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09 - 16 April 2008 
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Finance and Banking


Uganda Moving Towards Pension Reforms

Workers House: Home of NSSF Uganda
Uganda is slowly moving towards pension sector reforms that will hopefully see the National Social Security Fund and the Public Sector Pension Scheme cease to monopolise the savings of pensioners. In 2007/08 budget speech, the finance minister reiterated the need for reforms saying “there’s no doubt that Uganda needs and deserves a good social security and pensions system. Such a system should provide a secure and adequate income to people who are aged, unemployed and/or disabled.” The need for pension reform underscores the present challenges of the existing social security and pension system . The Commissioner for Compensation in the Ministry of Public Service while addressing a Capital Markets Authority workshop was quick to point out some of the shortcomings of the system saying that the present monopoly had curtailed national savings, was characterised by inefficiencies and poor returns and services to pensioners, a situation that requires immediate redress.

A global outlook shows that pension sector challenges are not restricted to Uganda alone. Germany, for instance, passed a law in March 2007 to increase retirement age from 65 to 67. This was a bid to keep the aging population employed longer so as to reduce pressure on the public pension system. It is projected that by 2030, the pension support system will be 2:1 compared to the current t 4:1. By 2050, the number of people above 65 years may exceed 30% compared to the current 19%. According to European Commission forecasts, pension expenditures will have risen by 13%.The United Nations Economic Commission on Latin America in its 2007 report “Changing population age structures and their implications on social economic development in the Caribbean” reveals that while pension systems are able to cope because of a relatively high number of youth currently engaged in the workforce, this may not be the case in future as trends reveal an increase in the aging population.

Governments must begin to plan for additional funding. According to a review by the Office of Policy of the US Social Security Administration, without reforms, the pension deficit of Mexico’s Pay As You Go (PAYG) system is projected to increase from 0.5% of GDP in 2007 to 1% of GDP by 2012. Philippines on the other hand exemplifies success in pension sector reforms having passed the Personal Equity Retirement Account bill which proponents believe will have the direct effect of stimulating voluntary retirement saving, long term investments promote capital market development thereby making the pension system a savings and investment vehicle for contributors.

The Investment Management Association of Uganda (IMAU) calls for pension sector reforms citing massive opportunities awaiting the liberalisation of the sector.  Currently, public and private pension funds account for some UG Shs 1 trillion (approx. 10% of GDP). With Uganda's growing economy, there is need to properly align vital policies and laws that affect the economy as a whole and this includes pension and social security.

In terms of perception, contributors in Uganda do not see their social security contributions as an investment largely because of the inefficiencies that ensue from the current system. IMAU shares the experience of other regional states like Tanzania where there’s high evasion because of a large statutory percentage required of contributors. It is on this basis that they have developed cold feet towards the proposed National Health Insurance Scheme that would require additional contribution. This view is further reinforced by the Kenyan experience, whose pension contributions are significantly low and as such attract high participation from both the public and private sector. Adequate reforms will help stimulate the much needed mental shift enabling contributors to appreciate social security and pensions as a savings and investment vehicle rather than a mandatory requirement from which not much benefit is derived. The PERA system in Philippines is the kind bound to encourage voluntary savings by the contributors because of its promising benefits.

Mr. Keith Muhakanizi Deputy Permanent Secretary in Uganda’s Ministry of finance underscores the need for reforms in three areas notably the need for an independent regulator for the pension sector congruent to the IMAU position, the need for internal reforms in the NSSF which are already taking effect and the need to transform the PSPS into a contributory scheme which he said will have the direct effect of greatly increasing the fund. The IMAU goes ahead to propose a market driven sector rather than statutory driven one so that the number of players in the market are not stipulated by law but rather, market forces are allowed to come into play under the oversight of the Regulator who establishes minimum standards and requirements as is the case for Banking Institutions, Insurance and the Communications sector. The aim is to build competitiveness in the sector so that contributors can derive maximum benefits. In other words, the drive should be towards a mental shift where contributors can see their contribution as an investment supported by a credible system that seeks to generate the best return on contributors’ savings.

Fundamentally, pension reform will pave way for enhanced massive build up of savings from the current UGS 1 trillion which accounts for a very small percentage of the able contributors. Evasion is still prevalent due to loss of faith in the system however once that faith is restored, the numbers will inevitably go up leading to a vast financial base that can be tapped into by all stakeholders. Government will have the opportunity to tap into local resources to finance it’s programmes to further stimulate economic growth and the private sector will have the opportunity to raise additional capital to finance growth and expansion plans while the workforce in turn enjoys a healthy return on investment/saving consequently making ‘apprehensive retirement’ a thing of the past.

By Edgar Rutaagi
Financial Adviser

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