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REPUBLIC OF UGANDA

OFFICE OF THE PRESIDENT

PENSIONS REFORM IN UGANDA; CHALLENGES AND


OPPORTUNITIES
PREPARED BY

DIRECTORATE OF ECONOMIC AFFAIRS AND RESEARCH


(DEAR)

Quarter One: FY 2013/14.

Contents
Acronyms ........................................................................................................................... iii
1.0

Introduction ............................................................................................................. 1

1.1

Objective of the Study ....................................................................................... 1

1.2

Methodology ....................................................................................................... 2

2.0

Establishment of the Public Service Pension Scheme ....................................... 2

3.0

Key Characteristics of the Public Service Pension Scheme ............................. 2

3.1

Membership: ........................................................................................................ 2

3.2

Current Benefits ................................................................................................... 3

3.3

Taxation ................................................................................................................. 4

3.4

Financing of the Public Service Scheme ......................................................... 4

4.0

Genesis of the Reform Process ............................................................................. 5

5.0

Rationale for the reform of the Public Service Pension Scheme ..................... 5

6.0

Chronology of the Reform Process ...................................................................... 6

6.1

Establishment of a Regulator (URBRA) ............................................................. 8

6.2

Liberalization of the Pension Sector .................................................................. 9

6.3

The Inter-Ministerial Task Force of 2011........................................................... 11

7.0

The Parliamentary Pensions Scheme. ................................................................ 12

8.0

The National Social Security Fund (NSSF). ......................................................... 13

9.0

Challenges facing the reform process .............................................................. 15

10.0 Opportunities and benefits presented by the reforms ................................... 16


11.0 Recommendations ............................................................................................... 17
12.0 Conclusion ............................................................................................................. 19
13.0 References ............................................................................................................. 20
Tables:
Table 1 Key indicators for the current public service scheme ...................................... 3
Table 2 Benefits offered under the public service scheme ........................................... 3
Boxes:
Box 1 The basic tenets of the actuarial valuation of pension schemes
Box 2 Benefits of portability of Pension Benefits to the Civil Service

12
16

ii

Acronyms
APRM
BOU
CMA
CPG
EAC
ETE
GDP
GLA
IGG
ILO
IPD
MOFPED
MOPS
NSSF
OECD
PSPF
PSPR
PSPS
STG
UPDF
URBRA

Africa Peer Review Mechanism


Bank of Uganda
Capital Markets Authority
Commuted Pension Gratuity
East African Community
Exempt Tax Exempt
Gross Domestic Product
Group Life Assurance
Inspectorate of Government
International Labor Organization
Implicit Pension Debt
Ministry of Finance, Planning and Economic Development
Ministry of Public Service
National Social Security Fund
Organization for Economic Cooperation and Development
Public Service Pension Fund
Public Service Pension Reform
Public Service Pension Scheme
Stakeholder Transitional Group
Uganda Peoples Defense Force
Uganda Retirement Benefits Regulatory Authority

iii

PENSION SECTOR DEVELOPMENT IN


UGANDA; CHALLENGES AND
OPPORTUNITIES
1.0

Introduction

Like other Commonwealth countries in the sub-Saharan Africa, Uganda


inherited a formal social security system established by the colonial
administration. It catered only for the public and formal private sector
employees. At present, the pension system in Uganda is underpinned by a legal
framework consisting of; the Constitution of Uganda; the Pension Act (CAP 286);
the Armed Forces Pension Act; the Uganda Public Service Standing Orders (2010
edition); the Parliamentary Pensions Act; the Retirement Benefits Regulatory
Authority Act; and the National Social Security Fund Act. Alongside the Public
Service Pensions Scheme and the National Social Security Fund (NSSF), which is
catering for the formal private sector employees, there are also dozens of
private, yet to be licensed occupational schemes that have been set up and
are operating, providing benefits over and above the NSSF mandatory
contributions.
Whereas this paper is largely intended to focus on the Public Service Scheme,
which is the largest provider of pensions in the country, a section will also be
dedicated to NSSF, which is a provident fund providing benefits (not pension) in
terms of lump sum payments to its beneficiary members.

1.1

Objective of the Study

This study has been undertaken, as part of the work-plan for the Directorate of
Economic Affairs and Research, for the year 2013/14. The main objective of the
study is to illuminate and present the dynamics that are driving the public
service reform in Uganda. Other specific objectives are to;
Examine the adequacy of the on-going reforms and appraise the policy
decision makers of the potential benefits for undertaking the reform;
Identify the key challenges that are affecting the reform process; and
Propose recommendations that may be undertaken to reinforce the
achievement of the desired outcomes.
1

1.2

Methodology

A scoping review of the reforms so far implemented and those being proposed
are the method that has been adopted. It is predominantly a desk review of the
various past reports, legislations, critiques, and policy measures that are driving
the reforms. These have been complimented by on-line resources of best
practices compiled by OECD and World Bank.

2.0

Establishment of the Public Service Pension Scheme

The Public Service Pension Scheme (PSPS) was established on January 01, 1946.
The provision of pension benefits to the public service employees (covering
traditional civil servants, including police and prisons services, local government
employees and teachers1) is enshrined in the constitution2. The Armed Forces
are provided for under the Armed Forces Pension Act3 (AFPA). Meanwhile, until
1994, the provision for pensions for the Urban Authorities was being administered
under the provisions of the Local Government Provident Act (CAP 292), while
Municipalities were also provided separately under the Municipalities and Public
Authorities Provident Fund Act (CAP 291). Following the amendment of the
Pensions Act in 1994, the provision of pensions to both Urban Authorities and
Municipality employees was brought under the purview of the Pensions Act,
which requires that all Local Government (Urban Authorities and Municipalities
alike) should provide for the pensions of their employees. Subsequently, the
responsibility of administering and managing pensions for local government was
transferred to the Ministry of Public Service.

