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Bbumba to Ignore Pension Reform in 2010/11 Budget
By Jeff Mbanga, The Observer
May 19, 2010
Uganda
Government has no plans of making concrete steps this year towards the opening up of the pension industry, confining the proponents of the sector’s liberalization to a fifth straight year of agony.
And chances that any such intervention will be done in the year 2011 are increasingly looking slim, The Observer can reveal. A Paper that lays the basis for next month’s National Budget reading hardly mentions any significant plans by government to open up the pension sector this year. Instead, the National Budget Framework Paper 2010, points out that a new regulator might be put in place by 2011.
“Government is advancing reforms in the pension sector,” notes the National Budget Framework Paper, which is prepared by the Ministry of Finance. “The Retirement Benefits Authorities Bill was approved by Cabinet in December 2009, together with the policy on liberalizing the sector which will allow private pension providers to compete with the National Social Security Fund (NSSF),” it adds.
“It is expected that the Bill will be submitted to Parliament, and the new regulator put in place by 2011. Government shall be undertaking actuarial evaluations of the large pension schemes currently operating in Uganda to determine the financial viability of the sector as a whole,” according to the
NBFP.
That is just about government’s future plans regarding the liberalization of the pension sector, which is bound to leave market players with more questions over a more credible timetable. A liberalized pension sector is seen as one of the best solutions for a deeper financial market, which tends to attract foreign capital, and also act as a source for credit.
Also, in Uganda’s case, a liberalized pension market is seen as the only solution of applying pressure on NSSF to offer its clients a good return on their savings. But calls for opening up the pension industry over the last five years are yet to bear any fruit. In what is increasingly looking like a cat and mouse game, Government has over the last few years raised hope among financial market players over the imminent liberalization of the sector, but fallen short of putting up concrete measures to fulfill its promises.
For example, in June 2007, Ezra Suruma, then Minister of Finance, talked of how Uganda needed a strong pension system. He also said, without being elaborating that Government would turn NSSF into a pension fund. Nothing substantial happened.
In June 2008, Suruma said a regulatory authority for the pension sector, which was supposed to lay the foundation for a liberalized market, would be put in place in December that year. December came and passed.
Early last year, Syda Bbumba replaced Suruma as Minister of Finance, with a strong belief among financial market players that she would succeed where her predecessor had failed. In June 2009, Bbumba completely left out any concrete plans for the liberalization of the sector, dashing much of the faith the market had in her.
While delivering her keynote speech at the Kikonyogo Capital Markets Awards two weeks ago, Arunma Oteh, the Director General of the Nigeria Securities and Exchange Commission, called on government to open up the pension sector “as soon as possible” as that would create an environment for more money in the sector.
She said that “the development of a strong capital market is imperative because theoretical and empirical literature have shown that there is a strong, positive correlation between capital market development and economic growth.”
However, there are arguments that 2011 won’t even be the year that the pension industry could be liberalized despite Cabinet pronouncing itself on the Bill.
There are fears within the industry that the election campaigns, which climax in February 2011, will distract economic reforms such as the liberalization of the pension industry.
Others expect government to take a break after a grueling election campaign.
Also, Nicholas Malaki, the Country Manager of PineBridge Investments East Africa Country Manager, offers an interesting argument as to why the market is in for a long wait.
“There is always a time lag when the Bill is presented in Parliament and when it becomes operational.” Pointing to the Kenyan example where the Retirement Benefits Bill was passed in 1997, but became operational around 2001, Malaki said that the Minister has to gazette rules and regulations for the sector, put in place trained personnel, among others, all of which “take some time.”
For now, private companies continue to offer in-house pension schemes, which are not clearly regulated. The fate of these pension schemes in the event of the company’s collapse remains unclear.
But also, the delay in opening up the pension sector means NSSF will not feel any pressure to offer its clients a good return on investment. Currently NSSF, which manages more than Shs 1 trillion, or $465 million, pays an annual interest of 3% on workers’ savings, which is below the inflation rate of about 7%.
While it will remain compulsory for employers and employees to save with NSSF, market players say that the liberalization of the pension sector is expected to put pressure on NSSF to increase its interest payments. That day, however, is not in the foreseeable future.
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