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Uganda fund managers urge regulator to set minimum charges

Saturday December 06 2014
UG nssf

The Uganda National Social Security Fund headquarters. The Fund’s asset management costs have reduced, attributed to outsourcing of fund management services. PHOTO | FILE |

Fund managers in Ugandan face less earnings as competition grows from new entrants and aggressive pricing tactics adopted by large clients.

Leading fund managers now believe minimum professional charges set by the regulator would protect firms with long-term ambitions while maintaining the profitability of pension schemes.

Asset management costs incurred by pension schemes have dropped from an average of two per cent recorded in 2011 to less than 0.4 per cent at the beginning of this year, according to industry sources, with established fund managers coming under pressure from new players seeking to gain significant market share in the short-term.

The fees are based on value of assets under management at the end of each year and are shared between fund managers, administrators and custodians using agreed ratios.

However, fund managers account for a lion’s share of the fees due to bigger weight attached to their role and bargaining power in the value chain.

As a result of downward movements in professional fees, asset management costs incurred by large industry clients have notably declined in recent months. For instance, the National Social Security Fund’s asset management costs fell to 1.85 per cent at the end of June 2014 according to the industry regulator.

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Through an outsourcing arrangement implemented two years ago, the Fund employs two external fund managers to oversee some of its assets, with roughly Ush20 billion ($7.1 million) allocated to each of them.

In comparison, asset management expenses incurred by Uganda Revenue Authority’s staff pension scheme have dropped from 0.7 per cent per year to 0.4 per cent to date while its assets have increased to more than Ush55 billion ($19.6 million), industry sources revealed.

Whereas local schemes are obliged to retain independent fund managers, administrators and custodians to avoid conflict of interest, Uganda Revenue Authority’s pension scheme is supported by internal administration services secured through legal exemptions — an arrangement that offers substantial cost savings.

On the other hand, average fund management fees charged in Kenya’s pension management industry fell to about 0.3 per cent last year on the back of severe price wars experienced since 2010.

Besides stiff competition, shrewd pricing methods practised by big pension schemes that frequently slash price quotations submitted by rival fund managers have also led to diminished professional fees, sources say.

READ: New firms enter Uganda unit trust market

A huge number of previously unlicensed pension schemes that benefited from informal management structures has similarly contributed to falling professional fees.

Before the commencement of a new regulatory regime in 2012, numerous pension schemes were managed by senior company staff or selected commercial banks — a model that bore low operating costs and less reporting pressures.

Consequently, various local schemes seeking to fulfil new compliance requirements laid out in the Uganda Retirements Benefits Regulatory Act of 2011 are apparently reluctant to pay much for professional services performed by internal employees in the past, fund managers argue. This scenario has piled pressure on some players to discount their bids in order to attract more clients.

“The current transition phase that requires schemes to shift from managing their operations to outsourcing it is making it difficult for new clients to appreciate our services and pay realistic fees. For this reason, the current fees are not sustainable and the benefits to savers are negligible. That is why we need some sort of minimum price benchmark of at least one per cent in order to reduce income erosion within the industry,” said Kenneth Kitariko, chief executive officer at African Alliance Uganda, a stockbrokerage and fund management company.

About 63 pension schemes have been licensed since last year while 120 schemes exist countrywide, according to the industry regulator.

Confronted by depleted revenue streams, fund managers cite serious risks of staff turnover in coming years — a problem demonstrated by the inability to attract and retain highly skilled investment experts.

“Local fund managers earning less income feel constrained to invest in better staff, which leads to weak execution of their mandate and poor performance of assets under management. As a result, big fund managers are compelled to take on schemes with assets of more than Ush5 billion ($1.8 million) in order to make ends meet,” noted Kenneth Owera, an investment analyst at Stanlib Uganda.

Though the Uganda Retirements Benefits Regulatory Authority (URBRA) appears positive about declining professional fees, it is yet to tackle the effects of reduced income streams on industry players.

“Due to aggressive bargaining, our asset management costs have dropped to about 0.4 per cent to date. Nevertheless, low professional fees pose a threat against attraction and retention of high quality staff with strong investment skills. In light of this challenge, we have deployed two fund managers to oversee our investments so as to counter negative risks of high staff turnover that could affect one of them,” said Michael Otonga, URA’s Commissioner for Corporate Services.

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