3.0

Key Characteristics of the Public Service Pension Scheme


3.1

Membership:

The schemes eligible membership is currently4 269,000 employees; covering


traditional civil servants5, civil servants in local governments and teachers. This
constitutes about 0.82% (of which traditional civil servants constitute 0.3%, while
teachers 0.52%) of the entire population of Uganda6. The total benefits that the
beneficiaries consume are about 0.35% of the countrys GDP as of 2011. The key
indicators of the system currently are summarized in the table below.
1

Except University Lecturers.


Article 254, of the Constitution of Uganda.
3
The Armed Forces Pension Scheme was established on September 03 rd, 1939. Note that this was just after the
beginning of the 2nd world war and six years earlier than the establishment of the Public Service Scheme.
4
As of the Financial Year 2011/12
5
Traditional civil servants include; employees in Ministries, Police and Prisons officers and public officers in the
Judiciary.
6
The population as at end of 2011 was estimated at 31.8 million.
2

Table 1

Key indicators for the current public service scheme

Ugandas total population (2011)


Size of the public service(exc. Army)
Average age of the public servants
Old age pensioners
Public Servants as % of total population
Average age of the pensioners
System dependency rate (pensioners
as % of no. public servants
Average annual pension received by
the pensioners.
Average annual pension as % average
wage
GDP (Billion Sh.)
Benefits payments as % of GDP
Source:

3.2

31.8 million
227,600
37.4 yrs
31,000
0.82%
63.7 yrs
13.9%
Sh.2,980,200
70%
Sh. 34,580 billion
0.35%

PROST technical note by the Pensions Advisor, from data provided by MOPS and
MOFPED.

Current Benefits

The table below summarizes the benefits offered under the Public Service
Pension Scheme.

Table 2

Benefits offered under the public service scheme


Type of Benefit

(a) Old age pensions;


Commuted Pension
Gratuity (CPG)

Monthly Pension

(b) Survivors Benefits

(c) Pension on abolition of


office.

Requirements
Length of service; 20yrs or 45
yrs of age and 10 yrs of
service. Mandatory retirement
age is 60 yrs.
Length of service; 20 yrs or 45
yrs of age plus 10 yrs of
service. Mandatory retirement
age is 60 yrs.
Paid to spouse and children
when the pensioner dies
before expiry of 15 yrs after
date of retirement
Abolition of office

Formula
(1/500th of annual salary
before retirement * No. of
months served) * (1/3) * 15.
[(1/500th of annual salary
before retirement * No. of
months served) * (2/3)]/12.
Pensioner monthly pension
paid for 15 yrs.

Normal pension + 25% of


pension + severance pay +
repatriation expenses + six
3

months pay in lieu of notice +


pay in lieu of approved earned
leave.
(d) Contract Gratuity for Contract Agreement
Gratuity in line with the terms
Public Officers serving
of the contract agreement.
on contract
Usually a prescribed
percentage of the annual gross
salary.
(e) Death Gratuity
Representative of the deceased Deceased public officers
public officer
annual salary at time of death
* 3, or deceased officers
would-have-been CPG,
whichever is greater.
(f) Short service Gratuity
Public officers retired in
(1/500th * annual salary
public interest or medical
before retirement * No. of
grounds provided you
months of service) * 15
complete 10 yrs of
pensionable service
(g) Marriage Gratuity
Payable to female Public
(No. of months worked *
Annual salary) * 15
Officers who retire on marriage
Grounds.
(h) Gratuity for Police and
Police Officer who retires
25 % of total emoluments or
Prisons Officers
below rank of AIP, or Prisons less.
Officer below Principal
Officer and has served for 12
years, or more.
Source: Ministry of Public Service.
NB: Pensions are indexed to wage/salary growth.

3.3

Taxation

Under the Income tax Act, taxation of the retirement benefits follows the
Exempt/Taxed/Exempt (ETE) system. In this system, pension contributions are tax
exempt, pension investment income is taxed, while the pension benefits are tax
exempt. The system is consistent with the requirements of the Constitution, under
Article 254 (2), which exempts pension benefits from taxation. In addition,
employers pension contributions are tax deductible.

3.4

Financing of the Public Service Scheme

The PSPS is an unfunded, pay-as-you-go and non-contributory defined benefit


scheme. As such, it is financed from the consolidated fund (out of government
tax revenues). The Ministry of Public Service is responsible for the management
and administration of the scheme. Its operational expenses are therefore
catered for by the government through the MOPS.

4.0

Genesis of the Reform Process

Policy reforms that were undertaken in the mid 1990s; which among others,
retrenched staff7 and consolidated as well as monetized8 the pay and
emoluments of the retained staff; revised the benefit formula; introduced the
indexation of pensions9 to salaries (as a result of the high inflation); and applied
it retrospectively to all wage increases since 1988. This resulted in a sharp
increase in the stock of pension liabilities (which became recognized in terms of
pension arrears). Further, whereas local governments were required to fund the
pensions of their employees, the woefully low tax base of the local governments,
exacerbated later by the scrapping of the graduated tax, significantly eroded
their capacity to generate adequate revenues to cater for the pensions. This
has necessitated the take-over of local government liabilities by the central
Government (MOPS). Other factors that contributed to the rise in pension arrears
are; the amendment of the Pension Act in 1978, to recognize the services of
persons who served under the defunct East African Community; and the
decision by the High Command of the UPDF to recognize the services of persons
who served in the previous armies, since independence.
Overall, as a result of the above developments, the stock of pension arrears
increased to unsustainable levels and has greatly stressed the government
budget, which has necessitated the urgent need to reform the PSPS.

