In most OECD and many non OECD countries, bonds and equities remain the two predominant asset classes for pension funds. While globally there is a larger allocation to equities (42.3%), the picture in Africa is more disparate. Broad asset allocation in sub-Saharan Africa has favoured equities that have shown a steady increase alongside 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, this is illustrative of regulation as well as local investment opportunities. This typifies one of the larger challenges pension funds face; identifying appropriate local investment and development opportunities at the same pace as asset growth.
Note: Zambia figures exclude NAPSA
Local regulation remains one of the main drivers of asset allocation. While much of African regulation is supportive of local investment, there are often significant differences between the regulatory allowances for pension funds, size of local capital markets and actual portfolio allocations. This is reflective of a number of factors, including familiarity with alternative asset classes, such as private equity, development of local capital markets and availability of investment opportunities. In many countries, assets are growing much faster than products are being brought to market, limiting investment opportunities if regulation does not allow for pension funds to invest outside of their own countries.
As pension assets continue to grow and international development assistance decreases, African pension funds have a pivotal role to play in facilitating inclusive growth and social stability. Larger pools of capital allow for investment in economic and capital market development locally and on the continent. Africa would benefit from local investment in longer term projects, including infrastructure. Local institutional investors lend credibility and a measure of validation, and often serve as a catalyst for greater external interest. Local investors also allow global peers to leverage local knowledge and networks. With longer investment horizons, pension funds can serve as anchor investors for infrastructure and social development projects.
While investment in private equity in emerging markets has historically come from DFIs, pension funds are slowly joining in. A number of countries including South Africa, Botswana, Nigeria and Namibia have led the way of alternative asset classes such as private equity. South African pension funds, for example, have been active in African private equity investment, both locally and across the continent, enabled by regulatory change. Since 2011, Regulation 28, which is the governing law for pension funds in South Africa allows up to 10% of pension assets to be invested in private equity, an increase from the previous 2.5% allowance for all ’other’ asset classes. Nigeria first introduced broad pension reforms in 2004 when the National Pension Commission (PenCom) was established and laws were passed introducing mandatory contribution schemes for all unfunded public and private sector employees initiating the change from DB to DC schemes. Regulation in 2010 set the limit for private equity at a prudent 5% and also imposed certain minimum requirements for such investment including a minimum ten years’ experience for investment professionals, a minimum 75% exposure to domestic Nigerian assets and required general partner (GP) investment. Draft regulation released for comment in early 2015 proposes to further relax these limits. While this enables investment, the requirements are quite prescriptive and have hampered practical implementation. Reforms continue and Nigeria is due to pass further legislation that will make provision for additional permissible investment instruments. This is expected to support development of local capital markets and increase allocations to equity markets.
Regulation can also enable regional and international diversification. Namibia for example allows up to 35% of assets outside the Common Monetary Area (Lesotho, South Africa, Namibia and Swaziland), however with a limit of 30% outside Africa, while Botswana allows up to 70% investment abroad. This allows pension funds the freedom to find suitable investment opportunities without being constrained by the current limitations of local market development. This is in contrast with East African countries such as Uganda and Tanzania where offshore investment is not allowed, although in the case of Tanzania it is unclear whether the restriction applies on a country or regional level (East African Community).