African pension funds to blend innovation with security
African pension funds, in particular Nigeria's, are not merely looking for positive real yields for savers; they are also seeking economic impacts through investment in infrastructure.
The 2016 World Pension Summit: Africa Special, which held on September 27 – 28 in Abuja, drew the participation of government officials, industry regulators, operators, local and global investors, representatives of labour associations, service providers, the media, and civil society. A gathering of such diverse stakeholders and observers is not always unified by common sentiments. But participants at this Summit shared a celebratory mood, because of how far the African pension and social security industry have come. They agreed on the need for innovation. And they emphasized the primacy of meeting the fiduciary responsibilities to pension contributors and beneficiaries.
Successful reform in African pension is not an experience that is limited to Nigeria. Knowledge of similarly successful pension reforms in sub-Saharan African countries, including Ghana, Mauritius and Uganda, and North Africa were shared by speakers who demonstrated acute understanding of the industry and related issues of governance, innovation and investment. And given the enthusiasm to share experience as demonstrated by participants, one envisages that success will beget more success in African pension. This, therefore, gives credence to the WPS as a platform of inspiration.
Innovation with Caution
Africa's pension industry can hardly meet the challenge of the future without innovation. For this reason, the theme of the Summit – Pension Innovations: The African Perspective – aptly describes the next hurdle in pension and social security coverage and the need for positive returns on pension assets in Africa.
This need for innovation is staggering. In her insightful Welcome Address, the Director General of Nigeria's National Pension Commission (PenCom), Chinelo Anohu-Amazu, said today, Africa has the demographic advantage of a largely youthful population. However, when this population begins to age in a few decades, the need to deliver social security and pension benefits will be quite substantial.
But in Nigeria, the population that is covered under the Contributory Pension Scheme (CPS) is less than 5 percent. Majority of the tens of millions of potential new enrolees in the CPS work in the informal sector; and others are in the rural areas. To forestall the exacerbation of old-age poverty, today's youthful working population has to come under the coverage of the pension scheme. The question then becomes how to make retirement savings attractive to informally employed Nigerians and Africans, and provide low-cost solutions to rural dwellers who already are struggling to meet basic human needs.
In his introductory remarks, the CEO of World Pension Summit, Chris Battaglia, highlighted the challenging landscape of global retirement benefit. Although global retirement assets have reached $15 trillion, the demand on the assets is growing. More people are achieving longevity. Data suggests more people will live for additional five years than in previous time. But it has been difficult to raise retirement age.
Japan is already “a country of centenarians,” having more people above 100 years of age than any other country. But Japan has been stuck in a recession for years. Globally, government bonds – into which pension funds are predominantly invested – are generating negative real yields, as noted by P.K. Kurianchen, Acting CEO, Financial Services Commission, Mauritius. In Nigeria, inflation rate has galloped to 17.6 percent, leaving little margin for positive yield. The erosion of financial value of pension savings even takes a more frightful note considering depreciation in the currencies of emerging and frontier economies.
However, this was not a conference that was overwhelmed by present and forecasted challenges. Indeed, it was a Summit that agreed on the need to exercise caution in the embrace of innovation and other frameworks for addressing the challenges, against the backdrop of a cocktail of innovative solution options.
Without equivocation, former President of Nigeria, Olusegun Obasanjo, who is regarded as the “Father of Pension Reform
in Nigeria,” said “innovation must be with caution,” adding that “we must ensure security.” But by no means did he overlook the scope for innovation in the investment of pension funds. He cited the experience of Singapore where pension savings are used to ensure provision of housing for all citizens.
The Singaporean model highlighted a redefinition of pension benefits endorsed at the Summit. From just providing benefits during retirement and when the contributor is deceased, pension assumes the broader need of providing social security, well before retirement. The Nigerian Pension Reform Act 2014, allows contributors to access maximum 25 percent of the balance in their Retirement Savings Account for residential mortgage during active work life.
Addressing the need for inclusion in African pension systems also received significant brainstorming. Bringing the informal sector workers and bottom of the pyramid operators to the pension net is a challenge that appears suited for this age of mobile phone explosion and disruptive technologies, including social media. On both savings and investment sides, smart pension apps can be very useful. As suggested by Chris Battaglia, a fraction of airtime purchases (by BOP operators) can be converted to micro pension savings. Mobile apps can also help pension administrators, as well as savers – where they directly influence how their savings are invested – lock in investment opportunities as they come up.
Pension for Infrastructure Investment
However, the need for improvement in real yield was a huge discussion, which was done justice to by well-qualified and experienced panellists. African pension funds, in particular Nigeria's, are not merely looking for positive real yields for savers; they are also seeking economic impacts through investment in infrastructure. Indeed, William Streeter, a US specialist in international infrastructure finance, who anchored the session on “The Dynamics of Pension Investment,” noted that pension invests in long-term liabilities (government bonds) while infrastructure is investment in long-term economic assets.
While challenges to infrastructure investment in Africa are multifarious and daunting, they can be overcome. To scale the hurdle of project development, Sev Vettivetpillai, Global Head of Thematic Fund, The Abraaj Group, UAE, said Abraaj has had to put together an in-house project development team. This helps in reducing the lengthy time project development often takes in Africa – usually 4 – 5 years. Mr. Vettivetpillai said “project development is not institutionalised in Africa.” This is a hindrance to infrastructure investment; and the lengthy time project development takes is quite risky, further impeding financial close. But Abraaj has been able to overcome this challenge and has done a number of infrastructure projects on the continent.
Finding the ways and means to deliver infrastructure in Africa is crucial, according to Solomon Adegbie-Quaynor of the Client Leadership and Strategic Investments, Sub Saharan Africa, IFC. He noted that it has been established empirically that infrastructure deficit can reduce GDP growth by 2 percent. He also highlighted the scopes for closing Africa's infrastructure gap. For example, he said that while investment in government-sponsored infrastructure might have several drawbacks, investment in B2B and B2C infrastructures are happening, and IFC is quite active in these segments.
Wole Adeosun, Founder and CEO, Kuramo Capital Management, USA, and member of US Presidential Advisory Council on Doing Business in Africa, validated investment in infrastructure. As real yield for pension fund investment in bonds remains either low or negative around the world, he said alternative asset classes provide the opportunity for better risk-adjusted returns. While it remains very difficult to find Africa-focused private equity funds that combine expertise and track-record, a few of them exist and should be found. The LPs can also form project teams.
The panellists agreed that investment pools can help overcome the challenge of smallness of project size, which becomes even bigger now in dollar terms, owing to the depreciation in the exchange rate in African economies in the wake of the macro-economic challenges caused by fallen commodity prices.
Given the regional agenda of the Summit, the discussion was not only about addressing solutions that can be adopted by specific, individual countries. Regional solutions were discussed, including collaboration among African pension fund regulators, which obviously is underway, given their impressive level of participation at the Summit. The idea of pooling subregional pension funds to invest in infrastructures that will serve countries in the pool, mooted by a member of the audience, was endorsed by the panel of experts, symbolising the fertile exchange of ideas between the high-level panellists and an audience of senior executives.
Africa Pension Awards
The expert-level discussions of the two-day Summit were broken by the programme of Africa Pension Awards that capped the Summit's agenda for day one. Quite definitely, African pension regulators and operators have done so much to deserve encouragement of awards in pressing forward for more achievements.
With Nigeria being the jurisdiction in Africa where reform has been most momentous in the last decade, the country made a strong showing on the list of award recipients. PenCom won two best awards in the categories of: Socio-economic Impact of the Pension or Social Security System; and Innovation in Corporate Governance (for regulators). Premium Pension Limited, a leading Nigerian Pension Fund Administrator, also won two awards as best in the categories of: Deployment of Innovative Practices to Facilitate Wide Coverage and inclusion; and Innovation in Corporate Governance (for operators). However, award winners were spread across African countries, including Ghana, Cote d'Ivoire, Uganda, Kenya, Togo and Mauritius.
Felicitation
The World Pension Summit: Africa Special 2016, was graced by several dignitaries, including senior government officials and diplomats from over ten countries; African entrepreneur, Tony Elumelu; Governor of Kaduna State, Nasir El-Rufai; and former Governor of Cross River State, Donald Duke.
In the years and decades to come, one hopes the resurgent enthusiasm and goodwill towards pension and social security in Africa will continue to grow and have wider coverage, positive risk-adjusted returns for contributors and beneficiaries, and improvement in infrastructure development through investment of the pension funds. As Ugandan Minister of Public Service, Wilson Muruli Mukasa, noted: “Africa pension is crucial for the future, and the reform process is winded.” This underscores the need for stakeholders to continue to support the evolution of the African pension and social security industry.