5.0

Rationale for the reform of the Public Service Pension Scheme

The primary reason that has triggered the need to initiate PSPS reform has been
a huge build-up of pension arrears that were clearly unsustainable, as they were
becoming unaffordable as indicated above. Further, the cumulative increase in
the size of the public service, especially following the expansion of the local
government structures; has similarly led to an increase in the number of
pensioners, including the implicit pension debt. Therefore, the current annual
accrual rate of 2.4%, arising from the adjustment of the formula from 1/600 to
1/500 in the mid 1990s, together with a high replacement rate of 87%, has
rendered the PSPS one of the most generous in the world10. It should be noted,
that even the current indexation method is contributing to the steady increases
in pension liabilities. The method employed indexes the full pension (even during
7

Retrenched staffs were forced to retire before the retiring age, which made them pensioners at a relatively young
age.
8
Certain items, like housing and transport allowances were consolidated and monetized for purposes of taxes and
subsequently pensions. Apparently, at the time, the effects of this policy on the pensions had not been foreseen. This
is because pensions do not form part of the normal day-to-day life pattern of the retirees. This policy raised the base
value for calculating the pensions hence; the overall effect was a sharp increase in pension liabilities.
9
The pension statutory instrument No. 6 (amendment of the 1 st schedule regulations, 1995) set out the indexation
formula for pensions, based on the salary levels.
10
In Africa, the Cape Verde is the second most generous, compared to the one for Uganda.

the commutation period) and deducts the actual amounts commuted, resulting
in the net pension increasing at a rate greater than the wage growth.

6.0

Chronology of the Reform Process

The reform of the Uganda pension system started in earnest in the mid 1990s,
with the amendment of the Pension Act. This was triggered by the erosion of the
value of the pension, caused by inflation during the 1970s and 1980s. The
Pensions (Amendment) Statute No.4 of 1994, and the Statutory Instrument No.6
of 1995, amended the Pensions Act and the Regulations respectively. Pensions
were indexed to the salaries, allowing them to be raised whenever salaries of
serving public officers are increased. The amendment also provided for the
payment of the survivors pension to the spouses, children and dependants of
the deceased public officers and pensioners. This amendment was backdated
to July 1, 1988.
Earlier-on, in 1978, the Pension Act had been amended to recognize and
provide pensions for the officers who served under the defunct East African
Community11 (EAC).
The consensus for the reform of the PSPS gained momentum and strengthened
in the early 2000s (partly informed by the studies commissioned by the MOPS).
The African Peer Review Mechanism (APRM) Country review report of 2009, also
recommended that there was need for reform, regulation and liberalization of
the pension sector. Other initiatives that had addressed the same matter
Include;
The Deloitte & Touch (2001) review of the Public Service pension
arrangements, which noted the issue of the rapidly rising pension arrears, an
ineffective design and poor administration of the scheme;
The Stakeholders Transition Group (STG) of 2003, instituted by the Ministry of
Gender, Labor and Social Development. The findings of the STG were the first
comprehensive initiative to assist government in the development of a legal,
regulatory and financing framework for the social security sector. The key
findings of the STG called for;
Review of the existing legislation, to provide constitutional protection of
social security and pension rights to all Ugandans (as opposed to only
public servants); and to consolidate all pieces of legislation on retirement
schemes, social security institutions and pensions.
Establishment of an independent regulator for the entire social protection
sector.
Liberalize the social security and pension sector.
Make all pension arrangements mandatory through a contributory system.

11

The defunct EAC broke-off in June, 1976.

Pensions Reform Task Force (PRTF) of 2004 was instituted by the MOFPED. The
recommendations of the PRTF include that ;
The pension sector should be liberalized;
An independent regulatory body should be established;
There should be a mandatory level of contribution by all gainfully
employed workers, followed by a voluntary and discretionary level;
The reforms should be carefully phased but that in the long term, pensions,
capital markets and insurance sub-sectors should be merged under one
regulator for the Non-Bank Financial Institutions; and
A uniform tax regime for all pension providers and tax incentives should be
explored.

Subsequent to the consensus generated from the various initiatives, the Hon.
Minister of Public Service presented to Cabinet (in 2004) the proposed reforms.
Cabinet approved; that the PSPS be changed from a defined benefit to a
contributory scheme; the establishment of an appropriate regulatory framework
to supervise the pension sector; and that a provision for the pension arrears
payments be prioritized within the total provision for domestic arrears in the
medium and long term.
The broad principles of pension reform have now been agreed and adopted as
the criteria for the reform options. The options are to be based on the following
key parameters;
Affordability. The scheme needs to be made affordable, with respect to the
financing capacity of government and individuals; through a combination of
measures to remove anomalies in the scheme-design and by adopting a
defined contributory arrangement (or appropriate hybrid thereof).
Secured funding (sustainability). The funding needs to be made more secure
through the introduction of contributions by government as well as its
employees. Secondly, a public Service Pension Fund (PSPF) would be
established to hold the contributions and it is to be managed by professional
Fund managers (licensed by Capital Markets Authority, under the provisions
of the CMA Act), in accordance with the provisions of the Retirement
Benefits Regulatory Authority Act.
Equity and Fairness. The scheme needs to be made equitable and fair with
respect to the general population. It is therefore the intention, that the system
should be widened to encompass all pensionable and contractual public
officers. Further, the introduction of contributions would enhance equity.
Adequacy of benefits. The reformed system is to ensure adequacy with
respect to protection against levels, inflation, and predictability. Adequate
pensions according to the World Bank definitions are the ones that are
sufficient to provide income smoothing over the individuals lifetime, while at
the same time prevent them from sliding into poverty. The challenge
7

however, is how to establish the level of such a pension (say a minimum, in


the context of Uganda). This has been set in terms of replacement rates, and
varies from country to country. However, the International Labor Organization
(ILO)12 recommends a minimum of 40% for full career workers in mandatory
schemes.
On the basis of the above parameters, the reform is expected to stop further
accumulation of arrears and accordingly ease the pressure on the budget for
extra pension funding. The specific reforms that have been proposed include;
i.

