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Uganda offers highest pension benefits

Octagon Africa, a regional financial services provider offering pension and insurance service entered Uganda’s pension market in 2013, and now holds about US$100million in assets under its management. The firm’s CEO Fred Waswa spoke to The Independent’s Isaac Khisa on a wide range of issues in the pension industry.

What is your assessment of the pension industry in Uganda compared to Kenya and possibly Zambia?

Ideally, if you look at the coverage of the retirement’s benefits schemes in Kenya, Uganda and Zambia, the coverage is much higher in Uganda compared to the other two countries. This is attributed to NSSF which is mandatory and with higher contributions.

The type of benefit provided to the employee in terms of retirement is higher in Uganda than in Kenya and Zambia because NSSF requires that everybody must save 5% and the employer must match with 10%.  That means that, in everybody’s salary, there is a 15% deduction.

In Kenya, on everybody’s salary, there is a US$$4 deduction: US$2 for an employee and US$2 for an employer. It’s a small amount of money. In Zambia, it’s the maximum of 5%; 2.5% employee and 2.5% employer.  The benefit that somebody carries home in Uganda is higher than the benefit that someone carries home in Zambia and Kenya.

If we focus on coverage, Kenya ranks highest than the other two countries simply because of the smaller contributions in NSSF in Kenya. Most private companies have set up pension schemes for their employees or have joined Umbrella pension funds or they have joined personal pension plans so you find that we have many more employees covered in terms of contribution and savings for retirement, but the contributions may not be as high as they are in Uganda.

The challenge of having a state scheme that drives the industry is the fact that it is inefficient; people will avoid money to go into state schemes because nobody trusts the government all over the world. They are afraid government will use their money on other things rather than investing on their behalf for retirement. So, with the government driving this scheme, there is less coverage because of mistrust. The state corporation must have structures to push people to sign up which is a challenge because of capacity.

Uganda has done well on the state scheme; in terms of private pension schemes we’re not doing very well. We have barely about 110 schemes currently registered in Uganda. Kenya has 1,500 schemes and Zambia has about 400 schemes registered. Zambia is a smaller market with a population of around 18 million people. So maybe comparability we find that it’s at a higher rate in terms of coverage compared to Uganda.

Uganda thus has a huge opportunity in the private sector for savings for retirement as specialists in personal pension. Economies in the third World are driven by SMEs and individual people such as farmers who are not covered under the corporate pension schemes.

Those people are not pushed by NSSF to be able to sign up for retirement, but we need to provide them with a platform for them to save for retirement. This means that there is a huge opportunity on the private sector in terms of pushing for personal pension schemes and small-medium enterprises, which is an umbrella pension fund.

How has been octagon’s growth since its inception in 2007 in terms of assets under its management? How much of this has been generated from the Ugandan market.

We started with zero assets which we have grown over time. Today we have about USD1.1 billion under management. Out of this, we have about USD 100 million in Uganda. The bigger part of this is basically in Kenya because of the private sector pension schemes, which are a bit large and so the growth has been steady. We are seeing stead growth especially in Uganda and Zambia. Zambia because of the two things; we now have a new government and always new things; newness introduces new thinking.

What do you think is the biggest problem in Uganda expansion industry at the moment? And what is Octagon doing to address this challenge?

The biggest challenge in Uganda is the regulation which we will simply try as much as possible to influence; the drive for legislation just around NSSF constraints the growth of the private sector pension schemes that needs to be looked at.

The growth of the private pension schemes in Uganda will do two things; one, grow the capital markets your capital markets will never grow if you just have one player in the market who is NSSF. If you introduce more players in the market, more fund managers come then they can drive the capital markets. You have more companies coming on the stock market because they know it’s going to be a lot of vibrancy in the stock, that in my view needs to happen and can only happen through legislation change.

The second aspect is ideally providing products for SMEs and self-employed individuals in terms of saving for retirement. We as Octagon Africa are very strong in driving for SMEs and personal pension. We have created products in Uganda and income drawdown for those that are retiring.

We are going to launch that product soon where anybody who is retiring can be able to take their money and place it in the income drawdown and can draw over a period. It can be up to 10 years of assurance of income. Today, the market for income drawdown annuities is on its deathbed.

The market for income drawdown annuities in Uganda is on its deathbed. It’s not vibrant at all, we need to bring vibrancy in this very particular market. Now, insurance companies are a bit uncomfortable pushing for annuities, so we need to provide alternative pension products and one of which we have done we basically at the tail end registration with UMBRA is an income drawdown.

