Uganda’s new pension could swamp USE with new players

Uganda’s pension sector is expecting an influx of new players once parliament approves the Pension Bill 2007 and the setting up of a competent regulator.

However, financial industry players say the still immature Uganda Securities Exchange (USE) may not be able to absorb the overwhelming flow of funds from new entrants, leading to excessive demand for shares and dramatic increases in share prices.

On the other hand also, tight regulation in the form of a minimum percentage being in the form of government securities would hinder growth in pension schemes whose investment attitude is very risk-friendly.

Simon Rutega, the chief executive of the USE, however said, “Even as the Pension Bill 2007 is passed, it could take up to two years to commence implementation. But it will will definitely promote competition and diversity of players in the capital markets.

“Yes, in the short term, demand for shares could become overwhelming but we are not worried. We expect an increase growth in the number of companies interested in listing on the stock exchange in the near future, which will help in alleviating that problem.”

Despite the high risks associated with investing in stocks, pension schemes have not been discouraged from investing on the USE due to the steady and robust performances registered by most of the listed companies.

But the equities counter has recorded slow growth with only three initial public offerings executed in the past four years, leading to limited options for risk diversification.

The USE has attracted only six local listings, four cross-listings and four corporate bonds in its 10 years of operation.

By mid 2007, the number of pension fund schemes operating in Uganda was estimated at over 100, with a total book value in excess of $50 million.

The passing of the new pension law is expected to increase public confidence in the sector and boost growth in national savings.

An influx of new and aggressive investors on the stockmarket emerging from a reformed pension sector is likely to intensify demand for the limited shares in the short term, causing increases in share prices, and liquidity problems.

A sharp increase in equity listings and corporate bond issues will be needed to stabilise growth in share prices and retain investor interest, especially in the retail segment.

Nevertheless, the USE has registered remarkable growth in terms of market capitalisation and turnover in recent years, making it a favourite destination among risk-eager investment players who prefer the quick high returns from trading shares compared with the lower returns generated from government securities.

Market capitalisation at the USE had grown to over Ush4 trillion ($2.2 billion) by mid this year while total turnover is projected to reach Ush85 billion ($48.8 million) by the end of the year. In 2007, total market turnover was Ush84.8 billion ($47.6 million), representing a growth of 1.2 per cent.

But, as Mr Rutega pointed out, potential delays in the implementation of the new pension law will give room for enhancing growth on the bourse to absorb massive investment flows from new pension schemes.

Though pension funds services are intended to guarantee security of income in old age and so tend to invest in risk-free assets like government securities, especially in young markets, analysts believe that the pension sector requires flexible regulation to secure steady growth.

For instance, the 40 per cent minimum investment level in fixed income assets like government securities stipulated in the Bill favours conservatively managed pension schemes that are risk-sensitive, unlike risk friendly pension schemes targeted at young working adults.

The latter would be uncomfortable with the investment cap, which returns on investment. A flexible regulatory regime on the other hand is likely to impart balanced benefits to various pension schemes and not a selected few.

The possibility of outsourcing NSSF’s investment services is one example of a flexible regulatory approach in Uganda’s pension sector, according to Kenneth Kitariko, general manager of African Alliance Uganda, a leading asset management and brokerage firm.

Though Uganda’s pension sector has remained unregulated for years, with a variety of thriving in-house pension schemes in both private and public sector institutions, its growth is still constrained by the failure to recruit the wider population due to limited confidence and low awareness.