Introduction of a system of pension contributions by both the government (as


employer) and its employees;
As a corollary to the above, introduce notional accounts for all public
employees;
Vesting and Portability arrangements. The reform of the scheme is intended
to protect all the accrued rights and awards of the current pensioners. This
will allow the institution of the arrangement of portability of benefits to be
effected. However, it is envisaged that a system of transfer costs will be
introduced for public officers who wish to transfer out of the PSPS or retire
early, to serve as a penalty. An appropriate transfer cost, as a percentage of
benefits accrued will have to be applied;
A speedy settlement of outstanding unpaid arrears;
Liberalization of the pension sector; and
Establishment of a pensions/retirement benefits regulatory framework to
regulate and promote the development of the retirement benefits sector.

ii.
iii.

iv.
v.
vi.

6.1

Establishment of a Regulator (URBRA)

The Uganda Retirement Benefits Regulatory bill, 2011 was passed by Parliament
into law on April 26, 2011. H.E The President of Uganda assented it into law on
June 28, 2011 and became effective in September 2011, as the Uganda
Retirement Benefits Regulatory Authority (URBRA) Act, 2011. The Act provides for
the regulation of the establishment, management and operation of the
retirement benefits pension schemes; supervise institutions which provide
pension products and services; protect the interest of the scheme members and
beneficiaries; and promote the development of the retirement benefits sector.
Further, the law provides for the establishment of the retirements benefits
appeals tribunal.
The thrust of the Act is to;
Establish an independent pensions sector regulator;
12

Article 67, (schedule to part XI) of the ILO Convention No. 102 of 1952. It should be noted that the ILO
Convention No.128 requires higher benefits levels; 45% for old age and survivors and 50% for disability pensions
respectively.

Put in place minimum requirements for the licensing, legal form, governance,
conduct, supervision, disclosure and audit of all pensions schemes in
Uganda; and
Provide for the minimum professional standards for all players in the sector
and to establish a formal separation of roles in all pension schemes, with
respect to the duties of the Trustees, Members, Investment Managers,
Administrators, Custodians, Lawyers, Auditors and Actuaries.
The law provides for the Authority to keep registers in respect of; all licensed
schemes; registered trustees; registered custodians; registered scheme
administrators; and licensed fund managers. In respect of all these, except for
the Fund Managers13, all interested players are required to apply for a license
from the Authority before they are allowed to operate. According to the CEO of
CMA14, as at end of December 2011, the 8 fund managers licensed by the CMA
were managing 19 occupational pension funds with just over UGX 220 billion
(US$ 92 million). According to the Retirement Benefits Authority15, as at end of
December 2013, the Authority had licensed a number of participants in the
sector. These include; 42 retirement benefits schemes, 11 administrators, 7 fund
managers, 4 custodians and 3 corporate trustees. The list of licensed participants
was published in the newspapers (New Vision 13/1/2014, page 46) in
accordance with sections 30(2), 35(3), 41(3) and 55(3) of the URBRA Act.
Among the licensed schemes is the NSSF, which, is the only mandatory scheme.
The Authority is also in the final stages of procuring a firm to undertake a survey
to establish the exact number of retirement savings schemes that are operating
in the country, including the resources they have and were they have invested
them.

6.2

Liberalization of the Pension Sector

Another bill, the Retirement Benefits Sector Liberalization bill, 2011 is still in
Parliament. The objects of the bill are;
Provide for the liberalization of the retirement benefits sector;
Remove the monopoly of a single retirement benefits scheme (NSSF) over
mandatory contributions; and
Provide for competition among licensed retirement benefits schemes.
The implications of the liberalization are that;
The NSSF will cease to enjoy monopoly of the statutory mandatory
contributions, and will henceforth compete with other private funds who will
have been licensed to collect contributions from employers and members;
13

Fund Managers apply and are issued with licenses by the CMA in accordance with the CMA Act and will be
required to present such a license to be registered by the Benefits Regulatory Authority.
14
Presentation by the CEO, Mr. Japheth Kato, on Sharing the East African Experience: The Case of Uganda
during the World Bank Contractual Savings Conference, held on 9-11 January, 2012 in Washington, D.C.
15
New Vision, Monday 13th January, 2013 page 46.

