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. In this article, I will touch on a few areas that stakeholders need to think about. Mortgage loans are granted to enable borrowers to acquire land or a residential house. These loans are granted on the strength of cashflows 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 5% 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 UGX 1.0million per month, his/her contribution to NSSF is UGX600,000 per annum and the employer adds a 10% which is UGX1,200,000. Therefore, the total contributions per annum are UGX1,800,000. Assuming NSSF declares interest of 12% each year for 10 consecutive years, that employee would have accumulated UGX36million by end of Year 10. The new regulation would allow that employee to assign up to 50% to act as collateral for a mortgage loan. Assuming that the lender accepts the application, he/she will get a loan of UGX18million, 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%per annum. If the loan rate is higher, then the employee will pay more to the lender, but does not fully recoup that 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 is appreciating 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 Unlike the Mid-Term Benefit (MTB) offered by NSSF, the assigned retirement benefits are not withdrawn from the Scheme.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 default 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 become 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% for those who are eligible. This new regulation has a higher cap of 50%, 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.