Mr Jimmy Lwamafa (right) and Mr Christopher Obey (centre) listen as Mr
Kiwanuka Kunsa (2nd right) consults with their lawyers led by counsel
Nsubuga Mubiru (3rd left) in Kampala before they were found guilty of a
Shs88 billion pension fraud. PHOTO BY MICHAEL KAKUMIRIZI
Kampala- The Finance Committee
of Parliament has been receiving views on the proposed plans to
liberalise the pension sector in Uganda. And what has been the dominant
topic is ending the monopoly of the National Social Security Fund
(NSSF).
Indeed, a closer look at the Liberalisation Bill, there is a clause that recommends the repeal of the NSSF Act.
Among
the many things faulted in the country’s economy is the low level of
domestic savings. The low savings have been blamed for the lack of
access to affordable long-term funds, which has created a mismatch in
the needs of borrowers and the available money.
One of
the key ingredients is for regulation of voluntary saving schemes in
the informal sector and also removing the minimum of the five employees
provision for the employer to start contributing.
The
major focus of the Bill seems to be NSSF and that is why it has failed
to receive the full support of President Museveni. In 2015, at one of
the NSSF celebrations, the President said: “Some people have been coming
to me with this idea that the sector will be more efficient when
private players are allowed in, but I just kept quiet. I have never
opposed or supported the proposed reforms.” He continued: “Unless these
people who are pushing for liberalisation are saying that NSSF is being
mismanaged, they will really have to convince me more.” At the same
function, he observed: “Having one player has one good advantage that we
have money available for any useful capital development projects.”
His
last statement probably makes President Museveni somewhat right. The
architects of the Bill seek to repeal the NSSF Act and allow other
private players to compete for those savings.
Increased savings
Mr David Bahati, the State minister of Finance, points out the ambition of the Bill is “to reform the pension sector and grow the pool savings in this country.”
In its January 2017 report, Uganda Economic Update, the World Bank was biased towards access to affordable financing. The report reveals that the pension sector coverage in Uganda is only 2.1 per cent of the total Ugandan population and about 5 per cent of the working population. These figures are substantially low. As a solution to the low savings and access to affordable financing, the World Bank recommends reforming the pension sector.
Mr David Bahati, the State minister of Finance, points out the ambition of the Bill is “to reform the pension sector and grow the pool savings in this country.”
In its January 2017 report, Uganda Economic Update, the World Bank was biased towards access to affordable financing. The report reveals that the pension sector coverage in Uganda is only 2.1 per cent of the total Ugandan population and about 5 per cent of the working population. These figures are substantially low. As a solution to the low savings and access to affordable financing, the World Bank recommends reforming the pension sector.
“Measures
must be put in place to ensure that pension savings are invested well to
provide a good return to savers whilst minimising potential risks. In
this respect, the proposed Pensions Liberalisation Bill to strengthen
the capacity of pension funds to meet their liabilities, to improve the
administration of the sector, and to provide a policy and legal
framework to increase participation in retirement savings schemes, is a
move in the right direction,” the report reads, in part.
The
Bill, in its current form, does not address the issue of regulating
competition. For instance, Section 14 that refers to trustees is
considered too generic. Trustees, according to the provisions of the
Bill, Uganda Retirement Benefits Regulatory Authority (URBRA) has the
responsibility of governance of retirement benefits.
However,
while appearing before the committee, URBRA chief executive officer, Mr
David Bonyi, stated that “the section is too generic and does not
reflect the responsibility of scheme trustees.” The Uganda Law Society
(ULS) had already raised the red flag around trustee governance and if
the law does not clearly define roles and responsibilities, that leaves
loopholes for unscrupulous people to exploit the savings of Ugandans.
Is liberalisation bad?
From the ULS, the Workers’ Unions, the Workers’ MPs and the NSSF, the message has been one: Amend the NSSF Act but do not repeal it. The Bill, in its controversial form, has been in and out of Parliament since 2011 and it is only until this year that some progress is being made with it at the Committee.
In its current form, even the proponents of reforms in the pension sector are being forced to revise their positions on the paper.
From the ULS, the Workers’ Unions, the Workers’ MPs and the NSSF, the message has been one: Amend the NSSF Act but do not repeal it. The Bill, in its controversial form, has been in and out of Parliament since 2011 and it is only until this year that some progress is being made with it at the Committee.
In its current form, even the proponents of reforms in the pension sector are being forced to revise their positions on the paper.
Appearing before the Finance Committee,
Mr Francis Gimara, ULS president, cautioned any planned liberalisation
by comparing it to the 1990’s liberalisation of the economy, which has
posted mixed results.
“We know what is going on in
other sectors such as utilities like electricity because of
privatisation. We have learnt from the history of liberalisation that we
are always in a hurry to liberalise. This time, we have an opportunity
to think,” he told the committee.
He also noted that
with liberalisation, people’s savings will be exposed to market-driven
and profit-hungry fund managers who may end up being reckless in their
operations.
Mr Gimara also pointed out that the source
of the laws should be scrutinised in order to know whose interests the
ministry of Finance is pursuing.
The accusation has been that the International Monetary Fund and World Bank are the actual organisations behind the Bill.
It
is without doubt that in terms of providing technical support, the two
entities have been providing some insight into liberalising the pension
sector.
It is understood that their focus is, however,
mainly on reforming the Public Service Pension Scheme and making it
contributory and providing assistance to URBRA.
NSSF monopoly still on
The government, upon the popular pressure from all over the place, has shelved plans to end NSSF’s monopoly. In its current form, the Bill would allow other private players to compete for the mandatory contributions, which NSSF currently takes at 100 per cent.
