By Richard Byarugaba

I recently heard of a subtle but quite vigorous debate regarding the Fund’s recently announced record interest rate to members of 15 per cent. Specifically, the debate has been centered around the sustainability of the interest rate declared. I believe these are pertinent matters where, unfortunately, facts may either get twisted or misplaced. Consequently, I feel it is necessary to make a few clarifications.

The NSSF Act empowers the Minister of Finance to declare an interest rate credited on the members’ accounts following the end of every financial year. This interest rate must be declared by the 1st of October every year. The interest rate decision depends on the financial performance of the Fund. The financial performance in turn relies on the return generated from the various investments of the Fund in the period.

The Fund’s members usually spend over 20 years saving with the Fund. This means that their savings are invested over a long-term horizon. As a result, the Fund tends to invest in long-term assets to match its membership profile. In investing in the various assets, the Fund seeks three sources of returns. The first component of return is cash returns which includes interest income (coupons) from fixed income investments, dividends from shares in companies and rent from real estate properties.

The second component of returns are capital gains or losses: this represents movements in market values of investments which the Fund is yet to exit. For example, the Fund bought Safaricom shares in 2008 at an IPO price of KES 5.0. Today, the price of these Safaricom shares is about KES 24.

This represents a gain of KES 19 per share over the last 10 years. This is alongside the annual dividends that the Fund has been able to receive from the company. The capital gain component of return is typical in equities and real estate investments and in many such cases the largest source of return.

The third component of return is on currency movements. This applies when the Fund invests in assets denominated in currencies other than the Uganda shilling. Extending the Safaricom example, the Fund made the initial investment when the KES UGX rate was 24.7. Today it is averaging 37.2. The difference represents a currency gain.

So, to conclude the example of Safaricom, the Fund made money in dividends, capital appreciation and currency movements. Because the Fund has never sold its shares, the currency and exchange rate gains represent unrealized gains.

Now, some people argue that interest declared by the minister should not include unrealized gains. That is, that only cash returns should be declared, and the unrealized gains be hived off until they are converted into cash.

However, this reasoning has two major limitations. First, some leaving members would not fully benefit from investments made from their savings. For instance, a retiring member who was saving with the Fund in 2008 whose savings were used to make Safaricom investment would not benefit if capital gains made in that period are not distributed. Second, such an interest distribution approach would also undermine the Fund’s number one role in the economy; being a source of long-term capital.

By their nature and name, long-term investments generate less cash and more capital gains. It is for this reason that pension funds money is also labelled patient capital. If the Fund were to ignore this cardinal role, it would have to resort to continuous selling of its assets or limit its investments to short-term assets. This would not only create volatility in the market but also push the Fund out of long-term investments resulting in a mismatch with its liabilities.

It is for these reasons that the Minister has taken a very measured approach in the Fund’s interest declaration process but obviously after reviewing the performance achieved in the period. The goal is for the Fund to maintain a premium of 2 per cent above the average 10-year inflation.

This has been built in the Fund’s investment strategy. Pension funds all over the world have preserving members value against inflation as a key investment objective. The Fund has achieved this over the last eight years making it one of the best performing pension funds on the African continent. The Fund’s investment strategy has become a benchmark for many regional institutional investors and in return the Fund has received several global accolades. Consequently, the Fund is committed to maintaining this performance and in doing so continue to raise the Ugandan flag globally in terms of pension fund management.