How NSSF has grown its asset base to Shs6 trillion

Workers House in Kampala is one of the assets where NSSF gets money through renting out some space to tenants. Inset is Mr Richard Byarugaba, NSSF managing director. PHOTO BY STEPHEN WANDERA 

In Summary

Performance. Projections indicate that the current asset base could be over Shs6.5 trillion by the end of the financial year.

By Mark Keith Muhumuza

KAMPALA. On different occasions, the managing director of National Social Security Fund
(NSSF), Mr Richard Byarugaba, has been assuring members that NSSF will focus on investing their funds in profitable ventures.
The debate on NSSF’s investment priorities started appearing when revenues were growing. This is as a result of growing its asset base to Shs5.8 trillion as at the end of October 2015.
According to Mr Byarugaba, this translates to about 6 per cent of Uganda’s Gross Domestic Product.
Projections indicate that the current asset base could exceed Shs6 trillion by the end of the financial year. This is attributed to the increasing member contributions.

Compliance levels grow
When the decision was taken to move NSSF from the ministry of Gender to Finance Ministry, the confidence in the Fund was dwindling.
Compliance was nearly below 50 per cent as the incentive to save was almost non-existent because of the tedious procedures used to process payments.
Compliance levels by members as of June 2015 was at 79 per cent from 73 per cent in the previous year. That means NSSF is still short of nearly 500,000 member contributions. Nonetheless, these compliance levels have enabled NSSF to collect Shs688b from Shs388b in 2011. Monthly collections are at Shs50b, which provides much needed investment liquidity.

When Mr Byarugaba joined NSSF in 2011, the rebranding and complete turn-around strategy for the Fund started. When NSSF re-launched in 2012, the members expectations were raised.
The Fund re-launched with new promises, among them was unveiling a new corporate identity that was accentuated with a refreshed blue and green logo as well as a new tagline, ‘A Better Future’.
“We are not merely changing our look and feel, but the change of our visual identity symbolises my commitment, your commitment and our commitment to deliver a better future for our growing membership,” Mr Byarugaba said in 2012.
With the rebranding, monthly contributions grew from Shs24.5b to Shs42b.

As at September 30, 2014, a compliance periodic audit established that employers of about 67,000 workers countrywide failed to remit their employees’ contributions worth Shs28b to NSSF.
The defaulting employers were mainly schools and vocational institutions across the country and had never remitted workers’ contributions since their registration.
However, the asset base is bigger than the member contributions. This means that NSSF can dispose of assets, pay members fully and remain with balance in the unlikely event that members opted to take their money out at once.

Revenue growth
This year, the economy slowed down, interest rates increased while the Shilling weakened, however, NSSF performance defied this trend with increased income.
NSSF’s management at the annual members general meeting held recently, were upbeat after shrugging aside, a mixed 2014/15 to grow income by 35 per cent to Shs807b.
On this income, at least, 500,000 members have been paid Shs187b compared to Shs166b in 2013/14, which represents 13 per cent interest on their savings.

Mr Byarugaba, who bounced back as NSSF managing director in November 2014, said the increased income was “way above our target.”
He said this was a result of a ‘favourable interest regime’. As the private sector pays the price for high-interest rates, NSSF made gains from buying government debt.
In the last five years, revenues have expanded from Shs161b to the current Shs806b.

Government securities
In the same financial year, interest rates surged and so did the depreciation of the Uganda Shilling. But this, in a way, played into the hands of NSSF.
The Fund has investments valued at Shs5.8 trillion up from Shs4.9 trillion in 2013/14. Out of this, 73 per cent, about Shs4.2 trillion is invested in fixed income assets.
Fixed income assets refer to treasury bills and bonds, corporate bonds and fixed deposits.
During the year under consideration, the interest earned on government short and long-term debt has been rising.

For instance, a two-year bond that was generating interest of 10 per cent in July 2014, by August 2015, a new issuance of the same bond was yielding 18.7 per cent interest.
Similarly, short-term debt of 91 days, 182 days and 364 days rose from 9.07 per cent, 10.33 per cent and 10.68 per cent, respectively in July 2014 to 12.76 per cent, 13.55 per cent and 14.02 per cent by the end of June 2015.

NSSF is one of the largest holders of government debt, which means any increment in interest returns yields higher interest payments.
The Fund increased its investments in government securities and other fixed income by Shs800b in 2014/15 due to the return on investments.
“During the year, interest rates on government treasury bonds went up and as a result, we invested in those treasury bonds. Therefore, our interest income increased as a result of the rates going up,” he said.

Government securities continue to be the safe haven for NSSF as often, the organisation doesn’t have to engage lengthy procurement procedures to secure investments. Of the Shs807b income, fixed income investments contributed 67 per cent.
Much of NSSF’s setbacks in the last financial year have been the consistent questioning of investment decisions, such as Umeme shares.

