Pension fund asset allocation

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 (45%), the picture in Africa is more disparate. Asset allocation in sub-Saharan Africa has favoured equities, which have shown a steady increase enabled by 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, it reflects both regulation as well as a lack of alternative local investment opportunities. This highlights one of the key challenges pension funds face; identifying enough appropriate, local investment opportunities to invest ever-increasing contributions.

Local regulation remains one of the main drivers of asset allocation. There are often significant differences between the regulatory allowances for pension funds, size of local capital markets and actual portfolio allocations between regions. 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.

Alternative assets

One of the ways in which the current shortage of investment opportunities can be addressed, is through investment into alternative assets classes. While investment in alternative assets in emerging markets has historically come from developmental finance institutions (DFIs), pension funds are slowly joining in. 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. Local institutional investors lend credibility and often serve as a catalyst for greater external interest. Local investors also allow global peers to leverage local knowledge and networks.

Private equity

A number of countries including South Africa, Botswana, Nigeria and Namibia have led the way in investing in 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.

In Nigeria, the regulator, National Pension Commission (PENCOM) prescribed a limit of 5%, for pension funds to invest in private equity as an asset class; this allowance has existed since December 2010. Using 2016 figures, this represents potential Limited Partner commitments of an estimated USD 842m. However, PENCOM also prescribes additional restrictions such as a minimum of 75% of the private equity fund to be invested in Nigeria, registration of the fund with the Nigerian SEC, and a minimum investment of 3% in the fund by the General Partners (GP). Deregulation of prescription will unlock capital to flow where it is required in Africa. Looking specifically at private equity, if African pension funds are to take the lead from DFIs in further deepening of the private equity industry, capital must be allowed to seek the most compelling investment opportunities.

Infrastructure

The pensions industry across Africa is aware of the immediate need to accelerate investment into Africa’s infrastructure. The Africa Infrastructure Country Diagnostic (“AICD”) states that USD 93bn per year is required to address Africa’s infrastructure needs with longer investment horizons, pension funds can serve as anchor investors for infrastructure and social development projects. Extensive engagement is currently underway across African pension systems where regulatory authorities and pension industry stakeholders are looking to develop frameworks within which pension funds can invest in infrastructure, mindful of the prudential oversight and limits necessary for pensions and savings investment.