There will be separation of trusteeship, management and administration of


the pension funds;
Key services like investment and management of the pension assets will have
to be contracted out to licensed fund managers and custodians; and
Pension schemes will have to adopt international best practices.
The retirement benefits sector liberalization bill has however attracted a lot of
resistance and opposition from some stakeholders, especially Trade Union
leaders. Their key concern is that the liberalization will lead into the weakening
of the NSSF which, may result in the workers losing some of their savings. As a
result, MOFPED put on hold the debate over the bill16 by Parliament and
instituted a taskforce to review the bill, bring on board and incorporate the
concerns of all other stakeholders, for consideration by Parliament. By the close
of 2012, the taskforce had completed its work, but representatives of the Trade
Unions have remained opposed to the bill.
It should be noted that at the core of a successful liberalized pension system is
good corporate governance as well as good pension governance. Good
pension governance delivers improved pension fund returns. Whereas good
corporate governance can improve good pension fund governance, good
pension fund governance can also promote good corporate governance. The
primary characteristics of good governance also resonate with good pension
governance. According to Kings (II/III), these characteristics are; discipline and
diligence, accountability and responsibility, independence, transparency,
fairness and social responsibility. According to the OECD guidelines, there are
many governance issues that need to be watched closely in a liberalized
pension sector environment. However, the key one, include;
trustee fitness & propriety, representation, training and assessment;
investment governance and fund documentation; and
conflict of interest management.
The risks that the pension schemes may be exposed to require to be managed
with utmost care, which therefore requires that, they must have well thought out
risk management policies. These risks include; investment/market risk,
counterparty default (credit) risk, funding and solvency risk, asset liability
mismatch risk, actuarial risk, governance/agency risk, operational and
outsourcing risk, external and strategic risk, legal and regulatory risk, and
contagion & related party/ integrity (reputation) risk. Thus the viability of the
contributory systems is most felt where the above-mentioned risks are
adequately contained and investment opportunities, strong regulatory
institutions and potential participants with appropriate expertise are present.

16

As of now (Dec.2013), the bill is at the Committee stage of Parliament.

10

6.3

The Inter-Ministerial Task Force of 2011

Following the enactment of the URBRA Act, the MOPS17 on September 13, 2011
decided to commission an inter-ministerial taskforce to synthesize and
contextualize the report (the World Bank technical report on options for reform
of the PSPS) that had been prepared earlier in 2011 to move forward the reform
of the PSPS. The 19 member task force consisted of officers from MOPS, MOFPED,
Ministry of Local government, Ministry of Justice and Constitutional Affairs,
Ministry of Defense, Ministry of Gender, Labor and Social Development and
Office of the Auditor General. The taskforce was required to assess the
necessary reforms that were to be undertaken on the PSPS, in compliance and
in light of the URBRA Act, 2011 and the Retirement Benefits Sector Liberalization
Bill, 2011. Further, they were to consider the proposed Public Service Health
Insurance Scheme (PSHIS), being spearheaded by the Ministry of Health, and
harmonize the recommendations therein within the overall PSPS reform agenda.
The task force finalized its report and presented its findings to the Hon. 2nd
Deputy Prime Minister and Minister of Public Service on February 06, 2012. The
key recommendations were the following;
i.
A PSPS should be created with a PSPF, under the guidance of the Minister of
Public Service and should be managed in accordance with the requirements
of the URBRA Act, with a separation of the Fund assets and management
from the sponsor/employer (government).
ii.
The scheme should be regulated by the Retirement Benefits Regulatory
Authority.
iii.
A contributory system, of 15% contributions (10% by the Government as the
employer, and 5% by all public service employees) should be paid into the
PSPF and a proportion of the contribution (1% is suggested) will be dedicated
as an integral portion for the Health Insurance.
iv.
The Public Service pension reform should proceed within the broader
framework of the Public Service pay reform.
v.
A two-pillar hybrid scheme (1st pillar being a defined benefit scheme, while
the 2nd pillar being a contributory benefits arrangement) should be
implemented.
vi.
A cut-off date of establishing the contributory arrangement should be set. All
the accrued rights up to the cut-off date of the current system will be fully
guaranteed by the government, while the new rights start accruing after the
cut-off date.
vii.
The government Standing Orders (2010), particularly Chapter L-f should be
amended to comply with the requirements of the reformed PSPS.
viii.
The Pension Act (CAP 286) should be repealed and replaced with a new Act
that defines the framework of the reformed PSPS including the transition
arrangements.
17

The Ministry of Public Service, according to the Pensions Act is also referred to as the Pensions Authority.

11

ix.

Government should meet the start up costs of the new scheme, for a period
of up to 3 years, when it is expected to attain stability.
Government should implement appropriate financial sector reforms, to
strengthen financial institutions and deepen money and capital markets to
support the optimal operation of the reformed PSPS.

x.

The MOPS has expressed its broad support for the recommendations and is yet
to present the recommendations to Cabinet for approval, so as to move the
reforms forward.

7.0

The Parliamentary Pensions Scheme.

There has been an increasing realization of the fact that the present public
pensions system in Uganda does not cover all public servants. Members of
Parliament, being part of the group not catered for, decided to push and
legislated to make a provision for their own members. The Parliamentary
Pensions Act No.6 of 2007 was passed by the 7th Parliament in April, 2007 and
assented into law on July 20, 2007. However, the scheme has been designed to
benefit legislators effective from those who served in the 6th Parliament (i.e., from
2001). The Act is a hybrid contributory scheme, covering the members of
Parliament and the members of staff of Parliament. It establishes a
parliamentary pension fund, for the payment or granting of pensions or
retirement benefits to its members.
Section 6(1), requires that 15% of the members pensionable emoluments are
deducted as contributions to the pension fund, while government contributes
30%18 for each member. The Act, under section 12(1), provides for the payment
of pension to a member who retires or ceases to be a member on or after
attaining 45 years of age, subject to being a member for a continuous period of
5 years or more. Further, section 12(5), allows a member entitled to a pension to
receive a lump sum payment of not more than 25% of his/her scheme credit.
Although the Act (under section 16) recognizes death-in-service benefit by way
of refund of contribution with interest and a gratuity amounting to two years
annual salary based on the last salary earned by the member, it does not make
provision for Group Life Assurance, which is a much cheaper way of financing
death-in-service benefits. This represents an area of potential business for
insurance companies that offer life assurance products. Management of the
Parliamentary pension scheme may wish to draft a proposal and start to
engage the insurers on this matter. It should also be noted, that section 21 of the
Act, provides for a Government guarantee during the short and medium term,
and ensure that the scheme is solvent for payments that may be required under
it. However, the time period when such a guarantee lapses, remains undefined
18

Section 6(2).

