updates member records and details, and is tasked with reporting on the day to day administration of the fund.
The actuary advises on the funds asset and liability position to confirm the scheme’s ability to discharge all its liabilities as and when they arise.
The auditor provides an independent opinion and ensures that the retirement benefit fund accounts and investments are run in accordance with international accounting standards.
The above efficient structure is achieved through the specialisation of roles. Indeed, the above services are provided at a fee. As a rule of thumb, the combined total of all the service provider fees should generally not exceed 2.5% of the total assets under management (AUM).
While these services are perceived as being expensive, one needs to be mindful of the value service providers add to strengthening governance and improving member returns.
There are several examples of how retirement benefit schemes not independently managed, get abused by their sponsors, even in jurisdictions with developed regulatory mechanisms for example, the 1991 Mirror Group Pension fund scandal in which 32,000 workers lost their retirement benefits when the then CEO and owner, Robert Maxwell, is said to have stolen more than GBP 400 million of member funds as a result of weak or non-existent regulation.
The retirement benefits sector will require a regulator to enforce the rules and laws concerned with retirement benefit schemes. It is crucial and instills confidence in the market that there is vigilant oversight on the management and operations of the several retirement benefit schemes that will be created (Mauritius and Kenya have over 1,000 and 1,500 retirement benefit schemes respectively, compared to the less than 30 schemes in place in Uganda presently).
The attendant risk of business failure is guarded against by the Capital Markets Authority’s important licensing and compliance role.
Kakooza incorrectly states that fund managers are opposed to real estate investments. Unless otherwise stipulated in the Law and Investment guidelines, retirement benefit schemes should be invested in long term assets like real estate (20-30% of assets), quoted equities, private equity (funds that invest in unquoted companies) government bonds / treasury bills and corporate bonds and fixed deposits, always balancing risk and liquidity management.
Admittedly, not many retirement benefit schemes currently have real estate investments in their portfolios simply because of the complexity of swiftly executing and managing real estate investments.
The writer also states that fund managers typically invest the bulk of investments abroad (offshore). We strongly support the view that the bulk of funds should be invested domestically to develop the local economies and thereby deepen the capital markets through the provision of long term financing for infrastructure and other developments, which in turn results in economic growth and development.
However, it is prudent to diversify into other asset classes, currencies and investments options, not available locally. In this regard, the promoters of the retirement benefit sector ought to set a ceiling of say, 25-30% of scheme assets to be invested outside East Africa (considered “domestic”) for the short to medium term (3 – 5 years) until sufficient investments options can be created domestically.
It is through the professional identification, execution and management of particularly foreign investments that professional fund managers are able to justify the resources they invest in economic research and analysis, and differentiate themselves.
Much as every fund manager aims to outperform inflation, at minimal risk to members’ funds, it is evident that a large weighting of a funds’ assets in fixed income securities in Uganda, cannot r
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