The National Social Security Fund (NSSF) recently declared an interest rate of 11.5% for the 2023/24 financial year. This means that over UGX 2 trillion will be credited to members’ accounts, making it the highest interest pay-out by the Fund to date. For context, last year’s rate was 10%, so this is a welcome increase for many savers.
However, some savers had hoped for even higher returns, especially considering that the NSSF made strong earnings from its investments in companies like MTN, Airtel, and other areas like real estate. They expected returns of around 12% to 13.5%, given the profitable outcomes from these investments. The reasoning here is that with such solid earnings, the NSSF could have offered more than the 11.5%.
So, why didn’t members get more? The NSSF Managing Director, Patrick Ayota, explained that while the returns were strong across different types of investments, the NSSF still provided one of the highest returns in the market compared to other players. This means that even though the NSSF’s investments performed well, the interest rate they offered is still competitive and even better than most similar funds.
This raises a key question: “Would members get more than 11.5% if the pension sector was liberalized?”
In a liberalized pension sector, there would be more competition. Private companies would be allowed to enter the market and offer retirement savings options. Ideally, more players would mean that companies would try to outdo each other by offering higher returns or better benefits to attract customers. This could lead to savers getting more than the 11.5% interest NSSF currently offers.
However, competition is a double-edged sword. While it might lead to higher returns in some cases, it also introduces risk. Private pension schemes may not have the same level of government backing or long-term stability that a large fund like the NSSF has. Some of these private companies could offer attractive rates initially but might struggle to sustain them over time or could even collapse, putting savers’ money at risk.
Another thing to consider is the “trust factor” . Right now, some members are choosing not to withdraw their savings because they trust the NSSF to grow their money safely over the long term. As Ayota pointed out, mid-term benefit withdrawals have dropped because people believe their savings are secure and growing in value within the Fund. If the market were liberalized, members might have more choices, but would they feel the same level of trust with private pension schemes? That’s uncertain.
Liberalizing the pension sector could open the door for higher interest rates, as competition tends to push providers to offer better returns to attract more savers. However, this comes with its own set of risks. While companies may initially offer attractive rates, maintaining those returns over the long term may be a challenge, especially without the stability and backing that the NSSF provides.
Right now, members trust the NSSF to keep their savings safe and growing, which is one reason why many people are opting not to withdraw their funds. Private pension schemes, while potentially offering more competitive rates, may not inspire the same level of trust or security. The question for members is whether they would prefer the promise of higher returns or the reliability that the NSSF has delivered over time.
Current Status of the Liberalisation Bill
The Retirement Benefits Sector Liberalisation Bill was submitted to Parliament in 2011. While it has been on the reform agenda for over a decade, it has yet to be enacted into law. The delay in passing this Bill has left the pension sector largely unchanged, limiting the potential for competition and innovation. The reforms outlined in the Bill aim to empower workers to choose pension fund providers and improve the overall management of retirement savings. Without the Bill’s passage, the current system remains in place, meaning members continue to rely heavily on the National Social Security Fund (NSSF) for their retirement savings.
The policy behind the Retirement Benefits Sector Liberalisation Bill is to liberalize the retirement benefits sector, remove the monopoly over mandatory contributions, and provide for fair competition among licensed retirement benefits schemes. It also aims to establish mandatory contributions and benefits, consolidate and reform the legal framework relating to retirement benefits, and convert the public service pension scheme into a contributory scheme. The Bill seeks to repeal the Pension Act (Cap 286) and the National Social Security Fund Act (Cap 222), along with addressing the preservation of funds under the NSSF.
