The 2014 census results indicate that Uganda has a labour force of 16 million people. By the end of 2015, only 757,179 Ugandans were saving with the National Social Security Fund (NSSF) – a mandatory savings scheme for all employees in full time employment other than civil servants.
2015 estimates indicate that there were 307,000 active civil servants and this, coupled with the active NSSF savers, translates into slightly more than one million Ugandans having some form of retirement benefit. This means that only about 6 per cent of Uganda’s labour force is actively saving for retirement, the rest face the risk of old age poverty.
What NSSF Act says
The NSSF Act requires formal sector employers with five or more employees to pay mandatory NSSF contributions for their employees. However, this provision excludes most Ugandans employed in the informal sector or those working for small firms.
Think about your local barber/hair stylist, boda boda rider or farm workers in the countryside. What retirement benefits provision is in place for them? None. The proposed pension reforms are geared at having all workers and employers in both the formal and informal sector contribute to pension schemes of their choice.
The reforms will enable more pension service providers to operate within Uganda and tap into the wide market – of over 16 million people – for pension service provision.
To address this low employer-employee participation in savings and in anticipation of the expected competition from new fund managers, NSSF recently launched a drive to increase voluntary pension contributions from individual savers. The focus of the drive has a behavioural finance aspect to it which centres on the plight of a former star national football team player who did not save for retirement and is entrenched in old age poverty. Given that NSSF has set out to tap into the previously unserved market before implementation of the pension reforms, one can only imagine how more innovative it will get when the proposed pension reforms are rolled out!
The proposed reforms should maintain the mandatory savings at a minimum of 15 per cent, with NSSF retaining a combined total of 10 per cent of the total mandatory savings. The individual savers would then be at liberty to choose another fund with which to save the remaining mandatory 5 per cent. Individuals and their employers should be free to save more than the remaining 5 per cent with a scheme of their choice. This would save the contributors from having to “put all their eggs in one basket” with one fund manager, a concept commonly referred to as diversification in portfolio management. The beauty in this for NSSF is that if contributors deem it to be their preferred pension fund, they can save the entire 15 per cent with them.
Receiving savings during employment
The reforms also introduce the aspect of receiving a portion of savings made during active employment as a lump-sum with the remaining savings paid out monthly as a pension into perpetuity. This will avoid the prevalence of retirees sinking into old age poverty a few years into retirement due to unwise investments undertaken.
Increased competition among pension fund managers is expected to lower administration costs and earn savers higher investment returns. With a pension regulator already in place to oversee the safety of members’ saving and monthly pension payments post-retirement, individual savers should be allowed to choose their preferred fund manager(s).
In a bid to increase their market share, the new fund managers will seek for more innovative ways of tapping into the unserved populace in Uganda’s pension industry thus crowding in more savers faster than one provider (NSSF) would.
One only has to recall how the liberalisation of the telecommunications industry led to increased competition, improved service delivery and introduction of innovative products such as mobile money which has increased financial inclusion levels in Uganda.
The introduction of new and innovative pension funds in Uganda, coupled with the proliferation of mobile money, will spur an increase in the number of Ugandans saving for retirement. This will ultimately save millions of Ugandans from the dilemma of old age poverty. The Government should not let its citizens down on this one.
Isaac Sekitoleko is a research officer at Capital Markets Authority