Reforms to boost African pension assets

13 Mar 2020, 12:00 am
Reforms to boost African pension assets

Feature Highlight

Two of Africa’s biggest economies – Nigeria and Egypt – have the lowest pension assets as a percentage of GDP on the continent.

Claudio Achadinha, Alternative Investment Analyst at RisCura

Two of Africa’s biggest economies – Nigeria and Egypt – have the lowest pension assets as a percentage of gross domestic product (GDP) on the continent. However, pension reforms and technological improvements are expected to continue to increase the value of pension assets as a percentage of GDP in Nigeria, which is currently at 7%, and increase the ratio from current 2% in Egpyt.          

This is according to the latest Bright Africa research by the investment firm, RisCura. The Bright Africa 2019 research looks at ten African countries, representing approximately half of Africa’s 2017/2018 GDP as measured by the International Monetary Fund (IMF). The ratio of pension assets to GDP is commonly used to determine the significance of a country’s pension assets with regard to the economy.  

“In Nigeria, confidence in the pension system was severely lacking, and a large proportion of the working population, especially in the informal market, is not contributing to pension assets,” explained Claudio Achadinha, Alternative Investment Analyst at RisCura. “Confidence has been improving over time, thanks to pension reform measures initiated in 2004. Given that Nigeria is Africa’s most populous nation, there is significant room for growth within the pensions industry.”

Egypt’s pension schemes, on the other hand, are considered to be inefficient and unsustainable. According to our Alternative Investment Analyst, “Egypt’s pension schemes invest their reserves at low, sometimes negative real interest rates, and members can easily manipulate the level of their pensions. As a result, Egypt’s pension schemes are spending more on pension payments than they generate from members’ contributions.”

To rectify this, Egypt's new Social Security and Pensions Act was ratified by the country’s parliament in July 2019. This is expected to bring about much-needed change.

How does Southern Africa stack up?

South Africa’s ratio of pension assets to GDP comes in at 57.44%. This is close to the average of 60%, per the Willis Towers Watson study, which covered 22 pension markets around the world.

“Namibia outshines South Africa, with pension assets as a percentage of GDP at approximately 80%. This is by far the highest ratio in Africa,” noted Achadinha. However, the Namibian economy is much smaller than South Africa’s. Botswana also has a healthy ratio of 41.44%.

A large portion of pension assets are concentrated in Southern Africa, where several large funds tend to dominate. These include the Government Employees Pension Fund (GEPF) in South Africa, the Government Institutions Pension Fund (GIPF) in Namibia and the Botswana Public Officers Pension Fund (BPOPF).

“When comparing the continent as a whole to other emerging markets, the ratios of pension assets to GDP were quite similar,” said Achadinha. For instance, the percentage of pension assets to GDP was 12.7%, 4.8%, and 15.4% for Brazil, India, and Mexico, respectively (Source: Willis Towers Watson research, 2019). “A potential factor for this similarity is the presence of larger informal sectors in emerging markets in comparison to their developed counterparts,” added Achadinha.

Pension fund asset allocation

In both Organisation for Economic Co-operation and Development (OECD) and non-OECD countries, bonds and equities remain the two predominant asset classes for pension funds. While globally, there is a larger allocation to equities (around 40%), the picture in Africa is different.

“Asset allocation in sub-Saharan Africa (SSA) has continued to favour equities, which have shown a steady increase enabled by the development of capital markets and regulatory change,” according to Achadinha. “In Nigeria and East Africa, however, asset allocation is dominated by fixed-income allocations, mainly comprising of local bonds.”

When viewed alongside the high asset-growth in the SSA region, this can be attributed to regulation as well as a lack of alternative local investment opportunities.

“Local regulation remains one of the main drivers of asset allocation,” noted Achadinha. “While much of African regulation is supportive of local investment, there are often significant differences between the regulatory allowances for pension funds.”

The basis of asset allocation is reflective of several factors, including familiarity with alternative asset classes, such as private equity, development of local capital markets, and availability of investment opportunities.

Regulatory reforms set to improve pension coverage

African pension fund assets are still relatively small, in global terms. But, the pace and direction of regulatory reform now taking place in Africa speaks to a common purpose in funding retirement and contributing towards the development of the continent’s economies and capital markets.

Our analyst said, “The introduction of a basic safety net or retirement income, and further introduction of private pension funds such as Kenya’s Mbao Pension Plan, are likely to improve coverage and increase asset growth in the continent’s pension industry.”

RisCura is a global, investment advisory and financial analytics firm that provides investment decision support in developed and emerging markets.

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