Implications of the proposal to pay 20% to NSSF members - National | NTV

Implications of the proposal to pay 20% to NSSF members

Tuesday May 12, 2020


The leadership of National Social Security Fund says that there is no legal basis for the Fund to release partial payments to savers to enable them to cope with the burden of COVID-19 pandemic, as a sizeable number of Ugandans had requested via social media platforms.

Mr Richard Byarugaba, the Fund’s managing director says that NSSF is a social security scheme, created to provide a safety net for members in case of old age, permanent incapacitation, or for dependents in the event of death of a member and the current pandemic does not meet any of the above criteria.

According to Mr Byarugaba, partial payments would be discriminatory.
“The Fund has 1.5 million members. If these were given relief from the Fund, the vast majority of the 19 million working population would be left out,” he said

In a letter dated May 06, 2020 addressed to the Minister of Finance, Mr Byarugaba outlined the implications of the proposal to pay twenty percent to the NSSF members


The immediate impact of the proposed payout will be an increased need for liquidity. At a member’s fund value near UGX 13.OT, a 20% payout would represent UGX 2.6T. In addition, the normal benefits payout for the financial year 2020/2021 I projected at UGX 800B. As a result, total benefits payout in the next one year would translate into UGX 3.4T. After a sustained period of good return performance, some retired members have been electing to leave their savings with the NSSF. Accordingly, it can be assumed that some members may not withdraw their 20% rendering the UGX 2.6T estimate exaggerated. However, we maintain the UGX 2.6T estimate and instead raise the normal benefits payout to UGX 1.1T from UGX 800B. This is because retired members who maintained their savings with NSSF could choose to take their money if the fund’s financial performance falters. Members above 55 years have a current balance of UGX 562B. With a bad performance, there could be a run on the Fund similar to how banks bleed to death if savers learn that the bank’s financial position has weakened. Therefore, we raise the estimate for the next year’s total benefits payout to UGX 3.7T. We estimate member contributions for the next year at UGX 1.2T, leaving the Fund with a liquidity requirement of UGX 2.5T excluding operating costs and contractual obligations. This extra requirement of UGX 2.5T would have to come from the Fund’s investment portfolio through a sale of some assets, specifically treasury bonds.


As indicated above, the Fund would have to sell its treasury bonds to meet benefits payments. Assuming afire sale across East Africa of UGX 2.5T, the damage to the markets cannot be understated. Today, the Fund is the biggest holder (over 50%) and buyer of the government of Uganda bonds. If turned into a net seller, the NSSF would not be able to invest in new government bonds. Consequently, the government of Uganda would struggle to raise funds in it’s treasury auctions to fund its programs. The muted demand for primary auctions would dramatically result into higher interest rates. Relatedly, the fund would struggle to find buyers in the secondary market unless the securities are heavily discounted and turmoil would arrive in the market place.
Secondly, ongoing real estate projects would be halted due to lack of liquidity or the NSSF could default on contracts. The Fund is currently implementing long-term projects such as; Government Campus (UGX 853B), Pension towers (UGX 307B), Lubowa Housing Estate (UGX 250B), Temangalo Housing Project (UGX 103B), Off take project (UGX 23B) and Yusuf Lule Road (UGX 160B)


With high interest available in government securities, banks would limit retail and corporate lending unless they were able to lend to the private sector at significantly higher rates. Interest rates on existing loans would also be adjusted upwards and banks would be hit by non-performing loans. This would hurt growth both in the short and medium term. Hence, a 20% payout intended to spur the economy, damages t with it’s effects reaching members, the business community and the country at large.
The other view is that the NSSF only sells securities in the other East African markets. Even if this were to happen, the Fund would still have to heavily discount its securities to entice buyers. Additionally, the sales proceeds in foreign currency would be converted to UGX, which could lead to appreciation of the exchange rate thereby hurting exports. Even then, the Fund would not invest in government of Uganda bonds, which still results into an increase in interest rates in Uganda.
On the equities, the NSSF holds over UGX 1.5T, with significant ownership in strategic companies like UMEME, DFCU, Stanbic, New Vision, CIPLA, Housing Finance Bank, Safaricom, KCB and Equity Bank. The high interest rates would lower the valuation of these companies , making it difficult for them to raise money on the capital markets. Consequently, in whatever form the Fund meets it’s liquidity requirements arising from this proposal, the economy would be severely hurt.


It is important to take deep dive into the membership of the NSSF. The total membership of the Fund today is 2.3M, with a core membership of 1.2M. Core members are those with balances on their accounts. Of the 1.2M, 53% are active and 47% are dormant. Active members include those that make at least one contribution in a year. 100,000, members or about 8.3% of the core members own 75% of the Fund. About 1M active members (80%) have balances below UGX 10M and 7% have balances greater than UGX 50M. Thus, this proposal will not address the wider need for a relief and yet leaves irreparable damage on the economy and financial system.


The proposal also bears financial reporting implications. For justifiable reasons, the NSSF currently classifies its investments in bonds as held to maturity. The sale of these securities would trigger a change of classification to either held for trading or available for sale. Either classification would lead to marking to make of the fixed income portfolio at a time of increasing interest rates. This would result into further losses to the remaining securities and consequently the Fund value and member balances.

2.6. LEGAL

In the recent ruling of David Jamwa Vs Uganda 2019, the Supreme Court dismissed Jamwa’s appeal for causing a financial loss when he sold bonds on the secondary market. The precedent set by the judgement might suggest that NSSF should not sell bonds in the secondary market if the transaction were to result into a financial loss. Yet this is the feasible route for funding the liquidity needs of this payout.