12

which, needs to be addressed. The actuarial review of the fund, is supposed to


be done once every five years (Section 23). It should be noted that industry
practice envisages such reviews be done every 3 to 5 years. It is particularly
necessary, that the review be done as soon as possible, in view of the already
alleged abuse of office and financial loss (as reported by Monitor newspaper, of
April 30, 2013) that has been caused by the management of the scheme and
being investigated by the Inspector General of Government (IGG). The box
below summarizes the importance of actuarial reviews in pensions risk
management.
Box 1. The basic tenets for the actuarial valuation of pension schemes.
An actuarial valuation of a pension scheme is a technical appraisal, which is an estimate of the schemes
financial position at a specific point in time. As a matter of professional practice, the actuarial valuation of
new schemes is required at inception to answer either of the questions; How much protection can be
provided with a given level of resources (contributions)? Or What financial resources are necessary to
provide a given level of protection? The actuarial valuation projects the future cash flows of the scheme
members benefits. The projections are derived from a combination of judgment and science based on
assumptions about the likely occurrence of future events that affect the outcome and duration of the
pension benefits. The assumptions on the other hand are based on past experience or standard tables 19.
The two basic assumptions relate to the economic and demographic status of the economy and
beneficiaries respectively. On the economy, the two basic assumptions are; on the investment returns (for
determining the present value of the future liabilities) and salary increases (for projecting the current pay
and therefore contributions until retirement). The demographic assumptions on the other hand deal with
the likelihood of termination of employment, retirement, disability or death at each age cohort. It is
important to note that the assumption, from an actuarial point takes on a long term view of between 20 to
50 years.
For example, the sufficiency of the legal or recommended contribution rates is a matter that must be
determined with the guidance of professional actuaries. However, in the case of the Parliamentary
scheme, now that the contributions have been specified in the law, the role of an actuarial report is to
serve as a tool for measuring the long term financial balance of the scheme. The actuarial reports are
therefore tools for monitoring the financial health of the scheme; providing an opportunity for rapid
adjustments to be done if performance is deviating from what had been projected. The regular periodic
review is necessary to confirm whether the funding objectives and commitments to the scheme are being
met or not taking into account the schemes maturity.

8.0

The National Social Security Fund (NSSF).

The provision of formal social security for the private sector commenced
following the enactment of the Social Security Act (No.21), of 1967. Under this
Act, the Social Security Fund was established, which operated as a department
in the Ministry of Labor. Later, this Act was repealed by the National Social
Security Fund Act (No.8) of 1985, which established the NSSF as a body
corporate. The NSSF is a Provident Fund, which pays benefits in a lump sum and
at the moment provides only the following benefits; Old Age, Invalidity, Survivors,
Withdrawal and Emigration Grants. The rates of return offered by the Fund have
historically been too low, often below the annual rate of inflation. However, in
19

Mortality tables

13

the recent past the rate has been rising gradually based on the increasing
returns to the Fund. Because of the huge Fund it has accumulated at its
disposal, the competition it may likely face as a result of the proposed
liberalization the pension sector has changed its investment strategy. During the
year ended December 2009, it realized a huge profit and as a result, doubled
the rate offered to 14%. Given that much of this profit came from their portfolio
investments in the stock markets20; and that the Fund was still embroiled in
various investment scandals and further that the rate offered was not
guaranteed, there was doubt as to whether this rate can be sustained beyond
the medium term.
The NSSF Act makes it mandatory for every employer with a minimum of five
employees to deduct and remit 5% of each employees gross pay to NSSF each
month, and for themselves, as employers, to contribute an equivalent of 10% of
each employees gross salary to the NSSF. This has given the NSSF a substantial
dominance and monopoly in the pension sector and hence overtime given little
incentive for them to provide high quality service to the contributors. Until very
recently, the contributors to the Fund were receiving very low returns on their
contributions because NSSF has made very poor investment decisions, resulting
into negative real rates of return on its asset portfolio. Because the pension
benefits available from the NSSF were plainly inadequate, several of the larger
employers decided to set up their own in-house occupational pension schemes,
in addition to making their mandatory contributions to the NSSF.
It should also be noted that upon the advent of the privatization program in
1993, in the PERD Statute, NSSF was listed21 as one of the enterprises in which the
state was required to retain 100% shareholding, a position that obtains up to
today. While government does not in fact have any shares in the NSSF, the
purpose of classifying NSSF in this category was to ensure supervision by the
government, considering the contingent liability that it poses to the treasury, if it
were to go under. The continued out-cry by the public over the fraudulent and
poor investment decisions by the NSSF under the stewardship of the Ministry of
Labor, prompted H.E. The President to intervene in 2007 and transfer the
supervisory role over the NSSF from the Ministry of Gender, Labor and Social
Development to the Ministry of Finance, Planning and Economic Development.
The restructuring of the NSSF was embarked on after the appointment of the
new Board of Directors, and the NSSF Act is yet to be amended to reflect the
governance structure required by the Benefits Authority Regulatory law.

