Part 1: Ahead of the 2024 AMETrade Pension Funds and Alternative Investments Africa (PIAfrica) conference in Mauritius, this first in a three-part series raises questions, outlines the challenges and considers the possibilities for the continent’s growing pension fund industry 

To say that Africa’s pension industry faces challenges is serious understatement. Funds in the continent’s pension sector are accumulating impressively, soaring to over $1 trillion. Forecasts of growth are compelling. Meanwhile, the continent’s regulators and financial professionals are making progress on solving just about every global capital market development issue found globally.

In the current low yield, high inflation environment, marked by climate change and geopolitical tensions, there is a growing need for responsible investment strategies that take alternatives forms of diversification into account. Mahad Ahmed, Managing Director of AME Trade, the organizer of PIAfrica, the premier pension fund and alternative investment event to be held in Mauritius in February, says: “What is emerging from our research is that pension funds are a catalyst for economic development via asset allocation into and investment into infrastructure projects.”

Developers and investors as well as to regional financial institutions that lend directly to private sector enterprises”

Stressing the importance of this, he added that there is a growing recognition that the challenge is not liquidity . Responsible Asset allocation and diversification strategies within the Alternatives that takes into account  regulatory aspects. 

Taking action

Action is being taken to resolve the conundrums of under-enrollment of the population, of where to invest, the lure of the cash pool to infrastructure builders and economic planners, developing markets that match development needs, the creation of new asset forms and the financial management required to avoid risking pensioners’ savings. Supporting programmes, from the likes of USAID and the development finance institutions (DFIs, such as the African Development Bank), are giving advice on governance, regulation, links to international investors, prudent and diversified investment strategies, and the capacity to license new investable products.

However, Africa’s pension market is highly fragmented and in most countries the industry is tiny – of this figure 90% is concentrated in Nigeria, South Africa, Namibia and Botswana, points out the Making Finance Work for Africa (MFW4A), an African Development Bank associate. Within these countries, a few large funds dominate – the Government Employees Pension Fund (GEPF) in South Africa with $124 billion, the Government Institutions Pension Fund (GIPF) in Namibia with $7.9 billion, Botswana Public Officers Pension Fund (BPOPF) with $2.6 billion and several vehicles in Nigeria. 

To help increase their scale, and to harmonise approaches, regulators in a number of countries have united to advance progress. The Africa Pension Supervisors Form (a programme of specialist development agency FSD Africa funded by UKAid) finance agency brings together pension supervisors from 10 African countries – Botswana, Egypt, Mauritius, Ghana, Kenya, Nigeria, Rwanda, South Africa, Uganda and Zambia – which combined are responsible for 86% of the continent’s pension assets. 

The APSF’s aims are to collaborate on interventions and reforms, the shift from defined-benefit to defined contribution schemes (which has been gaining momentum) and confer on such areas as new investment products, asset allocation policies, sustainable/climate investments, automation of pensions contributions, incentives for inclusive pensions and emerging trends in RegTech, fintech and SupTech. It is quite tough work list!

Currently, there is media attention on how Africa’s growing pension pool could help to bankroll the continent’s urgent need for infrastructure and green energy finance. Funds are in acute demand as international direct and indirect investment flows have become more risk averse and have fallen against the troubled world background. Meanwhile, Africa’s governments do not have sufficient income flow. The African Development Bank (AFdB) estimates that the continent’s water, electricity and transport alone need investment of $130-$170 billion a year, but the annual shortfall is currently $70-$120 billion.

Financing the shortfall 

The current structure of Africa’s capital markets is not adequate to meet this challenge. Despite the positive evolution of the last two decades funding available locally is still insufficient to meet financing needs, particularly as regards long-term finance.

Hence eyes are turning to not only to international, but also local pension funds. “Pension funds are generally speaking a nice pool of savings to be translated into development finance capital, because they represent long-term investments, which is exactly what is also required for infrastructure projects,” Sanjeev Gupta, executive director and head of financial services at the Africa Finance Corporation (AFC) reportedly told Energy Monitor magazine. AFC is a pan-African multilateral development financial institution that channels both private and public capital, and has to date invested more than $6.6 billion into infrastructure projects, and proud sponsors of the PIA event.

