Our members get real value, says NSSF

Our article titled, “NSSF on the spot,” (The Independent, March 02- 08), which was based on the Auditor General’s report of 2011, pointed out a range of issues mainly revolving around the Fund’s performance. The Independent sought out the Managing Director Richard Byarugaba to get a response to the issues raised. Excerpts.

Are NSSF members losing more than they are benefiting from their savings or not?

NSSF investments are long-term and should be evaluated on a long-term basis (long term is generally considered to be more than five years. For NSSF, the investment cycle is typically 5-10 years: for example, real estate cash inflows will generally begin in year 5). It is thus unreasonable to compare the return declared by NSSF to annual inflation rate.

Over the past 10 years, the Fund has paid a positive real return on the members’ savings, contrary to the article’s illusion that member value is not increasing. Ten year inflation rate from July 2001 to June 2011 averaged 6.7% while NSSF 10 year interest rate averaged 6.8%.

It is erroneous to compare the NSSF declared financial year (FY) 2010/2011 interest rate, to the 28% monthly inflation rate of September 2011, and not to the actually inflation for the financial year FY 2010/2011  which was 6.4%.

It also erroneous to say that is only in 2008 that the Fund paid an interest rate that was above inflation. The fact is that in five of the last ten years, NSSF paid rates that were above the respective annual inflation.

Why are members not able to utilise part of their deposits for mortgage deposits, or be covered for medical by the Fund?

The NSSF Act limits the products NSSF is allowed to offer to its members.  The eligible products are; Age, Withdrawal, Survivors, Invalidity, Exempted Employment and Immigration Grant benefits. The current Act does not cover mortgage or medical coverage.

The good news is that the proposed pension Bill has provisions for Mortgages, Education and Medical coverage. NSSF is eagerly waiting to roll out these products when the Bill becomes law.

How come that NSSF made capital gains worth Shs 26 billion in 2010, yet it declined to just Shs 5 billion in 2011?

Return on equity investments depends on the stock market performance. In FY 2009/2010, the Uganda Securities Exchange as measured by the ALSI gained 28%. NSSF made significant unrealised gains on its equity investments that year. However, in FY 2010/2011, the growth in the stock market declined by 19%. Notwithstanding the decline and tumultuous movement in the market, NSSF made a Shs 5 billion gain!   It must be noted that this was just a capital gain on equities, and not the Fund’s profit.

Administration costs shot to Shs 44 billion from about Shs 32 billion in 2010 while total expenditure rose to Shs 58 billion from Shs 47 billion. Why?

A simple analysis of the administrative expense reveals that the main increase between 2010 and 2011 was Shs 12 billion reported under legal expenses.  Further inquiries show that Shs 11 billion of the Shs 12 bn was due to provisions for the ongoing cases in the court. That is, it was not expenditure to satisfy current administration consumption, but rather a prudent and necessary provision for the Fund’s historical problems.

Without these provisions, overall administration costs and total expenditure would have been at the same level as last year FY 2009/2010 – Shs 32 billion and Shs 47 billion respectively.

One measure of efficiency is what is referred to as cost income ratio, which is the percentage of gross revenue that is utilised.  In 2010, this ratio was 29%. In 2011, this ratio, including the provisions was 37%. Without the provision, this ratio would have been 30%. 2011 was the first year of restructuring and the exercise included one off costs.

The increase in liabilities was primarily driven by the provisions for the legal cases. Part of the provision was impacted by a depreciated Uganda Shilling. Secondly an increase in liability, especially, short term liability demonstrates a good cash management strategy.

How come the Fund spent more than Shs 438 million on its 10-member board; an average of Shs 43m per person per year?

The board expenses are in line with the structure of the Fund.  Coming from a chequered history, the Board prudently dedicated an extraordinary amount of time in the affairs of the Fund, meeting on average at least twice a month. The results of these efforts were a better Fund at the end of 2011.

Wouldn’t a decline in the Fund’s surplus for the year from Shs 132 Billion in 2010 to Shs 81 Billion imply that there will be less in the basket for members to share in terms of interest?

Included in the Shs 132 billion for FY 2009/10 is Shs 64 billion of unrealised gains coming from revaluation of property and changes in stock market prices. The Board wisely adopted a policy to only revalue Real Estate investment assets once every two years (unless circumstances warrant more frequent revaluations). No revaluation was performed in 2011.  Revaluation will be performed in 2012, which means members do not lose out in the “basket” because it is recovered in the long term.

The Fund’s assets have grown by 25% in 2011 while revenue grew by 8%, yet the benefits accruing to members continue to decline. Why?

It is erroneous to assume that additional assets resulting from a 25% growth means these assets are available for investment for the entire fiscal year.  The reality is that   assets are invested as they are received. At any point, the return on investment is impacted by the dynamics of the prevailing economic environment. For example, treasury rates dropped in the early part of the year with assets invested during that time yielding lower interest income. It is a credit to the Fund that despite the FY 2010/2011 turbulence in the economic environment, it was able to provide members a competitive return.