Profitable firms
NSSF’s critics have often and continue to question the investment in power distributor, Umeme. In 2014, NSSF defied the odds and increased its stake in Umeme to 14.2 per cent from 8 per cent.
In Uganda, NSSF earned Shs7b worth of dividends from listed firms with Umeme contributing Shs4.5b. The Fund’s decision to invest in Umeme has been vindicated. Many experts agree that it was an inspired decision. Umeme is now one of the best performing stocks on the USE.
Overall, NSSF’s investment in equities (listed and non listed) generated dividends worth Shs34b, representing a 161 per cent jump from Shs13b in 2013/14.

During the financial year under review, the Fund increased its stake in Equity Bank. In Kenya alone in 2014/15, the value of shares NSSF held was Shs409b from Shs107b. A recent opinion written by Mr Byarugaba gave reasons why they were investing in equities.
“Equities are a major investment avenue for the Fund as they supplement safety attractiveness of fixed income by providing growth and return enhancement alongside long-term inflation protection,” he said.

The value of investments in companies within Uganda, Tanzania, Rwanda and Kenya rose from Shs438b in 2013/14 to Shs901b by the end of 2014/15. The value expansion can also be attributed to investments in Bank of Kigali and Tanzania Breweries.
As the Shilling depreciated, NSSF has also been able to withstand the shocks through several hedging mechanisms.
According to Mr Byarugaba, during 2014/15, there were unrealised foreign gains of Shs169b. These gains are as a result of assets held in foreign currencies and their value appreciates with strengthening currencies and the weakening Uganda Shilling.

Unlocking real estate investments
The Fund’s strategy is now to unlock the value in all its real estate projects. The Fund is already in final stages of starting construction of Lubowa Housing estate for the high end of the market. It will also construct another estate in Wakiso, Temangalo, for the affordable housing market.

In this financial year, there has been limited or no activity at Lubowa Housing project.
For Pension Towers, the services of another contractor for the project are yet to be secured. Mr Byarugaba describes these delays as “idiosyncratic risks associated with investments in real estate that create delays and escalate project costs.”
In fact, the value of assets NSSF held in real estate did not grow. There was a marginal decline to Shs444.5b from Shs444.6b in 2013/14, according to a presentation made at the annual members meeting.

Even as NSSF holds on to the real estate assets, it made Shs10b from renting out part of its properties such as Workers House, Social Security House, and Mbuya property. Additionally, the valuation of the properties is also on the rise. For instance, in 2014, the fair value of assets NSSF holds rose by Shs48b.
Mr Byarugaba has been pushing for withholding tax exemption on interest payments to members. The argument is that the tax is a disincentive for people to save. He also notes that if it hadn’t been for the taxes, members would have been given a return of 15.7 per cent instead of the 13 per cent.

The future
In the next 10 years, NSSF will be celebrating 40 years of existence in Uganda.
The outlook is for the Fund to have grown to at least Shs20 trillion worth of assets. At the annual members meeting, Mr Byarugaba pointed out key priorities that will drive the fund to the Shs20 trillion mark.
Improving compliance levels, diversifying the investment port folio and roll out new voluntary saving schemes are some of the priorities. For much of NSSF’s criticism on investment, the Fund is reacting to this.

For SMEs, the Fund will set up a private equity firm that will acquire stakes in these enterprises. NSSF will have the option of exiting these firms through the Uganda Securities Exchange.
The real estate sector, which has been facing supply constraints will also benefit from NSSF’s investment strategy. A more recent move is the Shs40b off-taker project.

“NSSF and the developer will agree on house specs, amenities, minimum units, price and timeline. NSSF will then provide a guarantee that it will acquire the units once the project is completed. The developer then identifies land that is acceptable to NSSF and builds houses as per agreed specs. Once completed, NSSF buys all the houses and pays the developer and sells the houses to members. The buyer either pays NSSF by cash or through a mortgage,” Mr Byarugaba added.
NSSF is also looking at properly structured infrastructure projects that comply with the regulations of the Uganda Retirement Benefits Authority.

For instance, the proposed Shs1.2 trillion Kampala-Jinja Expressway is expected to be funded through private sector funds. The private sector would then get a return on investment through a toll road charge on motorists.

The next article will explore how much has been paid to NSSF members since 1985.

NSSF CONTRIBUTION TO ECONOMIC GROWTH
• NSSF’s total assets stand is more than Shs5.8 trillion, which translates to about 6 per cent of Uganda’s GDP.
• The Fund is the single largest holder of shares on the Uganda Securities Exchange.
• The Fund holds approximately 14 per cent of all bank deposits.
• NSSF finance approximately 40 per cent of government debts through our investments in government bonds and securities.

PERFORMANCE
As at September 30, 2014, a compliance periodic audit established that employers of about 67,000 workers countrywide failed to remit their employees’ contributions worth Shs28b to NSSF.
The defaulting employers were mainly schools and vocational institutions across the country and had never remitted workers’ contributions since their registration.

However, the asset base is bigger than the member contributions. This means that NSSF can dispose of assets, pay member fully and remain with balance in the unlikely event that members opted to take their money out at once.
As the Shilling depreciated, NSSF has also been able to withstand the shocks through several hedging mechanisms.

mmuhumuza@ug.nationmedia.com