South Africa’s 68% ratio of pension assets to GDP surpasses the OECD average of 60% (per OECD Global Pension Markets in Focus, 2021). The ratio for most African countries’ pension assets to GDP remains below the 60% OECD average. In our Africa sample, Namibia consistently achieved the highest ratio, now at about 116%. According to the 2020 annual report of the Government Institutions Pension Fund (GIPF), Namibia’s largest pension fund, the Fund’s long-term balanced growth can be attributed to good investment returns due to a diversified investment strategy and a robust asset allocation process. Local asset requirements compel Namibian pension funds to hold 45% of contractual savings locally; there are very few opportunities to invest in the Namibian Stock Exchange. This regulation enables Namibian pension funds to seek viable long-term opportunities, amid limited opportunities, while avoiding and limiting potentially harmful investments in the process.
African long-term asset composition mimics the global picture, where a few countries claim the most significant proportion of long-term savings.
In Africa, 92% of the assets are concentrated in South Africa, Nigeria, Kenya, Namibia and Botswana.
Within these countries, the most significant funds are obligatory contributory social security funds or civil service pension schemes. Examples include the Government Employees Pension Fund in South Africa, GIPF in Namibia, the Botswana Public Officers Pension Fund and the National Social Security Fund in Kenya.
In global terms, African pension assets remain comparatively small but are growing. With aligned and proactive regulatory reform, along with the ability to leverage digital and mobile technology to increase coverage, savings in Africa are set for compelling growth.
African Pension Fund Asset Allocation (select countries)
Source: Regulatory annual reports, RisCura
In most OECD and many non-OECD countries, bonds and equities remain the two predominant asset classes for pension funds. For the selected pension funds within this edition, asset allocations for South Africa, Botswana and Namibia continue to reflect greater allocations to equities, more so than OECD countries. For the rest of the African countries, the picture continues to be skewed towards fixed income. Higher yield local currency government bonds remain comparatively more attractive than public equities for Nigeria, Zambia and East African asset allocators. Regulation continues to be the most important determinant of asset allocation decisions in African countries.
Encouragingly, amendments to regulation to enable greater allocation to alternative assets have moved beyond discussion and are now being implemented. For example, the Pensions and Insurance Authority of Zambia announced in May 2021 that certain thresholds would be increased for investment classes. The investment threshold for private equity investments was increased from 5% to 15%. PenCom in Nigeria also recently issued regulations permitting pension funds to co-invest in private equity funds with the expectation that allowing co-investment would increase pension fund exposure to private equity. However, this allowance still requires Nigerian pension funds to secure a “No-Objection” letter from PenCom before closing a co-investment arrangement with a qualified private equity fund. Such regulatory changes are progressive as they are alert to the reality that African pension funds need to increase their allocations to the real economy. Investing in alternative investments (in this instance, venture capital and private equity) allows African pension funds to invest in an asset class that can provide uncorrelated returns to traditional asset classes. Further, African pension funds will invest in a broader universe of companies than those currently available on their local stock exchanges.
A growing and youthful population, fast adopters and ruthless disruptors will act as an extremely powerful economic driver and enable profound investment opportunities for African pension funds.
The information, communication and technology sector presents opportunities for the continent to leapfrog and accelerate and drive economic activity on the continent.