The second bit we are doing is to be able to address the issue of penetration for the SME and individuals is the personal pension plan. I know that a couple of people have done personal pension plans in the market in Uganda, but the challenge has been the credibility of those platforms. Those are things we are trying to address.

The government seems to have blocked the establishment of private sector scheme with the recently enacted NSSF Act. Is this something you expected? How does this step impact on your operations and future growth?

The amendment to NSSF Act thereby giving tax exemption on contributions is the biggest advantage that it has got against the private sector.  In Kenya, all contributions go to pension schemes, whether it is its NSSF or it is the private sector, they receive tax exemption to a certain extent of about $200 per month. It’s a level playing ground for everybody thus we can grow the private pension scheme.

Private pension schemes will create more employment in Uganda, the private pension industry in Kenya employs almost over 10,000-15,000 people and these are jobs paying very well and the ripple effects are huge. So, the regulation that states that NSSF contributions receive a tax exemption, in my view, wasn’t a fair one. If anybody gets to read this, there is a need for a review. It simply means you want to stifle the private sector pension schemes.

As I mentioned earlier, people never trust the government, look at what Tanzania did, the state pension scheme receive 10% and 10% contributions. There are multinational companies that have set up pension schemes for their employees simply because they don’t trust the government.  You can never tell whether that money exists. They may be declaring a nonexistent fund. So, all these things are challenges that need to be addressed

We need to grow NSSF, tier-one contributions should go to NSSF while Tier two contributions into occupational schemes and tier three into personal pension plans, that way we provide for everybody.  You have a small amount that goes to NSSF maybe 3% like what happened in Zambia, where 2.55% goes to NSSF, then over and above people are doing 5, 10 into occupational schemes and members themselves want to do something more with another 2% going into a personal pension fund to help in saving for short term or medium term.

There is an opportunity in Uganda, I don’t think it was a good intention for that particular legislation to come through and I believe somebody is going to rethink through to be able to help out on that. In terms of whether that’s going to kill the industry, I don’t think so. It’s just going to slow down as people will prefer to put money in NSSF as opposed to the private sector.

We still have private-sector pensions pension funds, so we believe that the industry will grow out at one particular point.

Then governments policies change, and we think and know this policy will either be opened for the private sector or amended to make sure there is a level playing field.

 What can the pension’s industry do to encourage people to start investing in their pension sooner?

The spending culture across Africa is a problem generally. I know that South Africa, Nigeria and Kenya have progressed but the rest of the countries saving cultures are still poor just because of financial literacy. I often say, Africans only knew one asset; cows, another asset that came along was land. But as economies improve, it’s going to be moving much faster than before because of having one world order in terms of people thinking the same and having information flowing across the world in a twinkle of an eye. These kinds of things are driving people to have the same thinking patterns across the world.

What we have in Uganda in terms of poor saving culture is just because of financial literacy issues. We need to drive financial literacy; people need to understand that money is wealth and money is not necessarily meant to be consumed as it comes. The money needs to be used, saved and invested.

This goes hand in hand with government policies.  In Kenya, for instance, we are trying to push for financial literacy clubs in schools starting straight from primary school. We want to have clubs where children can be able to compete on financial literacy areas and things that they can easily relate to. So, when they grow up, they start remembering these kinds of things and it becomes easy for them to save.

Where do you see Octagon fitting in within the serving or traditional patient providers and digital advisors?

Octagon Africa is going to be a fintech in the pension industry. We are disrupting the market. We are developing products and services that are based on IT systems because most of our young people are online. We have an IT hub that develops our platforms and portals alongside the operation team to automate all products and services.

For example, with a personal pension plan, people sign up straight on their phones, save, monitor and access the benefits conveniently.

What piece of advice would you give to somebody who is starting his or her saving or investing investment journey?

One; don’t start saving too much. If you’re earning Shs1million and you want to start saving 20% of your money, sometimes it’s very ambitious but what that does is discourage you in the short term because you remain with very little money to be able to keep up with the daily needs. So, what happens is that you then cut down on your savings very quickly or stop suddenly. My advice is, when you earn, start with 5% or 10% something that you can easily forget.

Two; don’t save on platforms that are not regulated. We have so many Ponzi schemes. We also need to be knowledgeable; read more on financial literacy.


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