Be reassured, your retirement savings are prudently invested

All retirement  benefits schemes are required to have an investment policy statement, also known as the Investment Strategy, which clearly stipulates how they intend to invest members’ savings.

COMMENT | Lydia Mirembe |  “Advise people to learn how to grow their asset column and…accumulate their wealth rather than saving without investing.” That was the submission of one citizen, who was responding to an appeal to members of the public to save for retirement.

There seems to be  an impression that by mobilizing the public to save for retirement, cash is collected and stashed away in some bank account, waiting for the time when savers will retire and access it. Nothing could be further from reality!

It is important for all retirement savers – current and prospective – to understand their savings are prudently invested and they can all expect a good return when the time comes.

Where are funds invested?

For a start, all retirement  benefits schemes are required to have an investment policy statement, also known as the Investment Strategy in some jurisdictions, which clearly stipulates how they intend to invest members’ savings.

Apart from stating the investment objectives, the scheme investment policy should indicate the types of investments; the diversity of investments based on allowable asset classes; procedures to monitor the investments; and the desired outcome for the scheme.

The policy should also indicate their preferred asset concentration with defined investment maturity profiles that resonate with the age characteristics of scheme members. For example, if the majority of members are in advanced age, the scheme will not concentrate investment in long-term instruments. On the other hand, if the majority of members are younger and still in active employment for the foreseeable future, the scheme can invest in long-term instruments.

The Board of Trustees is expected to develop the investment strategy, with  advice from qualified professionals like actuaries and financial analysts. Most importantly, the Board of Trustees is expected to make the investment strategy known to all members saving with the scheme.

The URBRA Investment of Scheme Funds Regulations (2014), stipulate eight asset classes and the maximum proportion of savers’ funds that can be invested in each. These include:

1. Cash and demand deposits in institutions licensed under the Financial Institutional Act, or other similar institutions licensed in the East African Community (5%)
2. Fixed deposits, time deposits, and certificates of deposits in institutions licensed under the Financial Institutional Act, or other similar institutions licensed in the East African Community (30%)
3. Commercial paper, corporate bonds, mortgage bonds and asset-backed securities and collective investment schemes approved by the Capital Markets Authority (30%)
4. Government securities in the East African Community (80%)
5. Shares of companies quoted in a stock exchange in East Africa and collective investment schemes approved by the Capital Market Authority (70% )
6. Immovable property in Uganda, real estate investment trusts and property unit trust approved by the Capital Markers Authority (30%)
7. Private equity in the East African Community (15%)
8. Any other asset classes approved by URBRA. (5%)

One may wonder why this particular set of asset classes. The selection of assets and the investment limit allocated depends on many considerations, key among them being the risk involved and the return expected. For example, government securities are considered to be a risk-free investment option because there is a guarantee that government will not default, no matter how long it takes. Thus, schemes are allowed to invest up to 80% of the funds in government securities, across the East African Community.

On the other hand, investing in shares of quoted companies may be risky but has the potential to bring higher returns. Thus, schemes can invest up to 70% in shares of companies quoted in EAC.

However, schemes can only invest up to 15% in private equity (unlisted businesses) because the terms and projections are less certain. It would thus be risky to inject a big percentage of savers’ funds in such a venture, however lucrative it might seem.

As it’s oft-said, never put all your eggs in one basket. Schemes are encouraged to diversify investments as they develop their strategies. In addition, the URBRA Act requires schemes to engage professional and licenced Fund Managers who can use their discretion to decide where to invest savers’ funds, with a  view to maximise returns and ensure that members’ investments are not exposed to unmanaged risks.

The overall sector investment portfolio continues to grow steadily. By March 2022, the sector assets had grown to UGX19.4 trillion, compared to UGX16.9 Trillion in March 2021. This growth is in large measure, attributed to prudent investment enabled by a strict supervisory and regulatory regime under URBRA.

The benefits of prudent investment are reflected in the high annual interest declared by licenced schemes. For example, the mandatory NSSF declared 12.15% interest in June 2021. The highest interest declared by occupation schemes in the period ending December 2021 was 18.5%. On average the interest declared across the sector was 11.6%.

Ugandans should therefore be reassured that their funds are being invested prudently, and the sector regulator has eyes on all investments in each scheme. Additionally, Uganda’s non-bank financial services sector is strictly regulated to mitigate risks and mimimize losses. As the pensions sector regulator, URBRA urges all Ugandans to save their money with only the licenced schemes and get professional financial advice from licenced service providers.

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Lydia Mirembe is the Manager, Corporate and Public Affairs, Uganda Retirement Benefits Regulatory Authority (URBRA)