Why social security schemes can’t invest outside Tanzania

What is the percentage of Tanzania’s population that has access to social security schemes in this period of post-liberalisation of the country’s social security system?

The sector has a total of 1.95 million members, according to 2014 financial reports. This figure includes members of the National Health Insurance Fund. With the reforms in the social security system, we have widened the scope and opportunities for members to join the schemes. Section 30 of the SSRA Act No.8 of 2008 (as amended) provides an adequate room for extension of social security and that is why the number of members has increased from 930,000 in 2010 to 1.95 million in 2014.

Is there any plan to allow registration of private pension organisations to expand membership?

We do encourage private pension schemes. We have eight private schemes. For instance, we have privately owned employers’ pensions. These are separated as they are not treated as schemes.

What do you do to make sure that more and more Tanzanians get access to social security systems?

Low coverage of people in social security funds has been there since colonial rule. It is a question of colonial heritage. During colonial era, farmers were discouraged to join pension funds. Under section five of SSRA Act, efforts are being made to improve sensitisation programmes aiming to raise public awareness on the benefits of social security funds. We have established a communication strategy for education and awareness campaigns. We have been assessing the penetration level routinely. Another strategy we use is registration of mandatory schemes. The mandatory schemes have to include minerals, fisheries and farmers’ schemes. But there is no legal backing for that strategy.

To what extent are peasants covered in social security funds?

They are covered but not mandatory.

What is the major role of the workmen’s compensation fund?

Its major function is to cover people who are affected by accidents that may take place at work places. It is a new social security organisation so it is not yet well established. It is just one month old.

How do you reach the population to enhance coverage in all regions?

In compliance with the SSRA law, we have been focusing on every social group by organising public campaigns including elders, farmers, students, retirees, women and the general public. We reach them through various ways such as the mass media, seminars and the use of non traditional media.

What is the contribution of social security schemes to the country’s GDP?

It is 12 per cent.

Does inclusion of the informal sector in social security schemes help to increase membership status and level of investible funds by the social security organisations?

Yes, although it is too early to see the impact of the informal sector in social security investment.

How many voluntary members do you have so far?

We have about 40,000 for the entire sector.

Last year, the CAG said the government debt to social security funds amounted to Sh8.43 trillion with the Public Service Pension Fund being the chief victim of the loans. Is the government rate of repaying the debts convincing in your view?

The mentioned debt was of three categories; First category is the Pension Implicit Debt (PID), which is more than 50 per cent of the debt that you have quoted. These deficits are normal to any open-ended partially funded and Defined Benefits Schemes. Pension Implicit Debt is defined as present value of the promises made to members from the time they join schemes to the time of retirement.

Thus, where a scheme has adequate assets to finance its promises to members the PID is not a problem. To detect the problem we normally look at funding level. When a defined benefits scheme reaches a funding level below 40 per cent, then government has to set aside funds to finance matured obligations of the scheme. In this case the pension debt is no longer implicit, rather it’s explicit.

The second category of government debt to social security schemes is in form of contributions of the PSPF Pre-1999 liability. This relates to the public sector employees inherited by PSPF when the fund was transformed from a non-contributory scheme in 1999. You may recall that this fund was given a grace period of five years from 1999 to 2004 when they started paying benefits.

However, existing members prior to 1999 were transferred to PSPF without their contributions although the fund continued to pay benefits to them. This is a real debt and the amount, which is already paid to them up to 2013, is Sh1.2 trillion.

The third category of debt is basically related to investments made in collaboration with government institutions with guarantees from the government. These projects went as far as in 2004; so some of them have matured ready for interest and principal payments.

With regard to whether the government rate of repaying debts is convincing; in my view recent interventions by the government seems very convincing. Of the three categories of social security outstanding debts, the authority was concerned with the PSPF Pre-1999 and outstanding debts from the government. We are pleased to note that in February 2015, the government approved a repayment of Sh1.2 trillion and a cash injection of Sh44.5 billion per month. The government has approved payment of matured loan obligations to social security schemes subject to verification of the debts.

What is the timeframe agreed for the government to complete the process of paying debts?

The government has committed to winding up payment of debts in the 2015/16 financial year.

The commitment to pay Sh44.5 billion per month has started. According to SSRA investment guidelines of 2012, the government is not allowed to accumulate debts beyond 10 per cent of the assets value. Basing on this, for the past two years the government has not borrowed from social security funds.

