Experts urge prudence, due diligence before NSSF lends workers’ cash to government

On June 12 the National Social Security Fund (NSSF) posted a message on its Facebook page that read: “NSSF hits Shs 46 billion monthly target. Kudos to all that contributed to this great milestone.” The post attracted 15 comments, one of which said: “As long as you don’t give away our money for road construction, we are happy with this achievement.” The other comment read: “But we have witnessed those International lending institutions writing off most of those loans, do you think we the savers of NSSF are ready to risk that? By the way whose money is it and if owners are saying we are uncomfortable with that why insist?”

NSSF made a quick response that read; “Response from NSSF. Hi Connie and Stephen, it is not Kaguta (President Yoweri Museveni) asking for your money. It is the government of Uganda asking to help you the savers earn a ‘’guaranteed’’ return on your saving.”

The above comments appear to be an indication of the discomfort that a cross section of workers have over the recent announcement by President Museveni that the government would secure a loan amounting to Shs 1 trillion from NSSF.

Opinion is divided over the issue with some analysts criticising the move arguing that NSSF could face a situation of a bad debt, which could put the interests of workers at risk. The Fund, they say should instead look for other avenues to invest the money instead of risking it with the government, which does not appear to have a reputation for good financial management.

However, others including NSSF management have welcomed the move saying it would help them invest the “idle” Shs 2.5 trillion, which currently lies on its current account.

Ivan Kyayonka, the Fund’s new board chairman, defended the move during his inauguration on June 21, saying: “The proposal by government to borrow money from NSSF for infrastructure development is an idea that should be supported.”

It is a view shared by Richard Byarugaba, the managing director of the Fund, who added that it is not entirely a new development. “NSSF already lends funds to government,” Byarugaba said, adding that government borrows through Treasury bond auctions overseen by the Bank of Uganda and that the Fund is keen to participate in the development of the country.

“This is in keeping with the recognized norm all over the world of allocating a portion of pension fund portfolios to fixed income instruments like treasury bonds, treasury bills, and infrastructure bonds,” he added.

Analysts generally agree with the NSSF that treasury bonds are a major feature of all pension funds around the world. As part of its investment portfolio, NSSF has regularly participated in Treasury bond auctions together with other institutional investors including banks, insurance companies, private pension schemes, individual investors and offshore investors.  NSSF has invested heavily in ventures such as listed company shares, real estate, government and corporate bonds but more money is still available for investing.   Byarugaba said infrastructure bonds would provide an opportunity to diversify NSSF’s investments “given the dearth of opportunities in the Ugandan market that can absorb the Fund’s cash flows.”

Not risk free

Isaac Nkote, a senior finance lecturer at Makerere University Business School, concurs. He said ideally the idea “makes sense” because the world over the government is regarded as the best borrower. Also in terms of development, pension funds are key institutional investors because they have long term resources, which they must invest in different ventures.  He added that NSSF would be a cheaper source of funding than international finance institutions whose financing comes with exchange rate risks.

Nkote, however, expressed fears that the money could be swindled instead of doing infrastructure as purported. “But that is another issue,” he said. “The most important thing to me is [ensuring] that government pays back the money upon maturity of the bond.”

Kenneth Kitariko, the managing director of African Alliance, said the key thing is the structure to be used in carrying out the transaction. “The deal must be transparent,” Kitariko told The Independent on July 11. “NSSF has to assess a return on investment. If it finds out that the deal is profitable then they can go ahead, after all NSSF is struggling to find other investment destinations for the money.”

Kitariko said such long term bonds would not only help government do the roads but would attract foreign investors to invest in long term bonds of over 15 years. “Kenya has done this and that has made its capital markets grow,” he said, adding that the focus should now be on the long end and not on the short end and this would gradually support the growth of our capital markets - an essential avenue for raising money for development purposes.

Sam Lyomoki, the Workers MP, also called for caution. “The principle is okay but there have to be consultations with different stakeholders before workers’ money is lent out to government,” Lyomoki told The Independent on July 12, adding what workers don’t want is government rushing to borrow their  money without going through the right procedures. “That we will not accept,” he said, adding that Parliament has not been formally informed about the matter and that it would intervene in case things go wrong. “We are monitoring the rumour,” he added. Such fears are not far-fetched. In some countries, pension funds have struggled in times when governments find themselves in situations of bad debts. For instance, recent reports from Greece - which is currently embroiled in an economic crisis - show that some Pension Funds holding Greek sovereign debt worth two billion Euros have refused to take part in a bond exchange to ease the country’s debt burden. The Pension Funds have come under pressure from workers’ unions worried that the write-down on Greek debt holdings would affect the viability of their funds.  To date, the government is shouldering a debt burden of a staggering Shs 300 billion in pension arrears with tens of thousands of frail former civil servants still waiting to get their retirement benefits.  There is a fear that such a scenario could befall NSSF members if sufficient safeguards are not put in place before taking investment decisions involving the government.

