Pension assets boosting African economies

Claudio Achadinha,
Alternative Investment Analyst at RisCura

Two of Africa’s biggest economies have the lowest pension assets as a percentage of GDP on the continent, but pension reforms and technological improvements are expected to increase these numbers. The economies – Nigeria and Egypt – have pension assets as a percentage of GDP as low as 7% and 2%, respectively.         

This is according to investment firm RisCura’s latest Bright Africa research. The Bright Africa 2019 research looked at ten countries in Africa in this regard, representing approximately half of Africa’s 2017/2018 GDP as measured by the IMF.

The ratio of pension assets to GDP is commonly used to determine the significance of a country’s pension assets to its economy. 

“In Nigeria, confidence in the pension system is severely lacking, and a large proportion of the working population, especially in the informal market, is not contributing to pension assets,” explains Claudio Achadinha, Alternative Investment Analyst at RisCura.

“This is slowly changing 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,” says Achadinha.

Egypt’s pension schemes, on the other hand, are considered to be inefficient and unsustainable.

“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 its parliament in July 2019, and 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% – approaching 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 to GDP at approximately 80%. This is by far the highest ratio in Africa,” says Achadinha.  However, the Namibian economy is also 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 GEPF in South Africa, GIPF in Namibia and the Botswana Public Officers Pension Fund (BPOPF) in Botswana.

“When comparing the continent as a whole to other emerging markets, pension assets to GDP were quite similar,” says 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,” explains Achadinha.

Pension fund asset allocation

In both 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 has continued to favour equities, which have shown a steady increase enabled by the development of capital markets and regulatory change,” says 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 these regions, 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,” says 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 economy and capital markets.

“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,” says Achadinha.