For African pension fund managers, where to invest is a two-headed problem. Mostly these funds invest in markets that they understand – in local government bonds and equities. In Kenya, for example, according to a report from USAID Invest (which mobilizes private capital for sustainable development), 46% of pension funds are invested in government securities. Yet as they grow, current stock exchange investment availability will not match the size of the funds. Stock exchanges in Africa, although expanding, are for the most part small (Johannesburg alone accounts for than 80% of the continent’s entire market capitalization), liquidity is low and transaction costs high. However, African Securities Exchange Association has launched policy initiatives designed to change this. 

Meanwhile money piling up is putting pressure on managers to diversify into new asset classes. AME Trade’s Ahmed says the challenge now is to encourage diversification while containing risk as funds look to new asset classes and markets. 

A point raised by MFW4A is that investment in government bonds and listed equities, contributes “little to long-term funding for the real economy and economic growth, as well as delivering potentially lower investment returns”. A number of countries, including South Africa, Botswana, Nigeria and Namibia have led the way in allowing alternative asset classes, such as private equity. So far, though, overall, investment in alternative assets in these countries has remained below national limits, ranging in a recent MFW4A survey from nil to 2.7%. 

Hurdles across the continent to diversification include lack of awareness about alternative asset classes as well as the management of them. Then, there is the issue of scarcity of investable assets and appropriate vehicles through which to invest. Until recently, commitment to understanding risk appetite, regulatory regimes, and return expectations of African pension funds has been limited but that is changing. However, Ahmed believes there must now be a concerted effort to establish projects that are investable, and a supportive chain of established asset managers.  

Building trust 

As funds contemplate diversifying their portfolios into less familiar assets, such as alternative investments, private equity, venture capital, infrastructure, property or overseas stocks, they are aware of the need to proceed with caution. At South Africa’s $10-billion Eskom Pension and Provident Fund (EPPF – the electricity utility fund) CEO Shafeeq Abrahams told international new media institutional investor magazine, Top1000Funds, that diversification levels would continue be conservative, adding: “It’s critical that we inspire confidence through our behaviour, decision making and governance. All decisions must be made in line with member interest, independent of the employer. We are very mindful of the 80,000 families that depend on us.”  South Africa is among the small handful of countries where pensions have already diversified from local bonds and stocks. 

Helping drive the growth of pension funds across Africa are programmes from development finance institutions, regulatory and capital market reforms and the vast scope to pull in workers not yet covered by schemes.  Increasing coverage of the population is particularly relevant. 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” comments Bright Africa, the research engine for South Africa-based global investment management group Riscura. 

Delivering the message via mobile 

Currently, the majority of people in Africa lack social protection and are outside the pension fund network. So far only 8.5% of working-age Africans have pension coverage, compared to 32.5% in their global counterparts, says Riscura. Coverage among those employed by organisations, which have pension schemes, is 13.4%. The size of the continent’s informal workforce  – estimated at 80% of the total – presents the major opportunity for expansion, and it is to Africa’s impressive mobile connectivity that governments are being directed to expand pension coverage, putting over the message via mobiles.

 Ecofin news agency carried a report from PAN-African research network Afrobarometer a few months ago showing that out of 35 African countries surveyed, 24 had between 75% and 93% mobile phone ownership, and the continental average was 84%. (However, the internet access rate was only 45%). 

Mobiles provided an essential lifeline during the Covid pandemic, says a Bright Africa research document on capital flows, and technology adoption acts as a conduit for long-term savings. They kept the continent “connected but also learning, working and economically active”.  The “prioritised creation of digital platforms “ could help bridge the pensions coverage gap, by providing not just pension payments systems for workers in the informal economy, but for the spread of information. 

Designing products that enable informal sector workers to sign up for pension funds membership at low rates and without complicated procedures, such as Nigeria and Kenya have introduced, seem essential for the whole continent. 

The challenges to action seem never to stop coming, and especially when pension funds are considering backing infrastructure projects and where special purpose vehicles and risk-sharing mechanisms become involved.  However, the tasks are getting done and the victories being notched up. As Bright Africa comments, it is encouraging to “witness the spirit of African innovation” building long-term African savings and financial and social safety nets for the population. 

In Part 11 to be released in December, we will take a look at what is happening across Africa today, and how the industry is transforming. To learn more about the opportunities join us at AME Trade PIAfrica in Mauritius 28-29 2024