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Uganda Economic Update: Reducing Multiple Vulnerabilities – Why Uganda Should Improve Its Pension System

STORY HIGHLIGHTS
  • The fourth Uganda Economic Update explores changes the country can make to its existing pension system that can help millions of Ugandans by reducing old age vulnerabilities, promoting social transformation and accelerating economic development
  • The current pension system cover less than 5% of Uganda’s workforce, mainly urban workers
  • With only 2% of the population above 60 years of age, Uganda has a demographic window of opportunity to build a system that extends to the majority of its citizens, including those who are self-employed, work in agriculture or in the informal sector

KAMPALA, June 17, 2014 – A more efficient pension system will help Uganda’s elderly better support themselves after retirement, as well as help the country avoid the financial pressure that normally arises as the number of public pension recipients grow, according to a World Bank report released today.

The fourth World Bank Uganda Economic Update report, “Reducing Old Age and Economic Vulnerabilities: Why Uganda should Improve its Pension System,” examines the on-going reforms in the retirement benefits/pension sector that is intended to ensure that workers maintain a reasonable level of consumption and access to basic needs even after retirement, by saving some of their income during active employment.

Moustapha Ndiaye, the World Bank Country Manager for Uganda, said although the country's economy has remained on a positive growth path despite shocks, the growth policies need to be complemented with social policies to eliminate extreme poverty and achieve shared prosperity.

“Uganda has a working population of approximately 15 million people, most of whom are in the informal sector and agriculture,” Ndiaye said. “The current pension system comprising of NSSF, the Public Service Pension Scheme and occupational voluntary savings cover less than 5% of Uganda’s workforce, mainly urban workers. It does not extend to the majority of citizens, including those employed in the agricultural sector, the self-employed, and those employed in the informal sector.”

Citizens such as Margaret Nsubuga, 70, who was forced to retire from teaching in 1982 after doctors diagnosed her with an eye defect caused by choke dust. After receiving benefits for nine years, she stopped receiving payments, and has spent the last 18 years trying to find out why.

“I live in Mukono, but my pension is in Kampala, so I used to move to Kampala to check why I wasn’t on payroll,” said Nsubuga, who traveled 50km each month to inquire about her pension. “I had small income and most of my children were in school, so I had to struggle by practicing farming and working part time jobs.”

For 15 years, George Wilson Semwanga, another pensioner, has traveled nearly 90km every year from his home in Luwero District to the Ministry of Public Service, seeking his pension.

“I retired as a sub-county chief in Luwero District in August 2005, and was paid partial pension,” he said. “We were not comfortable with the money we received, so we appealed. Since then we have accumulated 44 months of unpaid arrears. I have moved to public service so many times, filled endless forms, but I still can’t get my money. Our situation is very bad, but worse is that most of our colleagues have died before receiving their pension.”

The complex topic of pensions has been of interest to the public since the government started reforming the sector. As a result of the prevailing frustration surrounding the current pension scheme, the Uganda government has embarked on a process reforming the pension sector. The reforms are intended to expand coverage not only to those in the formal sector, but also to those who are self-employed and in the informal sector representing the majority of workers in Uganda.

“Uganda’s Pension Sector is undergoing reforms under a two-fold process: the first process was the enactment of Uganda Retirements Benefits Regulatory Act assented to by the President in June 2011 and subsequently gazette, making it law,” said Mr. Keith Muhakanizi, the Permanent Secretary in the Ministry of Finance, Planning and Economic Development. “Parliament is now expected to pass another law, the Retirement Benefits Sector Liberalisation Bill 2011 that will liberalise the pensions sector and usher in a new regime of a competitive pensions sector.”

With only 2% of the population above 60 years of age, Uganda has a demographic window of opportunity to build such a system.

“Uganda’s very young population presents an opportune moment to re-design the pensions system to become a central pillar in the accumulation of domestic savings to support economic development, while at the same time provide a safety net against old age poverty,” said Rachel Sebudde, Senior Economist and lead author of the report.

What does the country’s pension system look like?

Uganda currently has a multi-tier pension system. The two most prominent parts are the public pension system, which covers the public sector employees, and the national social security fund that is meant to cover workers employed by firms with more than five employees. Other pension schemes cover armed forces, parliamentarians, and private employees as chosen by their employers. Until recently when the Uganda Retirement Benefits regulatory Authority was established, the sector was unregulated.  

What are the existing challenges to the current pensions system?

The public pension scheme is unfunded and suffers from lack of timely access to the benefits by retired workers, and access by unqualified beneficiaries, commonly called ghost pensioners, due to lack of proper records. At the same time the scheme is expensive and not affordable.  

The private sector pension schemes have been largely unregulated, some not very well managed and hence offering low returns to savers.

What would make the pension system more effective?

The government has initiated measures aimed at reforming the pension system. As in other countries that have developed their pension systems, the report notes that the Ugandan government should work toward achieving the five attributes of a well-managed pension system:

  • Coverage – Extending this form of social protection beyond the current 5% coverage to a larger proportion of the workforce so that workers can start saving for their retirement
  • Adequacy – Ensuring that the pension savings are sufficient to meet retirees’  basic needs
  • Sustainability – Ensuring that the system delivers the promised benefits to the pensioners over a long period of time
  • Security – Minimizing the risks that pension funds are lost or misappropriated
  • Efficiency – Ensure that pension funds are managed properly to optimize returns

What could constrain the achievement of these objectives and how can it be addressed?

  • Governance-related risks amidst fraud and corruption. If the proposed schemes for both public and private sector are not managed properly under strong independent, but regulated and transparent institutions, they will still not be able to provide an effective pension system for workers. To address this, the Uganda Retirement Benefits Regulatory Authority (URBRA) must adequate capacity to regulate and supervise the pension sector. 
  • Costs could rise with many pension operators. This has been a problem in many countries, hence needs to be addressed with appropriate regulation and managed competition for example through cost caps and cost default funds, among others.
  • Transition costs could triple fiscal spending on public pensions before it declines as the public sector scheme is changed into a contributory system. These transitional costs will subsist for about five years since the government will be paying the existing pensioners benefits while starting to contribute to the new public service pension fund. This cost would have to be properly planned for within the national budget. Various models are available on how to manage this cost.
  • Low-level of development of the financial market may limit benefits from a liberalized pension system. A concise financial sector development plan needs to be pursued hand in hand with the planned pension reform to widen and deepen the financial and capital market, while providing additional financial instruments for investment of the pension funds.

Informality of the labor markets and the high cost of universal pension systems may constrain extending coverage. The pension system still needs to cover more than 75% of workers in the formal wage sector who are not yet contributing to pensions. However, innovative approaches like the Mbao Scheme in Kenya will be needed to extend coverage to the many people employed in the informal sector. Education and awareness so far has revealed interest in the informal sector, and this will be critical in building trust in the system and expanding coverage. On the other hand, universal pensions systems that cover all elderly people need to be carefully planned as they are quite costly.