20
21

Share prices have since fallen, on the back of the escalating global financial crisis.
Class 1 of the 1st Schedule.

14

9.0

Challenges facing the reform process

Like in many countries, pension reforms take long; are complex and often
resisted by various interest groups. The full impact of the reforms on the new
entrants is normally felt a couple of decades later and in most cases entails
getting lower pensions than the previous generations. This calls for them to save
more or work longer for their retirement to compensate for the reduced
retirement. According to Angel Gurria, the Secretary General of OECD,
Promoting private pensions and raising retirement ages as important aspects of
pension reform, but alone are insufficient. Governments need to consider the
long term impact on social cohesion, inequality and poverty. Ensuring that
everyone has a decent standard of living after a life of work should be at the
heart of policies.
Therefore, as part of the effort to promote private (contributory) pensions
systems, keeping down the costs of running the pensions schemes is a challenge
and will remain critical in the medium to long term. Balancing sustainability and
adequacy of the pension payments is another challenge. This is particularly so,
where beneficiaries have been getting very low wages during their active
service, yet the cost of living is moderately high. It should be noted that the
recent proposal, by the Parliamentary Commission to amend the Parliamentary
Pension Act, to introduce trivial pension22 is in response to complaints of
inadequate level of payments being received by some current pensioners.
Other challenges include;
The Pension sector liberalization bill before parliament is still being resisted
by a section of workers representatives and hence, the full
implementation of URBRA Act may take longer to be effected.
Accurate statistical data on retirement benefits schemes is lacking and,
this makes meaningful modeling of the impact of the reforms, to inform
policy decision making at best as guesstimates. The administration of the
reformed scheme will require a drastic improvement in data quality,
relative to what is obtaining at the moment.
The necessary amendments to the various laws, namely; the Constitution;
the Pensions Act (CAP 286); the Prisons Service Act (2005); the Uganda
Police Forces Act (2005); the Uganda Armed Forces Pensions Act; the
Uganda Public Service Government standing Orders (2010); and the NSSF
Act among others will take long yet it is necessary to have them aligned
to the new pension sector regulatory framework.
The URBRA Act is yet to be fully implemented, yet the apparent weak
governance (as witnessed by the scandals that have rocked the Pensions
Authority MOPS) may expose the accumulated funds (member
22

Trivial pensions are lump sum payments that the beneficiary may opt to get, if the pension payment he/she
qualifies to get is so small that it cannot sustain a meaningful standard of living.

15

contributions) to misappropriation and/or undue political influence. The


defined benefit parameters within the hybrid system can easily be
manipulated, unless a strong oversight by the MOPS is built, to be able to
manage, model and forecast pension expenditures and liabilities in the
reformed system; in the short, medium and long term.
Government revenues have to be raised, so that it is able to pay the; 10%
contributions due for each employee in the reformed scheme; and the
accrued pensions rights under the old scheme.
As the system shifts to a contributory arrangement, the investment risks will
be borne by the contributors. In the absence of a well developed capital
market, a shallow financial system and the often volatile international
financial environment, ensuring that adequate and sustained returns are
obtained for members contributions will remain a challenge.

10.0 Opportunities and benefits presented by the reforms


The reform of the pensions sector presents a vast array of opportunities to
Government, the private sector and to the economy in general. Some of these
include;
Deepening the financial system and development of the capital markets. It is
now opportune to consider introducing long term investment products, like
longer term maturity bonds.
Mobilization of domestic resources. The savings to GDP ratio in Uganda is
among the lowest in Sub-Saharan Africa. This is an opportunity to improve on
savings mobilization, particularly for infrastructure development. This
ultimately reduces the reliance of the economy on foreign donor funds
which have been erratic and dwindling over the years. There is need to
consider issuing infrastructure bonds, as other countries in the region have
done.
Development of life assurance, annuity products and deepening insurance
penetration in general.
The full implementation of the URBRA Act will help improve the governance
of the pension schemes and instill confidence to the contributors. It will also
allow for the development of the private sector through the introduction and
growth of specialized skills and service providers, which ultimately improves
tax revenue for government.
Harmonize salary and pay reform across the civil service and all public
statutory agencies. For example, since the parliamentary pension scheme is
a statutory pension scheme, it should also be subjected to reform similar to
those to be applied to the public service pension scheme, and government
contributions as an employer harmonized, since the bills of these schemes
are paid from the consolidated fund. This will promote fairness across the
system.

16

Introduction of the contributory arrangement, similar to that of the NSSF,


allows for the integration of the civil service scheme (as an occupational
pension scheme) into the national social security system. This encourages
equity, fairness, transparency and removes the perception of preferential
treatment. Further, the proposed introduction of portability of benefits will
bring additional benefits in terms of efficiency to the civil service as explained
in the box below.
Box 2. Benefits of Portability of Pension Benefits to the Civil Service.
Historically, civil service pension schemes were established as a form of reward for long term
service. Therefore, lifetime employment was encouraged through such conditionality of terms of
employment being permanent and pensionable. However, overtime and in modern times, this
has become more of a barrier to labor mobility, prohibiting flexibility to attract new employees
(that bring in new talent, while removing non-performers), vital for a modernizing civil service.
The proposal to introduce the portability of accrued pension rights is therefore another incentive
both to the civil servants as well as for the public service scheme to integrate into the retirement
framework of the private sector. A number of countries have recently reformed their civil service
schemes, by introducing a contributory arrangements, and they include; USA 91987), Hong Kong
(2001) and India (2001).

