Assessing NSSF’s Performance: A Comprehensive Analysis for Savers

By Alex Kakande

The National Social Security Fund (NSSF) recently announced an interest rate of 11.5%, prompting savers to evaluate their investment choices. With a history of fluctuating returns, including a notable 15% in 2018 and 12.15% in 2021, understanding the impact of these rates on your savings is more important than ever.

While many may perceive that the National Social Security Fund (NSSF) declared a lower interest rate of 11.5% this year—a time when the majority of the assets they invested in experienced significant outperformance and an increase in yields—it is important to note that there have been years when NSSF has provided very attractive yield returns to its savers. (NSSF Invests close to 80% of the total Assets in Regional Treasury Bonds.)

So if the Fund has experienced significant yields on these types of investments, how come the return to the savers was a modest 11.5% an average for the last 5-6 years? It’s not like they have never given savers higher rates before.

For instance, in the distant year of 2021, they offered a 12.15% return, and in the almost forgotten year of 2018, they offered 15% to their savers. However, they have averaged around 11.4% over the last seven years.

But it is not the average that matters only; the real question is where you, as a saver—especially a voluntary saver viewing this as an investment—are best placed. This is a little-known fact, but let’s first highlight it:

According to Section 36 (1) of the NSSF Act, the new interest is calculated and credited based on the balance outstanding in the members’ accounts as of July 1, 2023.

This means that the 11.5% interest credited to your NSSF savings account is based on your total savings as of July 1, 2023, and any contributions made from July 2023 to June 2024 have not yet earned interest.

Given that NSSF computes interest on a cumulative balance that is one year behind, should the discount rate announced then be either discounted to factor in that one-year lag of income earned (July 2023 – June 2024) or, at a minimum, should an average rate be announced to consider even the contributions in July 2023 – June 2024?

Either of these methods would bring the average interest rate provided by NSSF to around 8%-9% of the total savings as of June 30, 2024, for the recently concluded financial year.

So, the question arises: Are you better off investing with yourself, say in bonds or some unit trusts, than with NSSF? Especially for voluntary contributions?

Certainly, given that some unit trusts have consistently provided returns above 11.5% over the years, and bonds are averaging a net return of over 14% per year. But do you possess the patience and behavioral discipline to compound your investment without withdrawing it, as NSSF does for you?

For comparative purposes, let’s consider a voluntary contributor who invests 5 million per year in a unit trust, in NSSF, and also in bonds. Two things stand out: With NSSF, you will be one year behind in compounding.

For example, if you started contributing in the fiscal year 2019, then at the end of 2019, you will not earn any interest on your NSSF contributions since it is one year behind in interest. Then, in the fiscal year 2020, you earn interest on your 2019 contributions but do not earn interest on your 2020 contributions.

However, the advantage of NSSF is that it forces you to be disciplined for a long time without accessing your funds and investments, especially if you are not yet of retirement age or eligible for mid-term access. On the other hand, unit trusts might offer a good average rate of 11% and will also help you to compound every time you deposit money into them.

Their best selling point is the liquidity of these investments; you can access your money whenever you want, with a turnaround time of around 1-2 days. This is beneficial, but it has also prevented many people from building a substantial investment portfolio due to the lack of discipline and the tendency to withdraw funds whenever possible.

In the case of treasury bonds, the fact that you must independently reinvest the coupon income every six months to compound the bond returns requires discipline and behavior that could see your investment grow to outcompete the forced discipline that NSSF imposes.

Having considered these three aspects, the person who invests in bonds would be UGX 8 million better off than the person who voluntarily contributed UGX 5 million per year to NSSF, and the person who contributed to a unit trust would be UGX 4 million ahead of the one in NSSF.

However, do they possess the discipline that the forced NSSF investor is subjected to, which allows their investment to grow? The cost of discipline over the six years from 2019 to 2024 is an UGX 8 million to go to bonds or 4 million to go to a unit trust.

If you know yourself and doubt your long-term discipline, please stick to NSSF; its average return is way above many other investments.

Contributions & Collections to the Fund

The NSSF team has done an excellent job over the years in ensuring increasing compliance by different employers to remit and contribute their share to NSSF.

The job has been so remarkable that in 2017, NSSF was only collecting UGX 76 billion per month, and now they are collecting over UGX 160 billion per month, doubling the collection contributions in just seven years.

If this trend continues, then by 2030, they will be collecting around UGX 300 billion per month or close to UGX 3 trillion per year. Whatever strategies the leadership has implemented, they are incredible, and the team should continue.

Editor:msserwanga@gmail.com

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