How Retirement Benefits Schemes work?

1. Introduction

A Retirement Benefits Scheme is a legally binding agreement or arrangement other than a contract for life assurance whether established by written law or by any other instrument, under which members are entitled to benefits in the form of an annuity or a lump sum payable upon retirement, or upon death, termination of service or upon the occurrence of an event specified in the written law, agreement or arrangement.

In Uganda, Retirement Benefits schemes are regulated by the Uganda Retirement Benefits Regulatory Authority (URBRA) under the Uganda Retirement Benefits Regulatory Authority Act 2011.

Retirement Benefits Schemes are commonly also referred to as pension schemes or provident funds. Retirement Benefits Schemes offer income protection and/or replacement in the event of retirement or termination of employment. Retirement Benefits Schemes are essential in providing a social welfare net in case of unforeseen circumstances. They are also an effective way of mobilizing public resources to support a country’s economic development as they provide a cheap pool of investment capital. 

The pension sector has grown tremendously over the years and sector assets stood at UGX 18.9 Trillion by end of December 2021 according to URBRA. Most of the assets are held in Government Securities, Equities, and Real Estate respectively. NSSF remains the dominant player and controls over ugx 16.3 trillion or 86% of assets. There are currently 64 licensed Retirement Benefits Schemes in the country.  Retirement Benefits coverage is still low at only 18%

2. Governance arrangements

All Retirement Benefits Schemes must have a Custodian, trustee, administrator, and fund manager. The “Administrator” is a person appointed by trustees to administer a scheme in accordance with such terms and conditions of service as may be specified in the instrument of appointment. The “Custodian” is a Financial Institution whose business includes taking responsibility for the safe custody of the funds, securities, financial instruments, and documents of title of the assets of scheme funds. The “Fund manager” is appointed by the trustees to advise on the investment of the assets of the scheme in accordance with such terms and conditions of service as may be specified in the instrument of appointment. The “trustee” is responsible for managing a retirement benefits scheme in accordance with the scheme’s rules and legal requirements.

This elaborate governance mechanism minimizes the risk of mismanagement of savers’ money. 

All Retirement Benefits Schemes in Uganda must be licensed by the URBRA. The list of licensed schemes in Uganda can be found on URBRA’s website here: – https://urbra.go.ug/licensed-retirement-benefits-schemes/

3. Classification of Retirement Benefit Schemes

Retirement Benefits Schemes may be broadly classified as mandatory or voluntary. Mandatory schemes are a requirement of the law and all eligible employers and employees should participate. Examples of mandatory schemes include the National Social Security Fund (NSSF) and Public Service Pension Scheme. Voluntary schemes are established on a voluntary basis by employers for the benefit of employees or by individuals.

Retirement Benefits Schemes may also be further classified as defined benefit or defined contribution schemes.  A defined benefit pension scheme is one where the amount you’re paid is based on how many years you’ve been a member of the scheme and the salary you’ve earned when you leave or retire. The public service pension scheme is a typical example of a defined benefit scheme. With defined contribution schemes, the amount you earn is based on the contributions you made and the returns earned throughout the period. NSSF is a typical example of a defined contribution scheme.

a) Mandatory Schemes

Mandatory schemes include the NSSF, Public Service Pension Scheme, and the Armed Forces Pension Scheme.

>National Social Security Fund

The National Social Security Fund (NSSF) is a mandatory defined contribution provident fund that pays lump sums at retirement. The contribution rate to NSSF is 15% shared at 5% and 10% between the employee and employer respectively. The scheme is a creation of the National Social Security Fund Act (Cap 222) Laws of Uganda and its core objective is to protect formal employees against uncertainties of social and economic life. The NSSF Act has been recently amended to provide for mid-term access of 20% of a member’s savings as long as someone is above 45 years and has saved for at least 10 years. The rest of the savings can be accessed in a lump sum at the age of 55 years.

All employers are required to register their employers for NSSF and remit the monthly 15% of the employee’s gross salaries. Failure to do so is an offense punishable by the law.

NSSF also has a voluntary saving scheme where people in the informal sector can contribute as little as ugx 5,000 into the fund.

>Public Service Pension Scheme

The Pensions Act regulates the arrangements of pensions for traditional civil servants, primary and secondary school teachers, police officers, prison officers, doctors, and public employees in the judiciary. The Pensions Act also covers civil servants in local government. The public service pension scheme is non-contributory and is also a defined benefit scheme.

It’s important to note that military personnel is separately catered for under the Armed Forces Pension Act.

b) Voluntary schemes 

Voluntary schemes may be occupational or individual.

