Uganda’s National Social Security Fund is walking a tightrope after the government decided to provide mid-term access to middle-aged struggling savers who have been hit hard by the Covid-19 pandemic amid difficult financing choices faced by the fund’s leadership.
Under the mid-term access benefits arrangement, NSSF contributors who have saved for more than 10 years, aged over 45 years and have lost their jobs, will be allowed to withdraw 20 percent of their savings held by the state-controlled social security agency.
Whereas President Yoweri Museveni has backed amendments to the NSSF Act of 1985 — that favour mid-term access to benefits for savers below the eligibility age of 55 years — a draft of legal changes related to this law are still being considered by the Attorney-General’s Office before being tabled in parliament for debate.
An estimated 100,000 savers out of the two million NSSF contributors are expected to benefit from mid-term withdrawals with a total value of Ush1 trillion ($281 million). A portion of this, Ush200 billion ($56.3 million) is attributed to interest earned on members’ accounts, according to NSSF data. But the minimum value of withdrawal benefits likely to be received by eligible savers remains unclear.
“About Ush300 billion ($84.4 million) would be needed to clear the first batch of mid-term access beneficiaries estimated at 30 percent due to an anticipated rush to cash out on the mid-term benefits scheme. This would lead to a budget shortfall of about Ush200 billion ($56.3 million) during the first month of implementation. Liquidation of some government securities in the short term would trigger a loss of 10 percent against net return on investments in that asset class based on prevailing rediscount rates provided by regional Central banks,” said Richard Byarugaba, NSSF Uganda managing director.
“We usually prefer reinvesting maturities in the government securities portfolio because it offers us a higher return than utilisation of those funds through payment of members’ benefits. We agreed with the president that mid-term access benefits would be paid gradually through deductions made against monthly collections. We had also suggested a separate mid-term access benefits payments fund that would cater for eligible beneficiaries without causing huge financial losses to the Fund but the trade unions shot down this proposal,” he added.
However, cash mobilisation challenges have highlighted serious investment risks faced by the fund during future settlement of mid-term access benefits claims. Increasing pressure from labour unions on the government to allow mid-term access could force the sale of part of NSSF’s financial assets, a situation likely to expose the fund to significant investment losses in the government debt markets.
Government securities account for about 75 percent of the fund’s Ush15 trillion ($4.2 billion) asset base, which makes this asset class an easy target for mobilisation of hard cash required to pay the mid-term access benefits.
Investment losses incurred by the fund directly affect returns on members’ savings under existing financial reporting rules that require investors in the capital markets to write off transaction losses suffered on financial securities. For instance, a treasury bond purchased with a 15 percent interest rate but sold at a 13 percent interest rate will generate a loss of two percent in the investors’ books.
While the value of maturing treasury bills and bonds held by NSSF has averaged Ush200 billion ($56.3 million) to Ush500 billion ($140.7 million) per month, the Fund is hesitant to exploit this monthly cash flow for payment of mid-term access benefits, citing notable investment losses pegged to this financing option. A shortage of viable investment choices across the East African region has prompted the Fund to reinvest cash from maturing government securities within the same asset class at higher interest rates in an effort to maximise returns on investment. Average yields recorded on the two-year Uganda government treasury Bond stood at 11 percent compared with 12.6 percent earned on the five-year treasury Bond earlier this month.
In comparison, the Fund’s monthly collections have grown to Ush120 billion ($33.8 million), which caters for suppliers and contractors’ expenses, internal operating costs and regular benefits payments made to qualifying members that seek either normal withdrawal benefits, invalidity benefits or unemployment benefits. Total costs incurred on suppliers and contractors assigned to big housing projects sponsored by NSSF are estimated at Ush70 billion ($19.7 million) per month while monthly operating costs amount to Ush40 billion ($11.3 million), NSSF data shows.
But financial analysts have disputed the Fund’s worries over financing of mid-term benefits and insist the government’s debt markets are less hostile than perceived.
“There could be a clause inserted in the amended NSSF Act that gives the Fund up to six months or one year to consider one’s application for mid-term access benefits at its discretion. Under these circumstances, the fund will be in a position to clear mid-term access claims with money received from collections, interest earned or coupon payments. That fund grows by Ush1 trillion ($281 million) every year and half of that figure is interest income alone,” said Benoni Okwenje, general manager for financial market operations at Centenary Bank of Uganda.
“The investment risks faced by NSSF under the mid-term access benefits arrangement are quite small and should not pose a big headache to anyone. Commercial banks are sitting on excess liquidity of Ush2.6 trillion ($731.4 million) today and are willing to absorb all the government securities that the fund wants to dispose of at reasonable interest rates. This leads to minimal investment losses incurred during the trading process in the government debt market. Funds received from the mid-term access scheme are likely to be spent buying land, new houses and kick starting some income generating projects that will eventually boost economic activity in local communities,” said Ronald Muyanja, a financial trader at Stanbic Bank Uganda.
The introduction of mid-term access benefits might slow down temptations among NSSF contributors keen to cash out their savings before the official retirement age. Unconfirmed reports indicate that some NSSF savers have produced concocted medical reports in a bid to secure early benefits withdrawal in the past while others have deliberately resigned private sector jobs and sought civil service plus local government jobs to get early benefits payments and pursue entrepreneurship dreams, local sources say.
“Mid-term access benefits are good for consumer spending and reviving the economy. But NSSF figures show that most of the people who receive social security benefits tend to exhaust them in less than two years... I believe low cost housing and agricultural projects focused on fast moving, fresh produce offer a strong return on investment compared with transport business. But I’ve also learnt hard business lessons during the Covid-19 pandemic. For example, one needs to be tech savvy to ensure business continuity. We’ve seen supermarkets close down because of reasons beyond their control and are unable to clear some of our invoices,” said Paul Sine, a retired BAT Uganda employee and business owner.