Great promise: Shifting demographics and reforms spell growth potential

Social safety nets in many of Africa’s economies are thin. A large informal sector, combined with inefficient administration of universal pension schemes, has limited income support from pensions. Pensions themselves have suffered from stringent portfolio allocation rules and shallow capital markets, which constrain their ability to invest in productive assets.

However, given the population of Africa is more than 1bn people, the continent’s pension fund industry holds significant potential. Recent years have seen reforms rolled out in economies from Ghana to South Africa to Kenya, which have helped to inject new life into the pension sector in what many believe is the beginning of a new phase of growth. This not only promises to improve social safety nets, which is crucial given the large youth populations in Africa, but should also help stimulate capital markets, finance infrastructure projects and attract new investors.

Low Base

The continent has historically been a small player in the global pension fund arena. To this day its contribution to total pension fund assets remains a modest one compared to more advanced markets. A 2015 report on the industry, published by Pensions and Investments and Towers Watson, which tracks the assets of the world’s 300 largest funds, identifies North America, Europe and the Asia-Pacific region as the three-largest pension fund domiciles, relegating Africa to the “others” category. However, this is changing. Africa’s asset management sector is witnessing a steady growth of pension fund activity, which promises to raise the continent’s profile.

The pension fund sectors of the 12 African nations covered by the PwC “Asset Management 2020” report (Morocco, Algeria, Tunisia, Egypt, Kenya, Mauritius, South Africa, Botswana, Namibia, Angola, Nigeria and Ghana) have seen sustained expansion over the last decade. The leader of the group, South Africa, had total pension fund assets of $309.8bn in 2014, while Ghana’s assets totalled $2.2bn, according to PwC. This trend, which is likely to continue as these economies continue to mature, and increasing prosperity and regulatory enhancement drive the industry forwards. Progress has been patchy, and there is significant variance between states as to their approach to the segment. But the growth drivers underpinning the expansion make for a positive outlook.

Rise Of The Middle Class

The most fundamental agent of this growth is the gradual emergence of a middle class in some of Africa’s most dynamic economies. This has been a decades-long development, but one which is starting to bear fruit in the form of an increasingly powerful consumer base and a higher degree of discretionary financial activity – including saving – among the population.

Definitions as to what constitutes the middle class differ. A recent study by the Pew Research Centre claims that only 6% of Africans qualify as middle class (defined as those earning $10 to $20 per day). The broadest definition, used by the African Development Bank (AfDB), defines the segment as being those who earn between $2 and $20 a day. By that metric, the middle class population on the continent tripled from 111m, or 26%, in 1980 to 313m, or 34.3%, in 2010, although the AfDB clarified that two-thirds of that number fell into the $2 to $4 category and were susceptible to falling below the poverty line. Regardless of what the actual figure is, or what the most accurate definition might be, it is clear that the middle class is growing across Africa.

Another demographic trend which is also likely to contribute to the growth of the pensions sector is Africa’s increasing numbers of young people. The continent has the youngest population in the world. According to data from the World Bank, 39% of Ghana’s population was under the age of 15 in 2014. As these young adults enter the job market, the ratio of workers to beneficiaries will decline and the volume of deposits pension funds receive will increase.

Framework Advancements

Helping the pension fund industry to capitalise on these favourable demographic changes is a spate of legislative and regulatory reforms, which have generally been impelled by fiscal pressures resulting from inefficient government pension schemes. Historically, these schemes were focused on the civil service, and the inadequacy of the limited number of schemes which cover private sector workers.

According to the OECD report “Pensions in Africa”, government-led measures include the following: the extension of pension coverage to the informal segment in Botswana; the introduction of individual defined contribution accounts in Nigeria; the rationalising of civil service pensions in Kenya; and the improvement of pension fund governance and taxation reform on retirement funds in South Africa.

In some cases, popular pressure has been the agent of reform. A series of workers protests in Ghana prompted the government to establish a Presidential Commission on Pension in 2004. This move resulted in what was to become one of the most significant institutional advancements in the African pension sphere of the last decade, according to the OECD.

New System

Acknowledging the need to provide retirement income security for all Ghanaian workers, and the inability of the existing system to meet this requirement, the commission proposed establishing a three-pillar pension structure, made up of two mandatory schemes and one voluntary one, and in 2008 this abstract proposal was made a reality by the passing of the Ghanaian Pensions Act.

