Sources of capital on the continent

Pension funds

In line with global trends, most retirement income in Africa is funded by its governments, but pension coverage on the continent remains low compared to the rest of the world.

Social security systems and coverage

African countries are at different stages of creating comprehensive and inclusive social security systems. Although some are further along this journey than others, most have introduced some form of arrangement for pension provision or have social security as a strategic goal.

In line with global trends, most retirement income in Africa is funded by governments, derived from taxes or other forms of government revenue. As a large proportion of formal sector workers are 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.

Defined Benefit (DB) schemes are dominant across the continent, although there are regional differences. DB schemes are common in many Francophone West African countries, in the Maghreb region, as well as Egypt and Sudan. Defined Contribution (DC) schemes (often provident schemes) are more prevalent in the English-speaking parts of Africa, especially in sub-Saharan Africa (Source: Stewart and Yermo, OECD paper).

Pension coverage on the continent, however, is much lower compared to the rest of the world. African countries are amongst those with a smaller proportion of individuals above the statutory pensionable age who receive a pension. The below figure illustrates how African countries are amongst those with the least pensioners receiving pensions.

Southern Africa is the exception of pension coverage when compared to the rest of Africa; which can be attributed to factors such as a well-developed established retirement industry in this part of Africa. South Africa’s Government Employee Pension Fund (GEPF), for instance, is Africa’s largest pension fund with over 1.27 million active members and assets worth more than ZAR 1.8trn (Source: GEPF 2018 Annual Report). Namibia’s Government Institutions Pension Fund’s (GIPF’s) assets are worth more than NAD 110.4bn. Both of these funds are Defined Benefit (DB) plans, therefore the benefits defined are guaranteed and don’t depend on how much has been contributed by members and employers. This, coupled with the sheer size of these funds, has contributed to the high coverage ratios experienced in this region. The figure below details pensioner coverage across 47 African countries.

Only 10, of the 47 countries, have 50% or more of their pensioners receiving a pension. For the remaining 37 countries, 12 are currently involved in or are experiencing post-war conflict and tension. As a group, these 37 countries have more than 55% of their population living in rural areas. In countries such as Burundi, about 87% of the population lives in the rural area. Unsurprisingly, pension receipts are likely to be minimal in less urbanised environments where the financial system does not readily facilitate the movement of capital between parties. The above percentages are a stark contrast to the rest of the world whereby 68% of older persons receive old-age pensions (Source: World Social Protection Report, 2017 – 2019).

In data presented by the World Bank South Africa, Mauritius and Botswana were the only countries whose coverage rate was supplemented by occupational schemes, set up by employers. Other African countries sourced most of their coverage from national schemes, with civil schemes playing an intermittent role on the continent. Civil schemes are pension schemes that are limited to civil servants. National schemes are government-sponsored pension schemes aimed at reducing poverty in the elderly.

There is seemingly a trade-off between the number of pensioners receiving a pension and how much is received by each pensioner relative to their last salary. In Seychelles, many pensioners receive a pension, but it is very low compared to their last salary. Alternatively, Namibia has one of the highest coverage rates and replacement ratios. Studies have shown that coverage rates are highly correlated to GDP per capita.