The National Social Security Fund Managing Director, Richard Byarugaba has warned that the pressured move to have the fund pay out 20% saving to members might turn out to be disastrous.
Following the outbreak of the pandemic, NSSF has been called out to pay at least 20% of the members’ savings as one of the ways to recover from the effects of the pandemic.
However, in a letter to the Finance Minister, Matia Kasaija, Byarugaba said the move will have far reaching impacts onto the fund that will distress its sustainability as a retirement scheme.
“The immediate proposed payout will be an increased need for liquidity. With a bad performance, there would be a run on the fund similar to how banks bleed to death if savers learn that the bank’s financial performance falters,”Byarugaba said.
The NSSF MD explained to the Finance Minister that paying out 20% savings would mean that the fund will have to sell some of its assets, especially treasury bonds to be able to raise an extra shs2.5 trillion.
Sale of assets
According to Byarugaba, the sale of assets to meet benefit payments would see the fund fail to invest in new government bonds yet the fund at 50% is the biggest holder and buyer of government bonds.
“If turned into a net seller, the NSSF would not be able to invest in new government bonds. Consequently, government would struggle to raise funds in its treasury bonds to fund its programs.”
NSSF says that the muted demand for primary auctions would drastically result into higher interest rates but also the ongoing real estate projects by the fund would be halted due to lack of liquidity.
NSSF in its explanation says the membership is at 2.3 million with a core membership that has balances on their accounts being at 1.2 million.
According to Byarugaba, of the 1.2 million, only 53% are active and these(active) include members who make at least one contribution per year.
“100,000 members or about 8.3% of the core members own 75% of the fund. About one million active members (80%) have balances below shs10 million and only 7% have balances greater than shs50 million.”
NSSF insists that even if they decide to payout 20% a big percentage of savers will not have their need to recover from the effects of Covid-19 addressed yet it will have a damage on the economy and financial system.
Byarugaba insists that a precedent set in the Supreme Court case ruling against former NSSF boss, David Chandi Jamwa indicated that the fund should never sell bonds in secondary markets if the transaction is to result into a financial loss.
“.. the proposal not only ruins the NSSF but also has wider negative implications for the country and society. The fund which has taken time to rebuild may collapse,”Byarugaba said in the letter also copied to the Prime Minister, Minister of Gender, Labour and Social Development and the Governor Bank of Uganda.