With pension funds in some parts of Africa growing at a remarkable pace, the continent has become its own biggest investor. This is according to RisCura’s 2015 Bright Africa report, an on-going research effort aimed at assisting investors into the continent.
Africa has experienced tremendous growth in pension assets over last five years. Assets in East Africa, for example, have grown in excess of 20% on a consistent basis only overshadowed by Nigeria, which has seen growth between 25% and 30%. In much of sub-Saharan Africa where pension systems are older and more established, growth rates have been lower, but still strong, ranging between 8% and 18% over the previous five years. These trends are set to continue as this young continent moves towards increased coverage, and more inclusive and comprehensive systems.
Source: Regulator annual reports and websites, other industry sources, EAC review of pension sector (Callund Consulting), Towers Watson Global Pension Study 2015, RisCura analysis
Note: Zambia figures exclude NAPSA
In line with global trends, the vast majority of retirement income in Africa is funded by governments, derived from taxes or other forms of government revenue (essentially a pay-as-you-go system or PAYG). With a large proportion of formal sector workers concentrated in the civil service, pension funds for public sector workers are well established and benefits are often more substantial compared to the private sector.
Coverage on the continent however, is much lower compared to the rest of the world. Data from the Labour Office’s 2014/15 World Social Protection Report estimates that currently only 16.9% of older people in sub-Saharan Africa receive an old age pension. Although this number is higher in North Africa at 36.7%, it is still considerably lower than much of the developed world (90% in North America and Europe). A recent report on the pension sector in the East African Community estimates that between 80-90% of the population is not reached via public or private pension fund schemes.
In part, this is due to the unique circumstances in Africa including demographics (young population), a large informal employment sector, and migration with limited pension portability, and dependency on government finances. The pace of regulatory reform has also led to divergent coverage trends between countries and regions.
Pension funds as investors
Pension funds globally have become significant investors, both as fiduciaries in global capital markets and in their capacity as investors in local and international development projects. At the end of 2014, global pension fund assets were estimated at USD 36,119bn, representing a 6.1% rise from the 2013 year-end value. On average, these assets account for 84.4% of these countries’ GDP.
The US continues to be the largest market at USD 11,690bn with Japan and the UK at USD 2,954bn and USD 1,755bn respectively. Together they account for more than 78.3% of total pension assets.
Africa is characterised by a diversity of cultures, with different social and economic factors driving capital market development, performance of asset classes, as well as currency movements. An aggregate estimate of pension assets for the continent is therefore on a best endeavours basis and can be time sensitive due to factors such as currency volatility.
The Bright Africa 2015 report analyses 16 countries in Africa, representing circa 65% of Africa’s 2014 GDP as measured by the IMF, and also those with significant economic influence in each region. An aggregate number hides variation between countries, while currency volatility increases the fluctuation of USD equivalent amounts. Pension fund assets in Africa are currently estimated at USD 340bn representing only 21% of these countries’ GDP. Individual country’s rates of AUM to GDP range from as low as 0.4% in Burundi to 76.1% in Namibia.
Big country bias
Similar to the global picture, the same big-country bias is present in Africa with 90% of the assets concentrated in Nigeria, South Africa, Namibia and Botswana. Within these countries, a number of large funds also tend to dominate.
Pension fund assets globally are on the increase as countries move from unfunded to funded (or partially funded) status, and as many outsource pension fund management to private firms and move from defined benefit to defined contribution schemes. According to estimates by the OECD, private pension fund assets globally grew at an average annual growth rate of 8.2% over the period 2009 to 2013, overshadowing insurers and investment companies.
In Africa, pension fund assets continue to grow for similar reasons, alongside an increase in coverage, as social security is extended to a larger portion of the population, formal and informal. The pension fund industry in Nigeria for example has grown from Naira 815bn in 2007 to Naira 5.492 trillion in 2014, which still only represents an average 7% coverage of the working age population (PenCom). The introduction of a basic a safety net or retirement income as well as further introduction of private pension funds should improve coverage and increase asset growth within the pension industry on the continent.
– Janca Steenkamp
Senior Investment Research Analyst, RisCura
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A potential downside of growing savings trends for investors is that because pension funds don’t diversify well, they tend to inflate local listed equities prices, making African-listed equities a somewhat inaccurate reflection of company value.
The international community can also help build African infrastructure by complementing domestic pension investment through co-financing and other innovative policies such as including domestic workers in the system to boost participation from the informal sector.
All in all, we have seen that the concerns of Africa based pension funds or other structures of savings with regards to pan-African investments are not just economic related, the concern is also linked to trust and solidarity between generations.