Uganda NSSF privatisation deal promises to be lucrative

The NSSF building in Kampala, Uganda. There are plans to privatise the fund. Picture/File 

By DANIEL K KALINAKI The EastAfrican

Posted  Saturday, August 17  2013 at  15:31

In Summary

• Proponents of the proposed privatisation, including Finance Minister Maria Kiwanuka, say breaking up the National Social Security Fund’s monopoly will lead to increased efficiency, innovation and return on investment through increased competition in the pensions sector.
• Critics say it is not clear how privatisation will spur the development of the new long-term fixed-income investments in Uganda such as infrastructure and municipal bonds.
• What privatisation is guaranteed to create, however, is a windfall for the fund managers, insurance companies and banks that have been lobbying the government to speed it up.

Financial institutions and fund managers in the region are lining up to cash in on Uganda’s cash-rich state pensions corporation when plans to privatise it are completed later this year.

Proponents of the proposed privatisation, including Finance Minister Maria Kiwanuka, say breaking up the National Social Security Fund’s monopoly will lead to increased efficiency, innovation and return on investment through increased competition in the pensions sector.

Critics say it is not clear how privatisation will spur the development of the new long-term fixed-income investments in Uganda such as infrastructure and municipal bonds that would be useful in turning the NSSF and the pool of pension cash in the country, into a strategic local financing option.

What privatisation is guaranteed to create, however, is a windfall for the fund managers, insurance companies and banks that have been lobbying the government to speed it up.

At a basic 0.25 per cent management fee, NSSF’s Ush3.5 trillion ($1.34 billion) represents close to Ush9 billion ($3.46 million) per year before expenses, but the big money is in attracting a share of the Ush50 billion ($19 million) monthly revenues from statutory pension contributions and locking it in long-term investments and annualised payouts.

At least 78 firms, including NSSF, have already applied for licences to manage retirement benefits schemes once the industry is liberalised. Despite NSSF’s monopoly, there is still a lot of growth in the sector through higher compliance and signing on of new savers.

Currently, only companies that employ five or more people are required by law to sign them up to NSSF, leaving hundreds of thousands working for smaller firms without pensions.

A World Bank report released last week revealed that 60 per cent of all formal jobs in Uganda are in micro-enterprises that employ fewer than five workers — and which are currently not required to sign up to the statutory NSSF pension scheme.

Few Ugandan firms run in-house pension schemes and employers are reluctant to stump up more than the 10 per cent they are currently required to pay by law.

However, 90 per cent of Ugandan workers who retire can only point to their NSSF pension, according to figures from the fund, suggesting demand for parallel and possibly private pensions and retirement savings schemes.

There is also the elephant in the room — the Uganda government’s public pensions scheme. Covering civil servants, the scheme has been fraught with corruption and mismanagement and has a black hole in its finances of about Ush300 billion ($115.3 million).

An ongoing investigation reveals that corrupt officials stole at least Ush150 million ($57 million) from the public pension fund in just over a year, suggesting that closer supervision could close the deficit.

However, with the government struggling to make payroll amid rising salary demands, it is not clear how much longer it can continue to shoulder the pension responsibility for its employees.

Many industry watchers who spoke to The EastAfrican said the success of privatisation, which now appears to be a matter of when, not if, will depend on the quality of the regulatory environment.

“Government needs a very strong regulator, otherwise you are finished,” a high-level official in the industry said. “You may as well forget the industry and hand it over to cowboys and commission agents.”