Kitariko described the Shs 1 trillion, which government plans to borrow as a “substantial figure” and said it would be prudent for NSSF to ensure that it has sufficient liquidity to pay its contributors as they retire.  Indeed, Prof. John-Jean Barya, a law professor at Makerere University, said governments all over the world do borrow from pension schemes but the pessimism in Uganda over the NSSF loan stems from the public’s lack of trust in the government when it comes to issues of money.  “People are concerned over what would happen if the government borrows and does not pay back,” he said, adding that even if the NSSF goes to court and gets a ruling in their favour, it is impossible to attach public property to recover the loan.

Two years ago, Uganda Revenue Authority attempted to secure a loan of $10 m at an annual interest rate of 12% for the next 15 years to build its headquarters at Nakawa, but Parliament blocked the deal amid vehement protests from stakeholders.  Recently, President Museveni reportedly asked Finance Minister Maria Kiwanuka to consider borrowing Shs 300 billion from the Fund to finance the expansion of Parliamentary buildings, which also fell through under pressure from stakeholders.

“If we had a government that respects institutions and is trustworthy there wouldn’t be many complaints because lending to the government is ideally supposed to be risk free,” Barya said.

No legal framework

In a bid to open up the pension sector, Parliament last year passed the Uganda Retirement Benefits Regulatory Authority (URBRA), which prohibits any lending except through securities traded in the open market. The Act created the URBRA but the board and management of the regulatory body are yet to be formulated, which some fear was deliberate as the Authority would make it more difficult for such deals to go through without safeguards to protect workers’ savings.

Also, the Pension Sector Liberalisation Bill 2011 is still under discussions by Parliament, which is expected to pave way for the ending of the monopoly of the NSSF, create more competition in the sector and ensure efficiency in management and investment of pension funds.
“There is wide public perception that NSSF has not been run on sound governance principles. This could have a negative effect on savings mobilisation. It is, therefore, imperative that immediate action be taken to enact a law to reform and liberalise the retirement benefits sector,” the draft Bill reads in part.  “This will avert the collateral damage that has been caused to the retirement savings of employees from the private sector and the retirement benefits sector as a whole.”

In the budget speech for 2012/2013, Maria Kiwanuka, the finance minister, said the regulatory body would be formulated in this financial year. Analysts wonder why the government does not wait for the regulator to be set up before such a huge sum of workers’ money is borrowed.  Indeed, Nkote said there should be an advisory body to advise both government and NSSF on how best to deal with the loan issue instead of relying on the new NSSF board.

Not lacking funds

The proposal to borrow from NSSF would probably imply that the government needs money urgently, which some analysts think is not the case.  Last month, Thomas Richardson, the International Monetary Fund (IMF) senior country representative, disapproved of the proposal to borrow workers’ savings from the NSSF at an interest rate below market rates, saying it would compromise the Fund’s ability to pay pension to its members in future.

Richardson argued that Uganda’s real problem is not lack of finances for its projects but rather its lack of capacity to utilise available finances in a timely and efficient manner.  He argued that the government has been borrowing large sums of money from international finance agencies like IMF and the World Bank for its  infrastructure projects, which ends up sitting in banks due to lack of ready plans to spend it and low absorption capacity. In addition, even the little money allocated to infrastructure from the national budget often remains unused up to the end of the year due to poor implementation and low absorption capacity.

Prof. Barya, who has consulted at the highest level on pension funds in the region, said NSSF money is basically lying there idle because the environment has made it very difficult for the Fund to invest for the long term benefit of workers.

If the investment environment was conducive he added, workers would be more comfortable if the Fund invested the cash in the development of its real estate ventures at Temangalo and Nsimbe Estates.

However, Byarugaba appears to be comfortable with the loan deal, saying government debt is a recognised asset class globally because of the steady coupon payments and guaranteed principal repayment at maturity with minimal risk of default, since the yields on these instruments are determined by the market through a competitive bidding process conducted by the Bank of Uganda. “It is standard procedure for the Fund to undertake extensive credit analysis before investing in any debt instrument.

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