Do you mean that there are no cases for accumulation of government debts beyond 10 per cent?

No. We have such cases where the government has borrowed above that level; this was the case particularly before the establishment of SSRA.

Can you give example(s) of social security fund(s) which has/have provided credits to the government above the legally-allowed ceiling of 10 per cent?

I don’t have exact data, but take it in mind that social security funds still want to do business with the government in so far as they pay debts. The government is the major client of social security funds.

In a nutshell, what is the remaining amount in debts the government owes social security funds?

I don’t have exact figures at the moment but what I know is that the government through the ministry of Finance is conducting verification of government debts to social security funds.

As a regulator of social security organisations, do you think that such debts accumulated by the government conform with interests of members or contributors as regards their access to various benefits?

With the above mentioned repayment schedule, the government has mitigated risks that could affect members’ benefits. The repayment has restored balance in the sector.

How about the sustainability of pension funds?

The pension funds are sustainable. The pension Implicit Debt has declined from 58 per cent of GDP in 2010 to 25 per cent of GDP in 2014. We expect it to decline even further when reforms gain momentum.

Do you think that the current regulatory frameworks governing social security organisations are conducive to business environment and membership benefits? If yes or no please explain more.

Yes. They are very beneficial to members and the economy at large. Firstly, harmonisation of legal and regulatory frameworks has opened up for enrolment of members from both formal and informal sectors unlike before the establishment of SSRA when membership was skewed towards formal employment.

Secondly harmonisation of investments and issuance of investment guidelines have opened up for investments in fixed income assets, properties, listed and unlisted equities as well as investment in infrastructure. I am proud to say that so far, Tanzania is the only country in Eastern Africa with such broad investment guidelines. The guidelines encourage innovation and foster real growth of the economy.

You could easily see multiplier effects of these investments.

Thirdly, harmonisation of pensions has reduced inequality among members of the schemes. The rules have addressed a lot of complaints from members in respect to inadequacy of benefits.

They have increased replacement rates from 66.7 per cent to 72.5 per cent. These rules have improved benefits because they have taken into consideration purchasing power of pensions. Previously, pensions were Un-indexed, as a result our pensioners were complaining of inadequacy of pension which was affected by inflation.

Tanzania Private Sector Foundation has been calling for integration of social security schemes in the venture capital financing. What is the response of SSRA on this pertinent issue for expansion of private sector investments?

Venture Capital is good but we have to be very careful with such investments. The returns in most of them seem to be higher than in other investments though the risk is equally high.

The funds are discouraged to enter in venture/start-up projects and exploration due to the fact that in case they fail the funds will lose members’ money.

As you are aware the pension system in Tanzania is a Defined Benefit system, its liabilities are long-term and are certain.

Thus before embarking on such investments, social security funds have to make sure that investments are safe, have adequate yields, adequate liquidity and allow for exist/diversification and risk management.

Being chairperson for East African Pension regulators, what progress has been made in harmonising social security schemes in the East African Community member states?

Progress has been made so far. You may recall that initially it was only Kenya which had a regulator of pensions, but now there are regulators in Tanzania and Uganda. We are developing the pension sector policy which will guide the sector in the region.

Among other things, the draft policy touches on harmonisation in the aspects of reviewing and strengthening the pension legislation. This requires partner states to develop a sound and harmonised EAC pension and legal regulatory framework anchored on internal best practices.

Other aspects are supervisory and regulatory frameworks: It requires partner states to develop, harmonise and provide the necessary supervisory and regulatory framework as pre-conditions for a sound regulation and supervision of the EAC pension sector.

There is another issue of pension taxation which requires partner states to adopt an appropriate pension tax regime which encourages portability of pension rights across the region.

Another pertinent issue is pension management, which requires partner states to have robust pension management principles which adhere to best practice. EAPSA has already developed investment principles, which among other things, cover: assets, the law relating to investment in pension funds should provide for operational policies, standards and procedures to be adopted by schemes and supervisory agencies in the investment process.

The law, regulations or investment guidelines should only provide for upper limits when investing in asset classes. Each partner should treat EAC as a domestic market as pension investment is concerned. Partner states are gradually encouraged to adopt the use of professional fund managers and custodians. Pension funds should develop investment policies to provide guidance on investment activities and minimum contents to include investment objectives, risk management, asset allocation, mechanism for asset realisation, asset/liabilities mismatch and other aspects relating to financial reporting for pension funds.

