The government’s plan to amend the current NSSF Act has caused uproar among the public in the past days. NSSF’s Managing Director, Richard Byarugaba, spoke to The Independent’s Isaac Khisa about the motives behind the proposed law and its implications to the members and economy.
What does this NSSF Amendment Act meant to achieve?
In terms of policy, the NSSF (Amendment) Bill 2019, will lead to expansion of social security coverage, efficiency and effectiveness in investments and introduction of new benefits. It will also lead to improved governance of the Fund as well as streamline appointment of staff to key positions – the Managing Director, the Deputy Managing Director and the Corporation Secretary.
The proposed amendments are also meant to correct the defects in the existing law- the NSSF Act, which was enacted in 1985. Since then, the labour market, the country’s demographics, standard of living, members’ social security needs, and even the country’s social-economic development needs have all changed. The Fund and the country need to keep pace with the rest of the world.
For instance, the current Act does not address new developments in the management of the Fund especially regarding governance, the need for innovation around products and other benefits. The need for a review of the benefits tax regime, easier recovery of social security contributions arrears, among others, are also addressed by the Bill.
What is your opinion on the proposed law?
We welcome and support the Bill. The proposed amendments are progressive and address the concerns of the members and the country at large. We also welcome the decision by Government to retain NSSF as the Basic National Scheme, entrusted with management of mandatory social security contributions for the entire country. This is in keeping with best practice around the world.
A section of the public think that the proposed law will make them pay more tax and therefore lose most of their savings compared with the previous law. What is your comment on this?
Uganda’s current tax regime with respect to pensions and retirement benefits is a TTE (tax, tax, exempt). This means that a member’s contribution is taxed at deduction of payroll, NSSF income is taxed when earned and the members Benefits are exempted from tax. So all the members’ accrued benefits will have been taxed by the time they are paid.
When the NSSF Amendment Bill, 2019, becomes law, the tax regime will change to an EET. Here member contributions will not be taxed, and NSSF income earned will not be taxed. However member Benefits will be taxed at the point of withdrawal. Should a member attain the age of 60 years their Age Benefit will not be taxed. Other benefits that will not attract tax also include the Invalidity and Survivors Benefits.
Therefore, under the new tax regime, a member will have more money compared to the current tax regime. The government, too, will have earned more tax revenues under the new tax regime than it would have collected under the current one.
The proposed law is silent about the accrued interest in circumstances of delayed pay-outs in relation to changes in the economic conditions such as inflation. What mechanisms will be put in place through which the final benefit pay-out will be determined to ensure that clients’ savings do not lose value?
This matter is already addressed in the current NSSF Act, specifically Section 31. It specifies that the Fund has to pay interest on members’ accounts every Financial Year at the rate declared by the Minister, after consultation with the board, not later than the Oct.01, which must be no less than 2.5 percent. In addition, we have made a commitment to pay at least 2 percentage points above the 10 year average rate of inflation.
We consider 10 years as our benchmark because we are a long term investor and therefore it is prudent that we measure ourselves against a long term horizon given, as well as holding members’ savings throughout their working life.
Over the last 10 years, we have consistently kept that promise, paying, on average about 2.7 percentage points above the average 10 year rate of inflation.
This has been achieved through an aggressive but at the same time judicious investment approach as provided for under our Investments Strategy.
So by the existing law and by practice, we have safeguards to ensure that members’ savings do not lose value and that will continue to be the case even after the NSSF (Amendment) Bill has been passed into law.
There’s fear among the contributors over a proposal in the bill that allows government to borrow from the Fund. The contributors are worried that their funds could be invested in low-down enterprises and that it will make NSSF captive to the state. What is your view on this?
There has been a misunderstanding that I would like to correct. Some commentators are saying that the proposed amendments will allow the Fund to directly lend to government but this is not the case.
The proposed amendment, specifically Clause 12 (b) says that “Notwithstanding the provisions of any other law, the Board may use in-house expertise or fund managers in the investments, which may include lending to Government.”
In other words this provision will allow us to lend to government but not directly. In fact, the URBRA Act already forbids direct lending, so the two and in consonance.
The Fund already lends to the government through its participation in regular treasury bond auctions. The NSSF participates in treasury auctions overseen by the Bank of Uganda on a regular basis. About 77% of our assets are invested with the government, and within East Africa.
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. Governments all over the world issue treasury securities for various reasons. As is common knowledge, the government periodically borrows from the public and other institutional investors including NSSF by issuing treasury bonds.
We strongly believe that judiciously investing in publicly issued government debt is one of the safest ways to earn a steady return since these instruments are considered to be risk free because they are backed by the full faith and credit of the Government of Uganda.
An allocation to treasury bonds is a major feature of all pension funds in the world and that is why NSSF has been regularly participating in treasury bond auctions together with other institutional investors. What this proposed provision does is formalise or put into legislation that which we are already doing and removes any doubt.