Also, the Minister of Finance declared an interest return of 6% in September 2011. As pointed out earlier, the interest declared was for FY 2010/2011 and should therefore be compared to the FY 2010/11 inflation rate of 6.4% and not the monthly inflation of September 2011.

The Auditor General’s report expressed concern about the Shs 27.7 billion which lies unallocated to members’ accounts. What is your explanation for that?

In the same report the Auditor General stated the cause of the balance that had not been allocated, the effort that the Fund is doing to allocate these funds, and this balance represented a significant drop of the balance that had been outstanding at the beginning of the year (Shs 53 Billion).

All Members’ savings whether allocated or not unallocated earn the same interest as declared at the end of the financial year in July.   It is not true that the unallocated accounts do not earn interest.

What is your comment on staff loans to acquire/ build houses over a period of 15-20 years?

The products eligible to be offered by the Fund are stipulated in the NSSF Act (Age, Withdrawal, Survivors, Invalidity, Exempted Employment and Immigration Grant). All these benefits are currently offered by the Fund. Only parliament can amend the Act and increase the product range.

The NSSF Staff Housing Loan Scheme is not a Fund’s product. It is a benefit to staff, just as salary is. All employees worldwide have benefits, both direct and indirect by virtue of employment with their employers. For instance, most bank employees in Uganda have similar loan structures that allow their staff to buy or build personal homes. It is highly misrepresentative to confuse staff benefits and with Fund products. But anyway the Fund withdrew that facility.

The accounts of many members have not been updated for the last six months. Why?

The Fund is upgrading its Management Information System (MIS) to make it more efficient and support automation of business processes to reduce turnaround time. All system upgrades go through a transition process and this is what happened between September and December 2011. As of today, the system is successfully running and members’ accounts are being updated. It is not true that the accounts are not updated for 6 months. The current target for updating members’ accounts has been set at 2 days upon receipt of members’ contributions. Further, there is no strand off between management on whether to purchase a system (the system was already purchased) or outsource data management to banks (has nothing to do with systems). Robust internal debates are encouraged whenever the Fund has to make a significant decision.

In light of previous allegations of corruption and poor management, some analysts say NSSF would be paying out an interest rate of not less than 25% to its members?

The current management NSSF has not been involved in any corruption scandal. But also, worldwide, the investment objectives of pension funds are to ensure safety of member savings and a provision of an optimal return within an acceptable and reasonable risk profile.  These remain the primary investment objectives of NSSF. It is widely recognized that return and risk move in the same direction; the higher the return, the higher the risk. Pension funds are long-term investors. They (Pension Funds) thus take on long-term assets to match their liability structures. Currently, the longest treasury instrument in Uganda is the 10-year government bond, which yields 13.23%.

For the calendar year 2011, the stock exchange had declined by 27%.  Real estate by its nature, takes a long time to come on board. With careful planning, real estate may provide meaningful long-term returns.

Professional asset management requires that a portfolio be diversified to minimize risks and maximize income.  Therefore, the Fund cannot invest all members’ funds in only one asset class, be it real estate, equities or fixed income.  The Fund has to have an appropriate portfolio mix.

Believing that the Fund should deliver a 25% return in this market while safeguarding member savings is fallacious and indicates an unsophisticated view of portfolio management. Return and risk are joint investment decisions that should never be considered in isolation.

The audit report shows that withdrawal benefits paid out in 2011 rose by four times to a record Shs 63 billion from just Shs 16 billion in 2010. Why?

Once a member meets a given criteria, and upon application, the Fund is obligated to pay benefits to that member. The Act has prescribed six ways in which members become eligible to get their benefits. Withdrawal benefits are paid members who reach the age of 50 years and have been unemployed for 1 year.  The fact that Withdrawal Benefits increased, is a reflection of the economic situation i.e. level of unemployment had increased drastically.  The Fund pays every member who qualifies to receive their benefits. As a result of the efficiencies that the Fund implemented, in 2011, the Fund paid Shs 80 billion in benefits compared to Shs 64 billion in 2010.

Your last word?

Rather than extravagance, this administration has been very prudent in the way it manages member funds. A key question governing each spend has been “show me value” before we spend. That philosophy then looks at not only the level of spends, but rather the value of each spend. So, does 2011 spend show that there was value for that spend?

An ‘unqualified opinion’ in the financial report for the first time 10 years! This opinion, reflects, the amount effort and resources that has gone into improving the overall Fund’s internal processes; including cleaning of member data, improving on the fiscal operations of the fund. So was there value? Yes, there was.

New channels that serve our members including: NSSF Go, Online access to accounts, SMS access to balances. Was there value? Yes, there was value. Significantly, reduced benefit processing time from one time high of 105 days to an average of 12 days. Was there value? Yes there was. Increased benefit total payout from Shs 64 Billion to Shs 80 Billion. Was there value? Yes, there was. There is a new upgraded IT operating system that will further improve processes for our members. Was there value? Yes, there was. Overall, realised income between the two years increased by 8%. This increase was achieved, excluding provisions, with, approximately, the same level of costs. Was there value? Yes there was.