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 report, South African, Botswanan, and Namibian asset allocations continue to reflect greater allocations to equities, more so than OECD countries. For the rest of the African countries, the picture continues to illustrate a skew to 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 single most important determinant of asset allocation decisions in African countries. Amendments to regulations to enable greater allocation to alternative assets remains a discussion point with many pensions regulatory and supervisory authorities.
However, the development of the market may not be as rapid as changes in regulation. By way of example, in Kenya, the upper limit for exposure to private equity of 10%, was established in 2016. As of June 2020, the total allocation to private equity according to the published statistics from the Retirement Benefits Authority (RBA), remains at less than 1%. This speaks to the fact that asset allocation reflects several 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.
Regulation is not staying stagnant. African regulators are alert to the transformative potential that technology presents for the continent. The current COVID-19 pandemic brought to light the need for African regulators to respond quickly to the rapidly evolving financial technology, or fintech, landscape. To that end, more African regulators appreciate the need to enable novel and emerging financial products and services to be created that may not meet all (current) regulatory requirements. Regulators in Africa are progressively adopting internationally recognised fintech regulatory sandbox regimes as a solution.
There are now regulatory sandboxes that have either launched or are in the design phase in South Africa, Kenya, Sierra Leone, Mauritius, Mozambique, Uganda, and Nigeria.
A sandbox allows financial institutions to test their products, services, or solutions in the market under a more relaxed regulatory environment but within a well-defined space and duration agreed with their regulators. In some jurisdictions, although sandboxes have not been established, regulators have nonetheless sought to put in place a supportive regulatory environment.
Regulators are reviewing legislation, governments are experimenting with unique solutions such as micro-pensions, asset allocations are changing to allow for greater long-term growth and across the continent, the high rate of mobile penetration is being viewed as a significant opportunity to innovate.
A major issue African governments face is that 85.5% of their working population are informally employed. To avert fiscal and social stress, policymaking on pensions and social security in Africa needs to quickly move to enable affordable, convenient, and secure micro-pension products to be established.
The composition of African long-term assets mimics the global picture, where a few countries claim the largest proportion of long-term savings. In Africa, 95% of the assets are concentrated in South Africa, Nigeria, Kenya, Namibia, and Botswana.
For the selected pension funds within this report, South African, Botswanan, and Namibian asset allocations continue to reflect greater allocations to equities, more so than OECD countries. For the rest of the African countries, the picture continues to illustrate a skew to fixed income.