NSSF on the spot

By Peter Nyanzi

Extravagance, high expenditure eroding workers’ savings

As the NSSF top bosses sing high praises about their financial statements for 2011, financial experts have started punching holes in it.

In a statement issued last week, NSSF managing director Richard Byarugaba said for the first time in 10 years, the Fund had been given “a clean audit report” by the Auditor General for 2011, which provided for an “unqualified opinion.”

“This is a great achievement and a huge milestone in the turnaround of the Fund,” he said, adding that the Fund has been receiving a “Qualified” opinion since 2002.

However, analysts say while a clean Auditor General’s report would show that proper books of accounts have been kept, contributors should wait to join the NSSF bosses to celebrate the “achievement” because they are losing more than they are benefiting from their savings. They say any financial report would only be good news if the Fund managers were increasing the value of the savings by paying their members an interest rate that is higher than the inflation rate for the year.

Despite assurances from the Fund that things have improved since Byarugaba took office in September 2010, members say what matters are not good reports but what the members of the Fund are benefiting from it.

“If we are not receiving a real interest rate (i.e above inflation), if we are not able to utilise part our savings for mortgage deposit, if we are not covered for medical by the Fund, if we cannot choose how our money invested, no matter what kind of report NSSF gets out, our savings are losing value and it is tantamount to criminal negligence,” said Moses, who has been contributing for 20 years.
Last year, the interest paid to members was cut from 7% to 6% at a time when the inflation rate was hitting 28%.  At the time, Byarugaba the MD, told a press briefing on October 3 that the “slight decline” was due to the general global economic turn down, inflation and the increased cost of doing business that affected earning from equities. While NSSF made capital gains worth Shs 26 billion in 2010, last year the profit nosedived to just Shs 5 billion.  Byarugaba said NSSF had averted a worse scenario through cost cutting. But what will be of even more concern to members is that the notorious administration costs continue to soar (and eating into their potential interest) even after promises that overheads would come down.

Highlights

A casual look at the audit report, which was prepared by Ernst & Young on behalf of the Auditor General, indicates that all is not well.

Administration costs shot to Shs 44 billion up from about Shs 32 billion in 2010, while total expenditure rose to Shs 58 billion from Shs 47 billion and total liabilities increased by Shs 24 billion compared to the previous year.  The Fund spent more than Shs 438 million on its 10-member board – an average of Shs 43 million per member per year (about Shs 4 million per month), which critics say is on the high side.  The Fund has eight law firms and incurred legal costs amounting to more than Shs 11 billion during the period under review.

The Fund’s surplus for the year has dropped from Shs132 billion in 2010 to Shs 81 billion, which practically means there will be less in the basket this year for members to share in terms of interest. Only once (2008) in its history has NSSF paid an interest rate higher than inflation when it paid 14% well above the average inflation rate of 12%.

Members will also worry that while the Funds assets are reported to have grown by 25% from Shs 1.7 trillion in 2010 to Shs .2.1 trillion in 2011 and revenue grew by 8% from Shs 137 billion in 2010 to Shs 147 billion in 2011, the benefits accruing to members continue to decline.

For example, the Fund paid out Shs 94 bn interest to its members at a lower rate of 6% yet it paid a higher rate of 7% for a less amount of Shs 89 billion in 2010.  The minister is yet to determine an interest rate, but it is not expected to go above 7% (which is  lower than the current inflation rate by 20 percentage points), an indication that members’ funds are losing value by 20% per annum.

The Auditor General, John Muwanga, expressed concern about Shs 27.7 billion, which lies unallocated to any member because the beneficiaries have not been identified. This means the money has never been credited on their accounts, hence not earning interest for them.

While the Fund does not extend such similar benefits to its other members, it offers its staff loans to acquire/build houses over a period of 15-20 years. About Shs 5 billion has been disbursed to the employees for that purpose according to the audit report.

Useful projects?

In July last year, NSSF launched an Electronic Service Delivery Project under its “NSSF GO” campaign that enabled NSSF members to access their contributions statements online and balances via SMS. The E-statement feature was billed as a user-friendly, quicker and easier and to access your e-statement online.

