With 72% of sub-Saharan Africans employed in the informal sector, the traditional pension system is being called into question.
The traditional pension system works on the premise that members are formally employed, work for 40 years and contribute regularly during this period, resulting in suitable retirement savings. As more people enter the labour force and become formally employed, they are in essence able to contribute towards their future savings.
If we juxtapose the traditional model to the current African landscape, where most people are employed in the informal sector, consistent employment for one year let alone 40 years is a stretch. While permanent or continuous employment may not be a reality for many in Africa, these members of African society (where possible), remain economically active in the informal economy during periods of unemployment.
The large numbers employed by the informal economy has historically limited the size of traditional pension funds and partially resulted in the continent’s low level of pension coverage. According to the International Labour Organisation, in sub Saharan Africa, only 8% of the labour force contributes to pension insurance and earns rights to a contributory pension, compared to 47% in North Africa. As in most low-income countries, the low level of contributor coverage ratio can be explained by the small share of formally employed wage and salary earners and the pervasiveness of informality, evasion, and inadequate law enforcement.
Despite higher levels of informality in labour markets, the provision of pension coverage and pay-out should remain an imperative if Africa is to make progress on its developmental agenda.
Providing pension access via African-based financial services and distribution channels such as M-Pesa, EcoCash, Leap Frog Investments and Equity Bank, which are innovative and disruptive, are natural and obvious choices.
Importantly, informing the thinking and messaging surrounding the provision of pension to potential members should be driven by simplicity.
Nigeria leads the way
Nigeria, Africa’s most populous nation, is leading the charge in making advances towards an alternative pension model for the informal sector. Its National Pension Commission (PenCom) has adapted their existing pension scheme for formally employed workers, the Contributory Pension Scheme by making it the backbone for the rollout of the Micro Pension Plan of Nigeria.
The Micro Pension Plan is designed to cover small-to-medium enterprises, self-employed Nigerians and the broader informal sector. It is estimated that the informal sector constitutes 70% of Nigeria’s total workforce. In the absence of the Micro Pension Plan, these economically active citizens would not be covered by any form of structured pension scheme. Out of a total 59 million adults in Nigeria, there are 38 million potential contributors that will come from the informal sector by activating the micro pension scheme. As at the end of 2016, total pension scheme membership for the formal sector alone in Nigeria was almost eight million members.
At RisCura, we strongly advocate for pension fund fiduciaries to spend more time on objectives or goal setting. But, we are mindful that this must also take into account the nuances of Africa’s developing savings base and the differences between micro and traditional pension plans.
There may be merit for pensions and savings practitioners to look to Target-Dated Investing (TDI) for micro pension products. Under TDI, the member has a clear view of the investment strategy being undertaken on their contributions based on a set term to retirement they have selected. TDI offers informal savers the benefit of a simplified savings programme and the goal is to ensure that the investment starts paying out at a pre-set date.
The combination of micro pension provision and TDI presents itself as an acceptable compromise for the possibility of an erratic contribution from some members. This dynamic may not offer the most elegant solution, but may serve as an important initiator of further improvements.
Echoing the sentiments of former Nigerian President Olusegun Obasanjo, “Emphasis must be placed on the urgent need for pension arrangement for the informal sector, given that it constitutes at least 61% of urban employment across the continent and will be on the rise due to population growth. We advocate for micro pensions, especially as the proportion of Sub-Saharan Africans in vulnerable employment has attained an alarming rate of 85% for women and 70% men”.
Gerald Gondo, Business Development Executive, RisCura