Will pension reforms benefit workers?

By Ibrahim Kasita

AFTER years of indecision, Uganda has finally taken action to open-up the pension sector. The move is expected to unlock funds needed for long-term investments.

The Uganda Retirement Benefits Authority Bill 2010 will establish an independent regulator to manage and operate the retirement benefits schemes.

It also intends to establish a comprehensive legal and regulatory framework for the sector.

“This is a positive step because the regulator is a vehicle to push for more reforms,” Kenneth Kitariko, the head of African Alliance, said.

Currently, workers and employers make mandatory monthly payments to the National Social Security Fund (NSSF), which they access on attaining 55 years.

“More reforms are expected to follow when the Bill is passed into law,” Kitariko said.
Among the anticipated reforms is the shift of NSSF away from being a provident fund – with beneficiaries being paid a lump sum on retirement, to a pension fund, where the contributors receive monthly payments for the rest of their life.

Reforming the pension sector is critical for competition and growth as it provides a key avenue for increasing access to long-term finance through increased mobilisation of savings.

“The law is very good for us workers. We shall get value for money because of the competitive rates offered by various service providers,” Felix Osike, a journalist, said.

“Our money has been mismanaged and there is no guarantee of getting our benefits. I think liberalising the pension sector will provide hope for workers,” said Ann Turinayo, an employee.

The Bill will end NSSF monopoly. It is also expected to improve service delivery. It will separate the duties of the employers, the trustees, the fund managers and the custodian.

“But essentially the Bill creates a possibility of the employees to contribute to more than two schemes,” Kitariko explains. Other anticipated changes include amending legislation to expand social security coverage to stimulate financial markets. This kind of legislation has already been enacted in Kenya and Mauritius, encouraging private sector pension provision though incentives.

“Streamlining the regulatory framework for the pension industry will ensure efficiency in management and investment of pension funds and this will provide incentives for saving mobilisation,” Gerard Mbalire, the Institute of Certified Public Accountants of Uganda chief, said.

“It will be critical to increase awareness and sensitisation on social security reforms as well as structuring of mandatory and voluntary savings.”

Experts argue that individual retirement benefits schemes have proved to be a promising window for savings for retirement to a cross-section of the population.

They provide convenient opportunities for self- employed professionals, workers in the formal sector, and employees in formal employment setups where employers opt not set up company schemes and also those already contributing to a scheme but who wish to make voluntary contributions.

However, the liberalisation of the pension sector will entail provision of stringent provisions to protect beneficiary savings against fraudulent fund managers and unfair competition. This means the pension schemes have to prepare annual audited financial statements, drafting of a trust deed and rules document in accordance with regulations, remitting contributions and paying benefits within set times and reporting to the regulator.

It is, however, not clear whether the existing contributors to NSSF could change to other profitable pension schemes.

“There will be a question of liquidity because NSSF has invested a lot money buying shares, housing and land projects,” Mbalire argued.

“I am not sure whether NSSF will allow its members to pullout. May be members could leave the scheme but the contributions will be settled later.”

NSSF, with about 400,000 members, is mandated to collect member contributions, invest them and pay commensurate benefits to qualifying members.

This makes it a provident fund not a pension fund since no early withdrawals of member balances are allowed.

Uganda’s formal social security was set up in 1968 to provide retirement benefits to people who retire from active service.