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Expanding the Pension Sector in Uganda Towards Sustainable Development RESEARCH SERIES No. 143 EXPANDING THE PENSION SECTOR IN UGANDA Pic courtesy: NCHIMOTO News EZRA MUNYAMBONERA May 2018 MIRIAM KATUNZE MARTIN LUTHER MUNU BRIAN SSERUNJOGI RESEARCH SERIES No. 143 EXPANDING THE PENSION SECTOR IN UGANDA EZRA MUNYAMBONERA MIRIAM KATUNZE MARTIN LUTHER MUNU BRIAN SSERUNJOGI May 2018 Copyright © Economic Policy Research Centre (EPRC) The Economic Policy Research Centre (EPRC) is an autonomous not-for-profit organization established in 1993 with a mission to foster sustainable growth and development in Uganda through advancement of research –based knowledge and policy analysis. Since its inception, the EPRC has made significant contributions to national and regional policy formulation and implementation in the Republic of Uganda and throughout East Africa. The Centre has also contributed to national and international development processes through intellectual policy discourse and capacity strengthening for policy analysis, design and management. The EPRC envisions itself as a Centre of excellence that is capable of maintaining a competitive edge in providing national leadership in intellectual economic policy discourse, through timely research-based contribution to policy processes. Disclaimer: The views expressed in this publication are those of the authors and do not necessarily represent the views of the Economic Policy Research Centre (EPRC) or its management. Any enquiries can be addressed in writing to the Executive Director on the following address: Economic Policy Research Centre Plot 51, Pool Road, Makerere University Campus P.O. Box 7841, Kampala, Uganda Tel: +256-414-541023/4 Fax: +256-414-541022 Email: [email protected] Web: www.eprcug.org Expanding the Pension Sector in Uganda TABLE OF CONTENTS ABSTRACT 2 1 INTRODUCTION 3 2. PENSION SECTOR REFORM PROCESSES 4 2.1 Structure of Uganda’s Pension Sector 4 2.2 The Public Service Pension Scheme 4 2.3 National Social Security Fund 5 2.4 Reforms in the Pension Sector 6 3. REVIEW OF RELATED LITERATURE 7 3.1 Effectiveness of Regulation and Supervision of Pension Systems 7 3.2 Increased Scope and Coverage of Pension Systems 8 3.3 Efficiency and Fiscal Sustainability of Public Pension Systems 9 3.4 Efficiency and Compliance of Private Public Pension System 10 4 METHODS AND DATA 10 4.1 Conceptual Framework 10 4.2 Data 11 4.3 Country Case Studies 11 5. FINDINGS AND DISCUSSION 13 5.1 Scope of Pension Coverage 13 5.2 Fiscal Burden of Public Service Pension Scheme 16 5.2.1 Pension expenditure as a share of GDP 16 5.2.2 Pension expenditure as a share of total tax revenue 17 5.2.3 Pension Arrears 17 5.3 Stakeholder Perceptions on Pension Reforms and Implications 18 5.3.1 Need for an effective universal regulatory framework for the pension sector 18 5.3.2 Need for further reform of PSP scheme 19 5.3.3 Need for further reform of the of NSSF 19 6. CONCLUSIONS AND POLICY OPTIONS 20 6.1 Conclusions 20 6.2 Policy Options 21 REFERENCES 23 APPENDIX 1: LIST OF KEY INFORMANTS 27 APPENDIX 2: COUNTRY CASE STUDIES EXPERIENCES 27 ECONOMIC POLICY RESEARCH CENTRE - EPRC 1 Expanding the Pension Sector in Uganda ABSTRACT Uganda has to expand the coverage of the pension sector in order to deal with the rising numbers of retirees as well as the uneven coverage. The study investigates the nature of additional reforms required to expand pension coverage in the country. Specifically, the study focuses on governance and regulation, scope and coverage, efficiency, and competitiveness with specific reference to national social security, fiscal burden of the public pension scheme, and entry of new players in the pension space. The methodology used includes analysis of national household surveys and administrative data on public pension scheme, document reviews, key stakeholder interviews as well as reviews of other country case studies. Pension coverage is low at about 9.3 percent of total employed Ugandans in both the formal and informal sectors, but mainly in the formal sector. With regard to the non-contributory public pension scheme, the fiscal burden has reached an unsustainable level with cumulative arrears of about UGX 516 billion by 2016. At the same time, governance and regulation continue to affect the effectiveness and efficiency of the national pension system and warrants further reforms. 