11.0 Recommendations
Implementing pension reforms is a complex undertaking because in involves
adjusting the lifelong contractual benefits of the retirees and most often involves
reducing the benefits. As such, a lot of care and caution needs to be exercised
and actions should be guided and informed by research and technical
judgment. As the economic and demographic systems change and so are the
pensions arrangements expected to evolve. Therefore, the reforms being
proposed may significantly differ from what will be required 50 years from now.
Nevertheless, the authorities may wish to consider the following
recommendations:
i.
The MOPS should consider and establish a Public Service Pension Reform
secretariat, as a dedicated unit with adequately remunerated technical
personnel, such as research and actuarial specialists to steer and move
forward the technical aspects of the reforms; including forecasting23
pension expenditures in the medium to long term. What is required,
among others is the preparation of a communication strategy to ensure
that all stakeholders are on board and understand the implications of the
reform. The pension department in the MOPS should also be
strengthened, so as to supervise the work of the secretariat, while
23

Further training to staff on the use of the World Banks Pension Reform Options and Simulation Toolkit
(PROST), could be the beginning. While some staff (in MOFPED and MOPS) may already be trained, there is need
to refresh them on the new version of the model.

17

ii.

iii.

iv.

v.
vi.

vii.

viii.

concentrating on resolving policy issues relating to the reform. The


improved capacity will allow MOPS to provide quality advice on feasible
policy options, since for reforms to be adopted as credible, the
projections should be based on well grounded assumptions.
The MOPS, as part of (i) above, should establish the magnitude of the
Implicit Pension Debt (IPD) under the current system. This should be done
as soon as possible and comprehensively, including debts in the local
governments and the Armed forces. It is important that the data is
professionally compiled and credible to form a basis for future modeling
of the reform. The IPD can then be updated when the cut-off date of the
transition is determined. By so doing, MOFPED is also allowed adequate
time to plan for the appropriate modality of financing the transition of the
current system to the reformed one.
The reform of the current system should consider making provisions for
death-in-service benefits through Group Life Assurance (GLA), which, is a
much cheaper way of financing it and is a product already being offered
by some Insurance Companies. This arrangement will also help strengthen
life assurance and improve the depth of insurance penetration that is
currently the lowest in the region.
As part of the reforms, and arising from (i) above, the Pensions Authority
(MOPS) should also address the issue of the adequacy of the pension
payments in the reformed system. This may be done, by establishing the
minimum acceptable pension, below which the beneficiaries should be
allowed to opt for a lump sum payment. The Parliamentary Pension
Scheme is already considering amendments to the Parliamentary Act to
this effect.
The Parliamentary Pension Scheme may also need to be reviewed, to
align it with the key elements of the reformed PSPS, since both schemes
benefit from contributions out of the consolidated fund.
As part of (v) above, a comprehensive actuarial review of the
Parliamentary Pension Scheme should be conducted, so as to establish
the long term balance of the scheme. This is because, as already
indicated, the actuarial valuation of the scheme was not conducted at
inception, which is required in professional practice.
In view of the critical role that the trustees play in the governance of the
pensions schemes, the Retirement Benefits Authority should subject all
persons nominated to act as trustees to a fit and proper test, which is a
recommended industry practice. The Authority can liaise with the Bank of
Uganda that is already doing this for the Board of Directors of banks for
guidance.
The Bank of Uganda together with MOFPED should speed up the issuance
of longer term bonds (than the ones presently issued); including
infrastructure investment bonds to deepen the market and diversify the
investment instruments at the disposal of the pension funds.
18

12.0 Conclusion
Since pension benefits are claims against future economic output, it is essential
that overtime pension systems contribute to growth and output to support the
promised benefits. The public service pension reform should be handled and
implemented within a framework of a holistic public service reform agenda. This
should include a thorough and careful study of the human resource policies;
including; remuneration and benefits, appointments, promotions and exit
policies of both the civil and armed forces. Otherwise, focusing on public service
pension reform without a better understanding of additional elements; like
public vs. private wage rates and earnings; different types of fringe benefits
available; and working conditions, may not provide results that are desirable
both in the medium and long term. In addition, this should help build a
trustworthy public service capable of delivering goods and services that are
demanded by the citizens more effectively and efficiently.

19

13.0 References
Callund, David (2004); Pension reform; charting a way forward.
Deloitte and Touche (2001); Review of the public service pension arrangements.
Dirk Muir, Karan Pilippe, Pereira Joana, and Tulaghar Anita; (Dec. 2010)
Macroeconomic effects of public pension reforms, IMF working paper 10/297
(Washington: International Monetary Fund)
Tatyana Bogolova, Gregorio Impavido, and Montserrat Pallares-Miralles, (Feb
2007); An assessment of reform options for the public service pension fund in
Uganda, Working Paper Series No. 4091 (Washington; World Bank).
Stakeholder Transitional Group (2003); The tripartite consultative process policy
recommendations and the way forward on social security reform in Uganda,
MOGLSD.
Pension Reform Task Form (2004); The recommendations for the pension reform
in Uganda, MOFPED
Report of the Inter Ministerial Taskforce on the Reform of the Public Service
Pension scheme (January 2012), MOPS.
The Pension Act (CAP 286)
The Parliamentary Pensions Act (2007)
The Uganda Retirement Benefits Regulatory Authority Act (2011)
The Retirement benefits Sector Liberalization Bill (2011).
OECD/IOPS (Jan. 2011); Good practices for Pension Funds Risk Management
Systems.
OECD (June 2009); Guidelines for Pension Fund Governance.

20

World Bank (June 2011); Technical Note on Options for the reform of the public
service pension fund in Uganda.

21