The first pillar of the new pensions system constitutes a basic state social security instrument, according to the OECD, which pays periodic pension benefits as well as a number of other benefits, such as payments to survivors and the disabled. The scheme is mandatory and, according to the media, operates on a pay-as-you-go (PAYG) model which is levied on all workers in the formal labour market.

The second pillar of the system is also compulsory for formal market workers, but this time benefits are defined by the level of contribution, and payment comes in the form of a lump sum. Moreover, whereas the monthly state pension scheme is operated by Ghana’s Social Security and National Insurance Trust, the lump-sum system’s arrangements are managed by private pension schemes.

Yet more private sector opportunity is provided for by the third pillar of Ghana’s pension system, which establishes a framework for provident funds and personal pension schemes administrated by the private sector. Unlike the monthly and lump sum systems of the first and second pillars, the private schemes of the third pillar are voluntary and based on tax-deductible individual contributions.

The latter provision is a useful means of encouraging a savings culture in the population, and ensuring that the third pillar of the nation’s pension system is able to expand to fulfil its role of supplementing the mandatory first and second pillars. It also represents a useful model for other nations, as Africa’s pension industry undergoes a gradual shift from unfunded to funded schemes, with an increasing amount of private management of assets. The development of Nigeria’s market is a case in point of what a government-led shake-up of the pension industry can achieve. The process of reform in Nigeria, which began back in 2006, transformed an unfunded benefit programme into a defined contribution system. Nigeria’s National Pension Commission estimates that on the whole the country’s registered pensions are now worth an estimated $15bn.

Increasing Oversight

Pension reform has led to a recognition of the need to strengthen the supervisory oversight of the market. This has helped establish a virtuous circle by which stronger regulation has bolstered confidence in pension instruments and has encouraged growth in the industry.

In Ghana the National Pensions Regulatory Authority plays a central role in the sector, operating as the principal regulator. It is also mandated with raising public awareness of pension products. Kenya has also established a dedicated pension regulatory authority, according to the World Bank, charged with overseeing pension schemes, including private occupational schemes. In other jurisdictions, the supervision of pension activity falls within the purview of the financial services regulator, such as the Namibia Financial Institutions Supervisory Authority, South Africa’s Financial Services Board and Botswana’s Non-Bank Financial Institutions Regulatory Authority.

Continental Snapshot

A growing middle class, increasing demand for savings instruments, as well as more advanced frameworks and robust oversight, have all helped to maintain the pension industry’s steady growth trajectory over the past decade.

Progress, however, is uneven. According to PwC, South African pension fund assets totalled R1.6trn ($138.2bn) in 2006, a figure which grew by a compound annual growth rate of 10.1% to around R3.5trn ($302.4bn) by 2014. The nation is the largest domicile of pension fund assets by a large margin, posting $309.8bn in total assets in 2014, compared to Morocco’s $25.7bn, Nigeria’s $18.9bn, and Kenya’s $7.9bn.

Its pre-eminence in the African market is thanks largely to the Government Employees Pension Fund (GEPF), the largest pension fund on the continent. It boasts 1.2m active members, more than 300,000 pensioners and beneficiaries, and assets worth more than R1trn ($277.5bn). GEPF, established in 1996 upon the consolidation of several separate public sector funds, is the only African fund to make it into the Pensions and Investments/Towers Watson global 300 ranking of the world’s largest funds and contains both contributory and non-contributory schemes.

The majority of pension funds in the sub-Saharan region slot into one of the four following categories: non-contributory pensions programmes which are either universal (such as in Botswana, Mauritius, Namibia, Seychelles and Uganda) or means-tested (as is the case in South Africa and Cape Verde); mandatory contributory pension schemes; voluntary occupational or personal savings and insurance programmes; and a wide range of informal voluntary saving arrangements, such as the traditional funeral associations of South Africa.

Research by the World Bank published in 2015 reveals the prominent role of government in the growth of pension activity since the turn of the century. The majority of the 47 sub-Saharan countries that have introduced old-age benefits did so between 1990 and 2010, with most opting for the PAYG defined benefit model.

Historically, non-mandatory contributory schemes, the segment on which private sector involvement is based, have been limited to occupational schemes for formal sector workers. In a trend that was established in the 1980s, an increasing number of employees in the private sector shifted from defined benefit schemes to the defined contribution mode which, although passing the risk to the employee, has been viewed as largely beneficial to fund members.