>Occupational Schemes

These are retirement benefits schemes established on a voluntary basis by employers for the benefit of employees. These schemes vary in design from one employer to the other. The employer in a private occupational pension scheme becomes the sponsor of that pension scheme. Occupational schemes may be managed as a stand-alone fund or as an umbrella fund. The stand-alone scheme is managed by the company itself. For example, many organizations like Umeme, Bank of Uganda, Makerere University, etc. have stand-alone occupational pension schemes. Umbrella schemes pull funds from different organizations and individuals and manage them under one scheme. Several umbrella schemes like UAP, Britam, Zamara, ICEA, etc. are available for smaller organizations or individuals. Umbrella schemes are easier, and cheaper to set up and manage for smaller funds.

Most occupational schemes require the employee to contribute a certain percentage of their monthly salary which is then matched by the employer. The employer contribution is tax-exempt. This makes occupational schemes a tax-efficient vehicle for retirement savings.

>Individual Schemes

Individuals can also set up their own retirement benefits schemes in the form of annuity plans and personal pension schemes. With an annuity plan, you deposit a lump sum with the fund, and then you receive regular payments for a certain period of time after retirement. Annuity plans can be structured to replace your monthly employment income. They can also be structured to guarantee payments for a certain period of time even when the insured party passes on. Some schemes also provide an annual escalation factor to increase payments every year at a certain agreed rate. Personal pension schemes are more like the occupational schemes except they have more flexibility and you can withdraw money anytime.

5. Advantages of pension schemes

• Tax efficiency. Employer contributions to registered pension funds are currently income tax exempt. Withdraws from retirement funds are also typically income tax exempt. This makes retirement benefits schemes an efficient vehicle for retirement planning.
• Compound interest. Retirement Benefits Schemes benefit from the compounding effect because of the long-term horizon. This means that someone who saves regularly can end up with a large nest egg at retirement.
• Secure retirement. A well-managed pension system can provide a secure retirement for a country’s citizens. This can help to reduce the dependency burden we currently experience.
• Peace of mind. Having a secure retirement can insulate you from the stresses of retirement. This gives you peace of mind and allows employees to concentrate on their jobs.
• Succession planning. A retirement fund can be an effective tool for wealth transfer to your children and dependents.
• Risk Management. A retirement fund can provide much-needed diversification to your asset portfolio. It’s also an effective way to de-risk your career and job.
• Other benefits (e.g. mortgage security). Retirement funds can offer other benefits. For instance, URBRA has passed new regulations which allow members to use a portion of their savings as collateral to obtain mortgages and housing loans.

4. A case for further reforms

Much as the sector has progressed there is still a case to be made for further reforms: –

• More inclusion. Only 18% of the working population is covered which leaves out a lot of hard-working Ugandans, especially in the informal sector.
• Wider benefits. There is a need for more innovation like housing, annuity plans, education, medical benefits, etc.
• Diversify investments. Most of the pension sector assets are lent to the government in the form of treasury bills and bonds. A portion of the assets should go to alternative asset classes like venture capital and private equity which have a more direct impact on employment and the economy.
• Compliance management. Most employers especially in the informal sector are not complying with their commitments. There is a need for concerted efforts on this front.
• More education and awareness. Many people remain unaware of the opportunities in the pension sector. URBRA should do more to educate the public.
• More schemes. NSSF controls over 86% of the pension market. There is room for other players to come on board and provide innovative solutions, especially to the under-served class.
• The current financing of the public sector pension scheme needs reform since it’s based on government revenues and not member contributions. This makes ongoing sustainability an issue.

5. How can someone participate?

There is room for everyone to participate. Formally employed people can join the Mandatory Schemes (NSSF + Public Service Pension Scheme). Eligible employees can join occupational schemes at work in case your employer sponsors a provident scheme. Individuals can subscribe to private annuity plans and pension schemes offered by different companies for as little as ugx 100,000. Individuals in the informal sector can also sign up for the NSSF voluntary savings scheme for as little as ugx 5,000.

6. Conclusion

Retirement Benefits Schemes remain a key social welfare net, especially for the working class. They provide some assurance of income safety in case of retirement or termination. They may also be structured to provide additional benefits like mid-term access, housing, and educational benefits. Retirement Benefits Schemes are also essential in mobilizing relatively cheap capital to support economic development. The pension sector has grown tremendously although a lot more needs to be done. There is a need for more inclusion, diversity in investment, better compliance management, more awareness, and more private players in the market.