The government, upon the popular pressure from all over the place, has shelved plans to end NSSF’s monopoly. In its current form, the Bill would allow other private players to compete for the mandatory contributions, which NSSF currently takes at 100 per cent.
However,
the ministry of Finance is now saying this will be abandoned and
instead they will be looking at amending the NSSF Act in order to make
it more efficient and remove the clause that sets a minimum number of
employees.
Mr Bahati told the committee that they were no longer interested in repealing the Act.
According
to the NSSF Act, companies employing five or more people are required
to remit 10 per cent to NSSF on behalf of their employees. The employee
is then also required to contribute 5 per cent.
The
ministry of Finance is now considering a proposal that would see NSSF
retain the 10 per cent; but still compete for the 5 per cent with other
new players.
In this area, there are also disagreements as some finance officials propose to, instead, have the 10 per cent left for other players and NSSF to compete.
In this area, there are also disagreements as some finance officials propose to, instead, have the 10 per cent left for other players and NSSF to compete.
Nonetheless, if the
ambition of the government was to trim NSSF’s wings, it appears to be
failing. While appearing before the committee, NSSF Board chairman, Mr
Patrick Kabarenge, emphasised that they were not opposed to any of the
reforms but rather disagree on the issue of having to lose the mandatory
contributions to private players.
How strong is URBRA?
What has come out from the proceedings in the committee is a concern about how a sector will be competitive and left to reckless risk-takers that will end up losing their money.
What has come out from the proceedings in the committee is a concern about how a sector will be competitive and left to reckless risk-takers that will end up losing their money.
There seems to be limited understanding of the role of the regulator, URBRA.
“How
many banks have been closed by Bank of Uganda? Who owns these licensed
retirement benefits schemes? Where will workers run to in the collapse
of business by the schemes? Who will be responsible for any reckless
business decisions that may be made by the management of these
retirement benefits sector schemes?” reads part of the letter submitted
by Workers’ MPs to the Finance Committee.
However, even the World Bank has recommended further strengthening of URBRA for it to meet the exact demands of the sector in a competitive economy.
“The stronger regulation of the pension system which has been initiated by the Uganda Retirement Benefits Regulatory Authority needs to be supported by stronger laws and regulations. Once completed, the reformed pension sector should support competition in the financial sector,” the economic report further reads.
However, even the World Bank has recommended further strengthening of URBRA for it to meet the exact demands of the sector in a competitive economy.
“The stronger regulation of the pension system which has been initiated by the Uganda Retirement Benefits Regulatory Authority needs to be supported by stronger laws and regulations. Once completed, the reformed pension sector should support competition in the financial sector,” the economic report further reads.
Some of that strengthening will
come from the Liberalisation Bill. For instance, URBRA is proposing to
have firms that are looking to compete with NSSF for the 10 per cent or 5
per cent to be registered as companies.
The regulator is looking at setting minimum capital requirements to work as a buffer that insulates workers’ savings.
The
Bill was read for the first time on September 19, 2014, and referred to
the committee for further scrutiny. This same Bill was first tabled in
the 8th Parliament and was never withdrawn yet the government brought
another draft in the 9th Parliament.
In the process of
scrutinising the proposed pension reforms, the Finance Committee wrote
to the Speaker on July 7, 2014, citing the technical glitch.
The
Speaker wrote to the committee on July 27, 2014, ordering the
government to withdraw the Bill. The Bill is now back in the same
committee.
One of the other requests from members of
NSSF has been the ability to secure a housing loan by using their
savings as collateral.
According to the proposals in
the Bill, members who have been saving for at least 10 years can use
about 50 per cent of their savings as collateral for a mortgage.
NSSF quick facts
NSSF
is a quasi-government agency responsible for the collection,
safekeeping, responsible investment, and distribution of retirement
funds from employees of the private sector in Uganda who are not covered
by the Government Retirement Scheme. Participation for both employers
and employees is compulsory.
According to its
financial statements for the year ending June 30, 2014, NSSF had Shs2.65
trillion in government Treasury bonds (with yields ranging from 10.25
to 14.35 per cent), Shs682.1 billion on deposit with commercial banks,
Shs251.3 billion in equity investments at fair value through profit or
loss, Shs250.2 billion in capital work-in-progress,Shs193.7 billion in
investment properties, Shs143.2 billion in corporate bonds (with yields
ranging from 11.03 to 17.00 per cent), Shs73.3 billion in equity
securities held-for-trading by fund managers, and Shs14.6 billion in
cash and bank balances.
Informal sector
If Uganda is going to grow the level of savings in the country, the
informal sector should also be able to access long-term savings options
such as the retirement benefits scheme. The informal sector is also
barely mentioned in the Bill, especially the details in terms of how
they will operate.
The Bill surprisingly
stipulates percentage contribution amounts according to Section 10(1)
(b) for the informal sector, yet this is the sector that doesn’t have
defined stable income levels.
“This section doesn’t support expanding coverage to include the informal sector.
Workers in the informal sector do not have a regular income requiring setting a contributions percentage while mandatory obligations on informal sector workers will not enhance coverage in that sector,” Mr Bonyi told the Committee.
“This section doesn’t support expanding coverage to include the informal sector.
Workers in the informal sector do not have a regular income requiring setting a contributions percentage while mandatory obligations on informal sector workers will not enhance coverage in that sector,” Mr Bonyi told the Committee.
Public service reforms
The
Public Service Pension Fund is also up for reform. In its current form,
it is not funded. In otherwords, the government gets money from the
Consolidated Fund every financial year to pay retiring civil servants.
The ministry of Finance had proposed a complete overhaul of this and
turned it into a Defined Contributory Scheme.
mmuhumuza@ug.nationmedia.com
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