Asset Allocation

As the assets held by Africa’s pension funds have grown, so too has the interest in where they are directed. In 2015 Towers Watson found that the world’s largest funds split their assets into three main categories, namely, equities (42.2%,) bonds (39.5%) and alternatives and cash (18.3%).

Africa’s pension funds, whether sovereign, public sector, corporate or private, follow a broadly similar pattern. In Morocco, for example, government securities and bonds account for 59.2% of total pension fund assets followed by equities at 25.9%, according to PwC. Nigeria, Kenya, Namibia and Botswana display a similar preponderance of government securities and listed equities, while South Africa departs marginally from the regional norm, with an estimated 45% of its aggregate pension fund invested in insurance policies.

African pension funds are beginning to play a larger role in infrastructure financing across Africa. Demand for finance in this sector is substantial as it continues to play a central role in government economic growth strategies, and there is a raft of infrastructure projects in the pipeline to be financed through public-private partnerships. The low-risk long-term nature of such an investment presents an attractive opportunity for pension fund investors.

One feature shared by all African pension markets is the negligible amount of pension fund assets directed towards the private equity (PE) arena, an asset class which has traditionally been the preserve of foreign institutional investors. However, as a report by the law firm King and Wood Mallesons (KWM) notes, reform is now establishing PE as a useful route to yield for the region’s pension funds. This development has the potential to greatly enhance economic activity in Africa’s emerging markets, as developing businesses start to claim a share of the significant reserves of capital held by the pension industry.

In 2010 Nigeria changed its regulations to allow up to 5% of fund assets to be allocated to PE or venture capital funds, which at the time amounted to a potential capital injection to these segments of around $800m. Botswana and Namibia have also altered their pension fund legislation to allow fund managers to take advantage of PE opportunities.

South Africa, meanwhile, has seen the greatest flows of pension fund capital towards PE, according to KWM. The nation’s pension fund regulation was reformed in 2011, and the recalibrated asset class allowances permit pension funds to invest up to 10% of their total assets in PE (an increase from previous allocation caps of 2.5% for investments in unlisted shares outside South Africa and 5% for unlisted shares within South Africa). The change means that the Public Investment Corporation, the asset manager for South Africa’s GEPF, can now direct around $4bn to African PE alone. Some funds have been quick to take advantage of the new rules. In the “Annual Survey of Large Pension Funds and Public Pension reserve Funds” by the OECD, South Africa’s Sentinel Retirement Fund features as one of the highest private equity/hedge fund components, at 16.1%. For now, however, PE asset allocations make up a small amount of aggregate pension fund assets on the continent. Yet the legislative and regulatory changes that have allowed some of Africa’s largest funds to increase their PE interests represents one of the most interesting developments in the pension arena.

Outside Interest

While capital is beginning to move from the region’s insurers to indigenous PE opportunities, international capital is also starting to flow towards African pension fund managers in what is the beginning of a vibrant funding environment.

Attracted by the potential inherent in Africa’s rapidly developing pension fund sector, international investors, including Western pension funds, have made some significant market entries in recent years. According to the press, in 2013 LeapFrog Investments, an emerging markets PE firm backed by global institutions such as J.P. Morgan, American International Group, MetLife, Prudential and SwissRe, paid $3m for a 25% stake in Petra Trust, one of the three biggest pension fund trustees in Ghana.


Speaking to the media, Hubert Danso, CEO of Africa Investor Group, highlighted the potential economic boost that would result from more investment flowing into African pension funds, which is in turn invested in PE opportunities that exist both inside and outside the African continent. “What we’re beginning to see is the emergence of an ecosystem… Within three, four years you’ll see a transformative industry.”

Africa’s pension industry remains at an early stage of development. A World Bank paper published in 2015, while highlighting the progress that has been made in the sector, drew attention to the fact that contributory pension schemes have “…struggled to deliver income protection to more than a fraction of the population,” and mandatory PAYG schemes remain irrelevant to the substantial numbers of informal workers who rely on family or informal schemes for support. However, Africa’s expanding middle-class, coupled with the growing emphasis on labour market formalisation in the employment policies of nations such as Ghana and South Africa, serve to transform this challenge into a good opportunity. Little wonder then that the African continent’s pension industry is of such interest to both foreign and domestic investors.