• One of the key challenges pension funds face: identifying enough appropriate, local investment opportunities to invest ever-increasing contributions
• Deregulation of prescription will unlock capital to flow where it is required in Africa
RisCura’s annual Bright Africa 2018 report is a highly recommended read on Africa’s capital markets. Check out the interactive website and download the short report at brightafrica.riscura.com.
Africa’s pension fund assets are now thought to be $372bn, according to leading pension fund consultancy RisCura. Some 90% of these assets are concentrated in Nigeria, South Africa which has $307bn in AUM, or 82%, Namibia and Botswana. Further, a few large funds dominate, including: Government Employees Pension Fund (GEPF) in South Africa, Government Institutions Pension Fund (GIPF) in Namibia, Botswana Public Officers Pension Fund (BPOPF), and a few large funds in Nigeria.
(NOTE, in a comparable story in 2015 we noted that total pension fund assets in 10 African countries were $379 billion in assets under management (AUM),85% or $322bn of this was based in South Africa. The change since 2015 may partly be due to currency decline at the time of compiling the statistics)
According to the Organization for Economic Cooperation and Development (OECD), total pension fund assets in OECD member countries in 2016 totalled $38 trillion, of which $25trn is held in the US, followed by Canada ($2.4trn) and UK ($2.3trn), the three countries making up 78% of the total pension assets.
In OECD countries, pension funds made up 50% of the economy, measured in gross domestic product (GDP) in 2016, up from 37% in 2006, while in other countries measured (“non-OECD countries”), they rose to 20% of GDP from 12%.
The table below shows pension fund assets in selected different African markets, according to data collected by RisCura. Assets under management (AUM) total $306.7bn in South Africa (pension AUM are 104% of GDP), $16.8bn in Nigeria (lots of space to grow as pensions are 4% of GDP), $10.7bn in Kenya (16% of GDP), $10.5bn in Namibia (99% of GDP), and $7.2bn in Botswana (48% of GDP). There is huge potential for growth in Egypt where pension AUM are estimated at 1% of GDP, Tanzania (10%) and Uganda (7%), Ghana (7%) and even Zambia (3%).
In OECD and non-OECD countries, pension fund assets are predominantly invested into bonds and equities, with 45% of assets allocated to equities. As capital markets have grown and regulators have advanced, the proportion of African pension funds invested into equities has increased, but in Nigeria and East Africa local currency bonds predominate. Local regulation is a key driver of asset allocation and often does not match the 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 fund to invest outside of their own countries” says RisCura.
“African pension funds have a pivotal role to play in facilitating inclusive growth and social stability. Larger pools of capital allow for investment in economic and capital market development,” argues the Bright Africa report. It says there is an urgent need to build resources: “Local institutional investors add credibility and often serve as a catalyst for greater external interest. Local investors also allow global peers to leverage local knowledge and networks.”
RisCura urges other countries to follow the lead of South Africa, Nigeria, Namibia and Botswana (we can also add Kenya to this list) in allowing pension funds to invest into private equity – in Nigeria the National Pension Commission (PENCOM) allows for 5% of assets into private equity as an asset class, which would amount to $842m on 2016 figures, but 75% must be invested in Nigeria and general partners have to be able to invest at least 3% in the fund, limiting the options and size of investment.
The report also highlights a huge role for supporting Africa’s urgently needed infrastructure development (Africa Infrastructure Country Diagnostic estimates $93bn per year of investment needed). However, it is important that frameworks created are compatible with the mandates and risk and liquidity factors, as well as “mindful of prudential oversight and limits necessary for pension and savings investment” says RisCura.
For these stats and more on the changing dynamics of retirement in Africa, download the excellent Bright Africa report and visit the interactive website. More than half, 52%, of African males over 65 years and 33% of females were “active in the labour market” in 2015, compared to 10% older men and 6% older women in Europe. Pensions in Africa are also seeking to adapt to the fact that many Africans earn and save informally, including Micro Pension Scheme in Nigeria where the informal sector is thought to be 70% of the workforce with 38m potential contributors and the Mbao Pension Plan of Kenya, using M-Pesa or Airtel Money mobile transfer services.