Ugandan NSSF members could access savings early as a cushion against Covid coup
Uganda’s National Social Security Fund is walking a tightrope after government decided to provide medium-term access to struggling middle-aged savers who have been hit hard by the Covid-19 pandemic amid difficult financing choices faced by fund managers.
Under the medium-term access benefits scheme, contributors to the NSSF who have saved for more than 10 years, over the age of 45 and have lost their job, will be allowed to withdraw 20% of their savings held. by the state-controlled social security agency.
While President Yoweri Museveni supported amendments to the 1985 NSSF law – which promote medium-term access to benefits for savers below the eligibility age of 55 – a draft of legal changes related to This law is still under review by the Attorney General’s Office before being tabled in parliament for debate.
It is estimated that 100,000 savers out of the two million contributors to the NSSF are expected to benefit from medium-term withdrawals worth a total of US $ 1,000 billion ($ 281 million). Part of that, $ 200 billion ($ 56.3 million) is attributed to interest earned on members’ accounts, according to NSSF data. But the minimum value of exit benefits likely to be received by eligible savers remains unclear.
“Approximately US $ 300 billion ($ 84.4 million) would be needed to eliminate the first batch of beneficiaries from an estimated 30% medium-term access due to an expected rush to cash out the medium-term benefit plan. term. This would result in a budget deficit of around US $ 200 billion ($ 56.3 million) in the first month of implementation. Liquidation of certain short-term government securities would result in a loss of 10% of the net return on investments in this asset class based on the prevailing rediscount rates provided by regional central banks, ”said Richard Byarugaba, Managing Director of NSSF Uganda.
“We generally prefer to reinvest maturities in the government securities portfolio because that gives us a higher return than using those funds through payment of member benefits. We have agreed with the President that the medium-term access benefits will be paid gradually through deductions made from monthly collections. We also suggested a separate medium-term access benefit payment fund that would support eligible beneficiaries without causing huge financial losses to the Fund, but the unions rejected this proposal, ”he added.
However, the challenges of raising liquidity have highlighted the serious investment risks that the fund faces when settling future claims for medium-term access benefits. Increasing union pressure on the government to allow medium-term access could force the sale of part of NSSF’s financial assets, a situation that could expose the fund to significant investment losses in the NSSF markets. public debt.
Government securities make up about 75 percent of the US $ 15 trillion ($ 4.2 billion) fund’s asset base, making this asset class an easy target for hard cash mobilization. and stumbling blocks needed to pay for medium-term access benefits.
Investment losses incurred by the fund directly affect the returns on members’ savings under existing financial reporting rules which require investors in capital markets to write off trading losses incurred on financial securities. For example, a treasury bill bought with an interest rate of 15% but sold at an interest rate of 13% will generate a loss of 2% on the books of investors.
While the value of maturing treasury bills and bonds held by the NSSF has averaged between $ 200 billion ($ 56.3 million) and $ 500 billion ($ 140.7 million). dollars) per month, the Fund is reluctant to tap this monthly cash flow for the payment of medium-term access benefits, citing notable investment losses associated with this funding option. A dearth of viable investment choices in the East African region has prompted the Fund to reinvest liquidity from maturing government securities within the same asset class at interest rates. higher in order to maximize returns on investment. Average yields on two-year Ugandan government treasury bills stood at 11 percent compared to 12.6 percent earned on five-year treasury bills earlier this month.
In comparison, the Fund’s monthly fundraising reached US $ 120 billion ($ 33.8 million), which covers supplier and subcontractor expenses, internal operating costs, and regular benefits paid to eligible members. who claim either normal withdrawal benefits, disability benefits or unemployment benefits. The total costs incurred by vendors and contractors assigned to large NSSF-sponsored housing projects are estimated at US $ 70 billion ($ 19.7 million) per month, while the monthly operating costs are to US $ 40 billion ($ 11.3 million), according to NSSF data.
But financial analysts have disputed the Fund’s concerns about funding medium-term benefits and insist that government debt markets are less hostile than one might think.
“There could be a clause inserted in the amended NSSF law that gives the Fund up to six months or a year to consider its application for mid-term access benefits at its discretion. Under these circumstances, the fund will be able to clear medium-term access requests with money received from collections, interest earned or coupon payments. This fund grows by Ush1 trillion ($ 281 million) every year and half of that is interest income alone, ”said Benoni Okwenje, managing director of financial market operations at Centenary Bank of Uganda.
“The investment risks that NSSF faces under the medium-term access benefits agreement are quite low and should not be a big problem for anyone. Commercial banks now have US $ 2.6 trillion ($ 731.4 million) in excess liquidity and are ready to absorb any government securities the fund wishes to have at reasonable interest rates. This leads to minimal investment losses incurred during the process of trading in the public debt market. The funds received from the medium-term access program will likely be spent to buy land, new houses and start income-generating projects that will ultimately stimulate economic activity in local communities, ”said Ronald Muyanja, a trader. financier at Stanbic Bank Uganda.
The introduction of medium-term access benefits could slow down the temptations of CNSS contributors wishing to withdraw their savings before the official retirement age. Unconfirmed reports indicate that some NSSF savers have produced concocted medical reports in the sources say.
“The medium-term access benefits are good for consumer spending and stimulating the economy. But NSSF figures show that most people who receive social security benefits tend to exhaust them in less than two years … I think low-cost housing projects and commodity-oriented agricultural projects fresh and fast turnaround offers a significant return on investment compared to transportation. Business. But I also learned some tough business lessons during the Covid-19 pandemic. For example, you have to be tech-savvy to ensure business continuity. We have seen supermarkets close for reasons beyond their control and we are unable to clear some of our bills, ”said Paul Sine, a retired BAT Uganda employee and business owner.