Will assignment of retirement benefits make sense?

In May 2022, the Minister for Finance, Planning and Economic Development launched the Uganda Retirement Benefits Regulatory Authority (Assignment of Retirement Benefits for Mortgages and Loans) Regulations, 2022. This regulation was long overdue following several pleas from savers. The regulations are detailed enough and everyone ranging from the saver (member), Retirement Benefits Scheme (RBS) itself and the banks have their role to play.

Mortgage loans are granted to enable borrowers to acquire land or a residential house. These loans are granted on the strength of cash flows arising from the employee’s monthly salary. An employee has a gross salary from which Pay As You Earn is deducted, followed by the mandatory five percent to NSSF and where applicable, an additional percentage is deducted towards a voluntary RBS.

If we use an example of an employee who earns a gross of Shs1.0million per month, his/her contribution to NSSF is Shs600,000 per annum and the employer adds a 10 percent which is Shs1.2m. Therefore, the total contributions per annum are Shs1.8m.

Assuming NSSF declares interest of 12 percent each year for 10 consecutive years, that employee would have accumulated Shs36million by end of year 10. The new regulation would allow that employee to assign up to 50 percent to act as collateral for a mortgage loan. Assuming that the lender accepts the application, he/she will get a loan of Shs18million, but at what rate? The mortgage loan rate is critical in deciding whether the savings/loan swap is financially viable. The break-even point would be for the lender to grant the mortgage loan at the same rate of 12 percent per annum.

If the loan rate is higher, then the employee will pay more to the lender, but does not fully recoup that from interest expense from earnings in the RBS.

Nonetheless, the employee will still be better off from other perspectives. If the house is purchased or completed, the employee will save money from rent payments to the current landlord. Secondly, as the loan is repaid, the land or house appreciates in value.

Thirdly, the employee continues to save more money into the RBS. Unlike the Mid-Term Benefit (MTB) offered by NSSF, the assigned retirement benefits are not withdrawn from the Scheme.

Despite the advantages of the new regulation, trustees and administrators of RBS will have to be prepared for risks that may arise.

One of them is defaulted by the borrower and the RBS will be expected to pay the assigned benefits over to the bank. The borrower is still expected to use their current net pay to repay all their existing loans.

If an employee becomes ambitious and goes for additional loans on the strength of this new regulation, how have his/her cashflows improved? Another issue is willful default which leads to a gradual depletion of the member’s accumulated benefits in the RBS. The borrower deliberately defaults and expects the RBS to remit the assigned benefits to the lender. Remember that the MTB from NSSF is capped at 20 percent for those who are eligible. This new regulation has a higher cap of 50 percent, which appears more lucrative but susceptible to risks.

CPA Dr. Albert Richards Otete is a Research Partner at J. Samuel Richards & Associates, Certified Public Accountants licensed and regulated by ICPAU.