But a mini survey by The Independent shows that all members interviewed said their accounts have not been updated for the last six months. This, according to sources within NSSF, is because the Information Management System, which was installed at a cost of Shs 1.8 billion, is malfunctioning. This means that the accounts of members in smaller companies can take up to six months before they are updated. Should interest be declared before they are updated, this would mean loss of interest payment.

There is an ongoing fight over how to resolve the Information Management System crisis.  One strand within management is pushing for NSSF to purchase a new system while another strand insists on outsourcing the members accounts management system through commercial banks.

Ironically, NSSF GO won an award from the global International Social Security Associations (ISSA) for reducing the Turn Around Time (TAT) for processing members benefits. The turnaround time for payment of benefits had reportedly gone down from over 106 days in June 2010 to 15 days as of October 2011.

NSSF operates a relationship management model for contributions collection and has a dedicated Relationship Manager for every employer. As a result, Byarugaba said, contributions have risen from Shs 28 billion per month in June 2010 to Shs 40 billion in July this year.

Unfortunately, uncertainty looms over the members contributions. Sources with NSSF who spoke to The independent on condition of anonymity for fear of losing their jobs, said internal strife is building up as uncertainty continues to grow about a looming human resource restructuring exercise.

NSSF has been a monopoly under the National Social Security Act of 1985.

But a new Pension Sector Liberation Bill, which will repeal both the Pension Act and the NSSF Act, was tabled in Parliament and Uganda Retirement Benefits Regulatory Authority (URBRA) Act was passed last year.

Top among the reforms under URBRA is the segregation of functions, namely; setting up fund administrators, fund managers, trustees and custodians.  NSSF, which holds over Shs 2 trillion in member savings, is to restructure as part of plans to cope with anticipated competition.

Several pension fund managers, mainly from Kenya, among them Alexander Forbes, Insurance Corporation of East Africa (ICEA) and banks like, Kenya Commercial Bank, and CFC Stanbic Investments, have showed interest in the sector.

NSSF is expected to cease being a provident fund and become a hybrid provident/pension fund. This means that unlike in the past when members got all their savings in a lump sum, under the new law a member will only get 33% of his total savings when he clocks 45 years, with the 67% being put in a trustee scheme as an annuity. This will be invested and given to members as a stipend on a monthly basis.

Unfortunately, the Fund has over the years been bogged down by corruption and poor management.

Analysts say if the Fund’s assets now estimated at over Shs 2 trillion, were properly managed, it would pay out an interest rate of not less than 25% to its members.

Mass withdrawals

A finance expert based in Kampala told The Independent that a quick look at the financial statement would show that the Fund was “clearly underperforming” and the economic value of its members’ saving a consistently being eroded.

“Even a lay man can see that something is very wrong from a mile away,” he said. “NSSF needs to be liquidated and members should transfer their funds to private fund managers who will definitely perform better.”

Not surprisingly, members are withdrawing from the Fund at an alarming rate, according to the audit report. For instance, withdrawal benefits paid out during the period under review rose by four times to a record Shs 63 billion up from just Shs 16 billion in 2010. Withdrawal benefits are paid to members who apply for their savings on clocking 50 years but before reaching the official retirement age of 55 years in case they prove that they are not in employment.

Parliament enacted the Retirements Benefits Regulatory Authority Act in September. However, six months later, the URBRA is yet to be formulated. Also, the Retirement Benefits Sector Liberalisation Bill is still stuck at Committee level, six months after its tabling in Parliament. Even if it is liberalised, under the current divestiture arrangement, the government would retain 100% ownership and control of the Fund, which gives the government much leeway to liquidate it.

Byarugaba told journalists recently that the new regulations before Parliament would allow the Fund to offer more products including medical, maternity, and housing products.

“This means that we will allow our members to withdraw part of their saving to secure a mortgage or contribute towards their house, and we are also looking at products to do with education,” he said.