Uganda’s National Social Security Fund (NSSF) declared 11.5 per cent interest on members’ funds for 2014 compared to 11.23 per cent the previous year, a move that suggests a cautious stance towards managing savers’ expectations under less certain economic conditions and a narrowing investment arena.

Though the Fund’s performance was robust over the past 12 months ending June 30, 2014, NSSF executives have opted for modest gains offered against members’ funds in a delicate balancing act meant to appease savers while maintaining stable returns amidst low economic growth and growing political fever ahead of the 2016 General Election.

The election cycle is negatively associated with steep increases in government spending and occasional capital flight; key risk factors that often trigger high inflation rates and strong depreciation in the local currency.

Economists say such trends erode returns on investment while discouraging new commercial ventures.

Whereas tight monetary policies deployed to bring down inflation usually stimulate high interest rates earned on government securities and fixed deposits, reduced consumer demand attributed to soaring interest rates directly hurts company profits, shareholder dividends and growth of share prices quoted on the stockmarkets- a bigger source of windfall incomes for investors compared to debt instruments.

Total member contributions grew to Ush638.2 billion ($237.7 million) at the end of June 2014 compared to Ush558 billion ($207.8 million) recorded in June 2013, NSSF data shows.

Total incomes rose by 14 per cent to Ush478.9 billion ($178.4 million) while total assets increased by 26 per cent to Ush4.38 trillion ($1.6 billion) during the same period. Interest payments shared by members similarly increased from Ush278 billion ($103.5 million) in 2012-13 to Ush366 billion ($136 million) in 2013-14.

READ: Uganda's NSSF gains from stable inflation, recovery

However tax related challenges and bureaucratic constraints have seemingly narrowed its investment space that consists of few asset classes that include fixed income assets such as government securities, equities and real estate.

For instance, the 20 per cent withholding tax rate charged on income earned from Treasury bills and bonds has rendered investments in short term securities less achievable for the Fund during the government paper auctions conducted by Bank of Uganda.

While Nairobi-based fund managers have reportedly opted for lower bids motivated by tax exemptions on assets held by Kenyan pension schemes, NSSF Uganda captures tax margins in its bids, rendering it uncompetitive and unable to acquire sufficient amounts of short term debt paper.

Besides this, a lower withholding tax rate of 15 per cent charged on interest income earned from fixed deposits often translates into a higher net return of 0.5-0.6 per cent making Treasury bills less viable, rival fund managers argue.

Sources at the Fund claim interest rates averaging 10 per cent earned against a one year Treasury bill bears less returns compared to interest rates of 12.5-13.5 per cent earned against one year fixed deposits offered by small commercial banks eager to outcompete big lenders on mobilisation of cheap deposits.

This situation has diminished NSSF’s shallow investment choices and complicated its decision making processes, observers noted.

“We usually include a tax margin in our bids and this has rendered us less competitive in Treasury bill auctions against Kenyan fund managers who handle tax exempt funds belonging to local pension schemes. In addition, local banks usually offer two per cent more against yields earned from a one year Treasury bill for fixed deposits held for the same duration.

“But our disposable resources for investment have increased to Ush140 billion ($52 million) and clearly exceed the financial value of all viable commercial options. For this reason, we are keen to explore more long term investment options out there and expect government to avail some of these opportunities in the near future,” explained Gerald Paul Kasaato, NSSF Uganda’s acting head of investments.

On the other hand, government feels reluctant to provide long term investment opportunities such as infrastructure bonds with durations of 15 and 20 years due to fears of a debt trap linked to smooth but sometimes expensive local borrowing and shortage of viable projects according to Aston Kajara, the Minister of State for Finance in charge of Privatisation.

The Fund’s asset mix currently comprises of 79 per cent invested in fixed income investments while equities and real estate account for 10 per cent and 11 per cent respectively.

Equities generated the highest return on investment during 2013-14, with a net return of 28.6 per cent compared to 16.9 per cent and 7.1 per cent attributed to fixed income and real estate investments.

The remarkable performance in the equities portfolio is mainly attributed to strong performance of major stocks listed at the Nairobi Securities Exchange (NSE). But delays in acquiring ministerial approvals from the Ministry of Finance for execution of equity transactions partly undermined returns from this segment, Kasaato revealed.

Investment guidelines issued by the Finance ministry give the Fund’s board powers to approve investments below Ush1 billion ($372,452) while those exceeding this amount are subject to the minister’s approval.

READ: Investment governance reforms at Uganda’s NSSF long overdue

For example, the fund directly invested Ush1 billion ($372,452) and Ush4 billion ($1.5 million) in the KCB Group and Equity Bank Group counters during the last financial year but failed to execute additional transactions due to delayed political approvals that spent months in the pipeline.

While KCB’s share price rose from Ksh33 ($0.4) to Ksh59 ($0.6) during the period under review, Equity’s share price increased from Ksh45 ($0.5) to Ksh57 ($0.6), stockbrokers indicated.

It also owns other shares worth Ush70 billion ($26 million) at the NSE through selected Kenyan fund managers.

“The NSE has rallied sharply this year because of intense participation by foreign fund managers. As a result, most of the big stocks like Safaricom have gained significantly while some less popular stocks have risen by about 40 per cent. The banking and insurance sectors have benefitted more from this bullish rally unlike the manufacturing stocks,” said Simon Mwebaze, an investment analyst at UAP Financial Services Uganda Limited.