2 ECONOMIC POLICY RESEARCH CENTRE - EPRC Expanding the Pension Sector in Uganda 1 INTRODUCTION framework surrounding the pension sector, which has resulted in ongoing debates targeting private There are immense benefits from reforming and sector reforms, especially NSSF (Kalyegira, 2017; expanding the coverage of pension schemes. Pension Munyambonera, 2017; Musaali, 2017). Overall, this funds contribute to economic growth by increasing the current dispensation suggests poor performance of the capitalization and liquidity of financial sector especially country’s pension sector. It also implores questioning in capital markets and banking sector. This increases how effective, efficient, and adequate Uganda’s financial intermediation, total factor productivity, and pension sector really is. Do we need further reforms resultant GDP growth (Yuwei Hu, 2012). Moreover, to improve performance of the sector? What are the savings from the pension sector leads to a reduction potential implications of such reforms? Notably, the in interest rates for borrowing, leading to private need for further pension sector reforms in Uganda is sector profitability and subsequently to growth through in line with the wider reforms in the sector across the creation of jobs. Funds from the pension sector can East African Community (EAC) Partner States. Partner also be used to finance government projects such as States are currently working on the harmonisation of infrastructure developments and in the medium-term policies to enable the full implementation of the EAC they reduce government reliance on donors (Wasswa, Common Market Protocol (CMP), which came into force 2016). on July 1, 2010. The EAC CMP provides free movement of goods, capital, services, and labour across the In response to the fiscal burden of public pension region,2 thus calling for portability of social security.3 systems and pressures from the ageing population, many countries such as Nigeria, Ghana, Botswana, It is against this background that this study examines and Chile have undertaken pension sector reforms, the current pension sector. In addition, it provides the geared towards adopting a multi-structured framework case for further reforms in Uganda’s pension system. recommended by the World Bank (Alo, 2004; Holzman Specifically, the study investigates whether (i) there & Hinz, 2005). This framework recommends a national is need to have a universal law for the entire pension pension system that integrates both public and private sector, (ii) the public service pension scheme needs schemes to address the challenge of efficiency, scope to change; (iii) further reform of the NSSF is required and coverage. and (iv) there is a case for introducing new private sector players in the pension market. Broadly, the Although a number of reforms have been undertaken study contributes to the policy discourse surrounding in the pension system for Uganda over the years, Uganda’s ability to accelerate national social protection administrative challenges in the overall pension sector interventions, as emphasized in the second National persist. Most notable is the unsustainable fiscal Development Plan. burden of the public service pension scheme. Despite reforms that followed the 1994 law1 and the significant The rest of the paper is organized as follows: The next expansion of both the country’s labour force and elderly section discusses a diagnosis of the pension sector in population, the pension sector has continued to suffer Uganda and the reform process. Section 3 consists of from limited coverage. Specifically, pension coverage the literature review. Section 4 outlines the conceptual of the older population stands at 2 percent while that framework and describes the data and methods of the active working population stands at 2.8 percent of analysis. Section 5 presents and discusses the and 2.3 percent by the public service pension scheme and National Social Security Fund (NSSF), respectively 2 Common Market Protocol and Annexes, available at http://www.eac. (GoU, 2015). int/commonmarket/index.php?option=com_docman&task=cat_ view&gid=30&Itemid=6 Moreover, there appears to be a fragmented policy 3 Portability of social security is the ability to obtain, preserve, maintain and transfer vested social security rights or rights in the process of being vested, independent of nationality and country of residence (Avato et al. 2010). 1 Changes such as establishment of the pension regulatory authority called the Harmonization refers to adoption of measures that makes polices and laws Uganda Retirements Benefits Regulatory Authority (URBRA) in 2011 and a among partner States compatible or almost similar etc. Coordination entails complimentary act- supposed to guide the operations of the authority (the provisions to establish common rules and principles which have to be ob- Uganda Retirements Benefits Regulatory Authority Act, 2011). served by authorities and institutions of each coordinating party. ECONOMIC POLICY RESEARCH CENTRE - EPRC 3 Expanding the Pension Sector in Uganda findings of the study, and finally, Section 6 presents majority of the employable Ugandans largely in the the conclusion and policy options. informal sector. This poses a big social security risk to the aging working population in the near future. 2. PENSION SECTOR REFORM 2.2 The Public Service Pension Scheme PROCESSES The PSPS was established by the 1946 Pension Act which was later amended in 1994. The provision of pension benefits to public service employees4 2.1 Structure of Uganda’s Pension Sector is enshrined in the constitution. The Armed Forces Despite Uganda’s growing population and the are provided for under the Armed Forces Pension consequent increase in the working population age, Act (AFPA). Before the amendment of the PSPS coverage of the pension sector remains dismal.
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