First Uganda Pension Reform Policy Credit (PRPC) Sector - Compulsory pension and unemployment insurance (50%) - Banking (10%)

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1 PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB7516 Operation Name First Uganda Pension Reform Policy Credit (PRPC) Region Africa Country Uganda Sector - Compulsory pension and unemployment insurance (50%) - Public administration - Financial services (10%) - Banking (10%) - Non-compulsory pensions and insurance (15%) Lending Instrument Operation ID Borrower Implementing Agency - Payments, settlements, and remittance systems (15%) Development Policy Lending P Republic Of Uganda Ministry of Finance, Planning and Economic Development (MoFPED) Date PID Prepared February 18, 2014 Estimated Date of Appraisal Completion 30 May 2014 Estimated Date of Board Approval 31 July 2014 Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Introduction and context

2 The proposed DPL represents the launch of a two part series which focuses on reform of the pension system in Uganda. The main goals of the operation are to: (a) strengthen the governance and investment of existing pension schemes; and (b) reduce government pension liabilities in order to contribute to fiscal stabilization. In addition, a well-functioning pension sector has the potential to play an important role in the development of long-term finance for investment. Strengthen the position of existing funds is also vital before coverage of the pension system can be extended to a broader population. Governance remains a major challenge in Uganda, as evidenced by the global governance indicators and persistent in-country high-level corruption and mismanagement of public funds. Such governance problems have recently affected the Public Sector Pension Scheme in the form of ghost pensioners, as well as the National Social Security Fund (NSSF) in terms of negative real returns and high administrative costs. The urgent need for structural reforms within the Ugandan pension sector is also driven by fiscal considerations. Although the pension sector covers only 2.1% of the population 1 (equivalent to less than 5% of the workforce), a large amount of implicit fiscal liabilities are involved. Without reform, yearly expenditures for government pensions are set to almost treble from 0.4 to 1.1% GDP, representing a significant proportion of government revenues. Pension assets represent a major potential source of long term financing for the country, given these assets are held over several decades and can take advantage of longer-term investments offering illiquidity premiums. The NSSF is the largest investor in Uganda, with total assets of UGX 3 trillion (equivalent to 5.6% of GDP), and dominates local securities markets. Yet 80% of the portfolio remains in fixed income securities. The new management of the NSSF has recognized the need to diversify the holdings of the fund (and has already started to outsource to specialist, external managers) and to move towards longer-date securities. Opening up the market for mandatory social security contributions which are currently directed to the NSSF will allow for more professional management of pension assets. The NSSF and other pension fund managers in the country are ideal and willing investors for the longer-term financing instruments which will need to be developed to support economic growth. The Government has taken bold steps in reforming the pension sector and the Bank has been supporting these reforms through analytical work and capacity building. The Ministry of Finance, Planning and Economic Development (MoFPED) has championed a reform process yielding significant results so far. The creation of the Uganda Retirement Benefits Regulatory Authority (URBRA), the presentation of a Bill to Parliament to Liberalize the Retirement Benefits Sector and gradually remove the monopoly of NSSF in the provision of pension services and the elaboration of a reform proposal for the Public Service Pension Scheme testify to the Government commitment to the reform process. Since 2010 the World Bank has continued to play an advisory role, supporting these developments by carrying out analytical activities and providing technical assistance and capacity building. 1 Excluding the military.

3 Proposed Development Objective(s) The objective of the DPL is to address pension sector governance and fiscal sustainability issues. The proposed DPL will contribute to the goals contained in the CAS FY11-15 of creating longer-term private investment financing and improving access to financial services. Preliminary Description The proposed operation will support the implementation of an ambitious Government reform program. The Government has deplored corruption in the management of the pension sector, and remains acutely aware of the fiscal risks implicit in the system and has expressed its willingness to accelerate the process of pension sector reform. This operation will support reforms aimed at: (i) building capacity within the new pension regulatory authority (URBRA); (ii) introducing competition to the NSSF in the provision of mandatory retirement benefits; (iii) converting the Public Sector Pension Scheme into a contributory, fully funded, defined benefit pension fund (PSPF) with revised parameters to enhance fiscal sustainability; and (iv) amending the current banking regulatory framework to recognize and include mobile financial services and agent banking, as well as enhancing the national payment systems to improve the administration of payment services, including in relation to pension payments. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts The measures supported by the proposed operation are expected to have a limited poverty and social impact. The poverty profile derived from the National Household Surveys suggest that households whose heads are civil servants or employees in the formal private sector (and therefore covered by NSSF) are generally better off than households headed by informal sector workers. The suggested reform options would have mixed impacts on the welfare indicator and poverty levels of the targeted population: (i) On one hand, the proposed introduction of a monthly contribution to the pension for civil servants would be gradual (1% per year), and thus would not be felt by the worker and their households as a reduction in their disposable income. (ii) On the other hand, for the private sector employees, who will be affected by the extension of the coverage under the NSSF, the poverty effects, though quite limited, could be evident in both the short and long term. According to the most recent census of business

4 establishments conducted by Uganda Bureau of Statistics (UBOS), 60 percent of the formal employees in the non-agriculture sector are in micro enterprises (firms which employ less than 5 workers) and hence are still out of the pension bracket. Another 18 percent are in small firms (employing between 5 and 20 employees), with a high probability of not being in the system as the bulk of them are unregistered. While the reform will likely bring many of these workers into the pension bracket, the overall impact on poverty will be small until the sector grows in its contribution to total employment. As with the public sector pension reform, further analysis will be undertaken to establish the magnitude of impact this reform will have on the welfare indicators. Environment Aspects This operation does not pose any significant direct environmental risk considering the four DPL Policy areas to be covered. It is anticipated that there will be no activity that will have any linkage and/or effects on environment, forests, habitats, or change of concentration of pollutants in air, soil, or water. Financing Source: ($m.) Borrower 0 International Development Assistance 45 Total 45 Contact point World Bank Contact: Andrea Dall'Olio Title: Lead Economist and Sector Leader for Private and Financial Sector Development World Bank Country Office for Tanzania 50 Mirambo Street Dar es Salaam Tanzania

5 Tel: Fax: Borrower Government of Uganda Contact: Hon. Keith Muhakanizi Title: Permanent Secretary Ministry of Finance, Planning, and Economic Development Kampala Uganda Tel: For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: