Africa’s pension challenge

Payout poser as life expectancy on continent projected to increase by 11 years

AFRICA’S youthful population and growing middle class are generally considered positive investment themes for the continent, but will African pension systems be able to serve this youthful cohort when they inevitably grow old?

Africa’s youth will not only age, but will also live longer. According to UN research, Africa is projected to gain nearly 11 years of life expectancy by 2050, reaching 71 years in 2045 to 2050.

“Developing more efficient pension systems across the continent is crucial and we need to increase ongoing savings contributions for the development of institutional investment and investors in Africa,” said Gerald Gondo, one of the authors of RisCura’s Bright Africa report for 2018.

“The symbiotic relationship between pension systems (suppliers of savings) and institutional investors (investors of savings) allows for the creation of assets that should safely and sustainably fund the retirement goals of African savers,” said Gondo.

About 70 percent of Africa’s workers are employed in the informal sector. This has limited the size of traditional pension funds – resulting in low levels of pension coverage. Formal pension funds are unable to cater for low incomes, which are irregular as many workers are seasonal and migrant.

“Stakeholders in African pension systems, including policy-makers, pension practitioners and development finance institutions, need to embrace this reality and enable savings for this group,” said Gondo.

The pension systems of Nigeria and Kenya are already embracing alternative forms of savings. In Nigeria, the Micro Pension Plan is designed to cover small-to-medium sized enterprises, self-employed Nigerians and the broader informal sector. As at the end of 2016, there were an estimated 38 million potential contributors to Nigeria’s Micro Pension Plan. The Nigerian pension industry’s strategic objective is to cover 30 percent of that country’s working population by 2024, which will only be achievable by reaching out to the informal sector.

Kenya’s Mbao Pension Plan also targets workers in the informal sector, who run micro, small and medium sized enterprises. Under Mbao, members must make a daily minimum contribution of 20 Kenyan shillings (R2.73) using their cellphones. Members can make their payments through M-Pesa and Airtel Money transfer services in real-time, 24 hours a day, and from anywhere within the cellphone network coverage.

“These plans show the opportunities that cellphone penetration offers for pension funds,” said Gondo. “They also reflect international trends, where digitally-integrated payment, administration and investment functions allow greater flexibility in participation as well as lower costs.”

In most OECD and many nonOECD countries, bonds and equities remain the two predominant asset classes for pension funds. While globally there is a larger allocation to equities (45 percent), the picture in Africa is more disparate.

Asset allocation in sub-Saharan Africa has favoured equities, which have shown a steady increase enabled by the development of capital markets and regulatory change.

In Nigeria and East Africa, asset allocation is dominated by fixed income allocations, which predominantly constitute local bonds.

When viewed alongside the high asset-growth in these regions, it reflects both regulation and a lack of alternative local investment opportunities. “This highlights one of the key challenges pension funds face: identifying enough appropriate, local investment opportunities to invest ever-increasing contributions,” said Gondo.

Local regulation remains one of the main drivers of asset allocation. “There are often significant differences between the regulatory allowances for pension funds, size of local capital markets and actual portfolio allocations between regions.

“In many countries, assets are growing much faster than products are being brought to market, which limits investment opportunities if regulation does not allow for pension funds to invest outside of their own countries.”

South Africa, Botswana, Nigeria and Namibia have led the way in investing in alternative asset classes such as private equity.