Africa’s pension fund assets

Globally, pension funds have become significant investors, both as fiduciaries in global capital markets and in their capacity as investors in local and international development projects. According to research by Willis Tower Watson, pension fund assets are estimated to be USD 40.173bn at the end of 2018. A massive 91% of these assets is held by seven of the largest markets, with the US being the largest at USD 24.71bn.

A common measure used to determine the significance of pension assets to a country’s economy is the pension assets to GDP measure. Our review uses ten countries in Africa, representing approximately 50% of Africa’s 2017/2018 GDP as measured by the IMF, and comprises those countries with significant economic influence in each region.

Interestingly, two of Africa’s biggest economies, namely Nigeria and Egypt, have some of the lowest pension assets to GDP percentages at 6.77% and 1.51%, respectively. Nigeria’s 2004 pension reform, for instance, has assisted the country in overcoming issues with the pay-as-you-go system that was subject to political risks. Although confidence concerning the pension reform is slowly restoring, there is a large proportion of the working population, especially in the informal market, not contributing to pension assets; resulting in a low ratio of pension assets to GDP. However, once issues such as mismanagement of funds; growing informal sector contributions; and fulfilling the knowledge gap are resolved, and given Nigeria is Africa’s most populous nation, there is significant room for growth within the industry.

Egypt’s pension schemes, on the other hand, are considered to be inefficient and unsustainable. The country’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 (Markus Loewe and Lars Westemeier, 2018). However, Egypt’s new Social Security and Pensions Act ratified by its parliament in 2019 could bring about the much-needed change.

Although South Africa’s 57.44% ratio of pension assets to GDP is within the average of 60% (per the Willis Towers Watson research), the vast majority of African countries’ pension assets to GDP remains well below the 60% average. Namibia, on the other hand, has the highest ratio in Africa, at approximately 80%. According to the 2018 annual report of the GIPF, Namibia’s largest pension fund, the fund balance growth can be attributed to good investment returns due to a diversified investment strategy and a strong asset allocation process. The fund is estimated to more than double the assets held in the banking sector (Source: The Namibian, 2019). However, these pension funds face the regulatory burden of investing 45% of their assets in Namibia, where limited options are available.

When compared to emerging countries, as defined by FTSE, pension assets to GDP were quite similar to their African counterparts. 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). Similar to the global picture, the same big-country bias is present in Africa, with 90% of the assets concentrated in Nigeria, South Africa, Namibia, and Botswana. Within these countries, several large funds also tend to dominate. Examples include the GEPF in South Africa, GIPF in Namibia, Botswana Public Officers Pension Fund (BPOPF) in Botswana and some larger vehicles in Nigeria.

The assets in African pension funds 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 contribution 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, are likely to improve coverage and increase asset growth within the continent’s pension industry.