In one of the sensitisation seminars, it was noted that Social Security Funds have limits when it comes to buying shares through the Dar es Salaam Stock Exchange. Can you clarify on this issue?

The limit set is 25 per cent of assets’ value. They have not exhausted because the amount invested by them at the DSE is only 11 per cent.

Does the SSRA allow social security funds to investment abroad?

Under the prevailing guidelines social security funds are not allowed to invest offshore. Offshore investments can be risky. Taking a case of the past economic crunch in Europe, if we were to invest offshore social security funds would incur huge losses.

As a result our social security system has not recorded resilience to global economic crisis. Bear in mind that we still have huge potential for social security funds to invest in the country.

There are a lot of infrastructure projects that are yet to be done. The infrastructure projects under the PPP [public private partnership] are yet to be earmarked extensively. For example, they can invest in oil and gas projects, roads and communications infrastructure.

They can as well invest in more social infrastructure such as education institutions, health centres and water supply projects. However, it is important to note that they are only allowed to invest in project financed undertakings not equity ones. The equity ones are risky.

Why are they not embarking on more infrastructure projects?

We have only few government guaranteed infrastructure projects like construction of buildings at Dodoma University, Construction of Mabibo Hostels for students of the University of Dar es Salaam and others.

The basic reason is that there are no experts engaging as developers to ensure that the infrastructure development funds are recouped for protecting members’ money. We need to have proper developers to be partners of social security funds for infrastructure development projects. They have to operate outside government controls. They can operate as investment banking and developers and the government should remain as regulator and creator of attractive business environment.

Why is it that there is no direct lending to members of social security funds?

Bear in mind that the core function of social security funds is not lending but providing better benefits to their members. That is why we have allowed them to access credits through savings and credit cooperative societies (Saccos). The Saccos in this regard act as fund managers. Some managers are commercial banks.

Why are you not ready to allow members to take at least 60 per cent of their money as credit?

Remember pension is like insurance business. We always follow insurance principles of operation. Pension is about benefits.

They have to safeguard members’ funds. Under the guidelines every shilling invested must yield at least one per cent of total value of investment. In other countries members are not allowed to access any form of loans because social security organisations deal with contingencies.

Many members still complain that they don’t benefit much from their contributions. How do you deal with this problem?

We are sorting out this problem, especially premature withdrawals by members. Currently the SSRA has a joint project with ILO on actuarial evaluation of pension schemes. Under the eight month-project, which started in October 2014, it is targeted to have price structures of various benefits to members.

We want to introduce new benefits covering health, education and unemployment risks. We are planning to have proper costs or price of each package of benefits.

There is a concern that some of the social security funds have been procuring materials outside the country while they can buy the same locally as a way of empowering locals and creating employment opportunities. What is your take on this?

It is beyond our mandate. The one who is responsible for procurement activities in the country is Public Procurement Regulatory Authority (PPRA). We can just provide advice. It is up to the board of directors of the social security funds to ensure that they comply with the PPRA guidelines.

What are the challenges facing SSRA?

We face a challenge of inadequate coverage of social security. There are also challenges of inadequate data governance at the scheme level, inadequate awareness of social security products and services, lack of viable Private-Public Partnership (PPP) investments, which do not need government guarantee and high administrative costs of the schemes.

What is the way forward in tackling these challenges?

As our day-to-day role, we are continuing with awareness creation and public education programmes for more people to join pension schemes.

With regard to the problem of proper data gathering, we have signed MoUs with several public agencies such the National Identification Authority, Tanzania Revenue Authority, Registration Insolvency and Trusteeship Agency, Tanzania Investment Centre, National Bureau of Statistics and the Bank of Tanzania.

We are going to have a collaborative database with these partners. We will further be ensuring that attractive business environments for the funds are in place. We want to have freely saleable investments.

We have to think out of the box. We are encouraging social security funds to invest more for increasing members’ benefits and ensuring that members contribute more for their pension benefits. With regard to administrative costs we have sent an application for government support.

This issue is being worked by the government. It must be noted that Tanzania is the only country in East Africa with government guaranteed social security schemes.