In the financial world, it is the capital that disappears. Two visions, two aspects, the same problem: old age in Africa. Indeed, economic growth has increased the life expectancy in the continent, spawning new demographic challenges for populations. How to ensure the peaceful retirement of millions of Africans retiring each year from active life to finally enjoy its soft twilight? Pension funds that feed the funded pension systems are a first answer.
From an Anglo-Saxon origin, a pension fund is an investment fund whose capital is made in order to ensure its pension policyholders. These funds can be set up and managed by a plurality of actors. It is thus common to find funds administered by a company in the interests of its employees. Pension funds may also be public and run by managers appointed by the state. At a time when pension funds appear to be adequate infrastructure financing vehicles to the African socio-economic structure, with recent investments by the South African Public Investment Corporation (PIC) in solar power or funding up to 60 % of Kigamboni bridge by the Tanzanian National Social Security Fund. Therefore, this article aims to crack the market for pension funds in Africa in order to identify their ability to support the explosive growth of the black continent.
North America continues to dominate the world of pension funds with assets under management accounting for over 40% of worldwide outstandings. Europe (28.5%) and Asia Pacific (26.3%) follow far behind. By country, the United States (124) and the UK (26) have between them half the funds ranked in the Top 300 of Towers Watson. Taking 10 African nations most involved in the business of pension funds, the mainland industry is worth nearly $ 380 billion in assets under management (more known as Asset Under Management or AUM). Comparing this figure with the world’s leading pension funds that are the United States (36%), Japan (13%) and the Netherlands (7%) shows that the continent is far from being a giant in this industry whose total outstanding held by the 300 largest funds in 20133 was 14, 900 billion outstanding compared to 31,980 billion for the entire industry. However with a growing population and widespread bankruptcy of pension systems, both in terms of funding and in terms of their effectiveness, the sub-Saharan Africa pension fund industry has all the characteristics of a market where there is a long to be done and whose growth prospects are enormous.
Major Governmental Pension Funds in Africa
Political reforms greatly impact the industry
And this, African governments have understood. Although one cannot really talk yet of industrial policy revolution on the continent, there are convincing examples of reforms and show a clear willingness to improve the legal and institutional framework to encourage the development of such funds and funded pension system. For example, in Nigeria, the national pension fund that manages the retirement of civil servants has recorded strong growth since the beginning of the government’s reform policy in 2006 that transformed a failing system that was lacking funding in an efficient and transparent system based on the contribution of its employees. The pension fund industry has tripled in five years to reach $ 25 billion of AUM in 2013. And the growth prospects are not decreasing either. Indeed, only 10% of Nigeria’s workforce is currently covered by a retirement plan funded mainly because of the importance of informal employment that is not affected by the legal obligation for up businesses instead of a pension fund. In Botswana, the decentralization of the pension system conducted by government in 2001 led to a proliferation of funds and promoted the professionalization of their management.
Today, two million people in the country are the target of the hundreds of pension funds currently operating in the country! In total, the industry’s assets totaled $ 6 billion in the country in 2012, 42% of GDP this Southern African nation after the Bank of Botswana. The development of the industry, however, is to guarantee the right response to the challenges of its actors of socio-economic environment of the countries in sub-Saharan Africa. Cultural rifts are to be considered, in fact, the diversity of the continent’s cultures directly impacts the development of such structures. Thus, in general, we see an advance of Anglophone Africa on Francophone Africa and the continent’s biggest funds are mostly located in the Commonwealth nations. The low level of banking penetration of the active population of the continent (24%) is also an obstacle in a continent marked by distrust of banks and institutions. In 2012, a study on financial inclusion published by the World Bank has highlighted the surprising bank design within African societies. In fact, it is seen as only a credit provider and local populations prefer the informal savings vehicles (tontine, informal insurance cooperatives, diasporas networks, real estate) when it comes to build up capital.
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However the evolution of the standards of living, the emergence of a stable middle class that has been growing since the start of the 21st century and increases in life expectancy (increased 4 years since the 1990’s) point to a window to public awareness of new consumer banking practices. This awareness must of course be accompanied by reforms on the quality of the institutions that govern these pension funds in order to avoid the pitfalls encountered in the past. In Cameroon, for example, the poor performance of contribution records has had disastrous consequences on the human level. In fact, many Cameroonian civil servants died before receiving their retirement fund because they could not prove their decades of devotion to public service. Hinsley Njila CEO RealFocus Capital, a Private Equity firm located in Chicago, advanced corruption and mismanagement of funds as a direct result of inadequacies of the government pension system. The technological development of the continent will therefore encourage the emergence of a solution to these problems. In fact, the annual growth of financial services also causes a rise in auditing and verification processes to meet international standards. These current developments therefore allow a consolidation of the management of public pensions, and could impact the medium and long term development of pension funds in sub-Saharan Africa, allowing the establishment of a virtuous circle around the contributors.
The African regulator, is also conscious of these issues. In many countries, we have witnessed in recent years for reforms in the regulation of these funds. In terms of allocation policy is has been an evolution. In Nigeria for example, investment in private equity funds by pension funds became possible in 2010, it is still limited to 5% by the legislation, a limit rarely reached by the funds. To include the management of pension funds in an endogenous development policy, local governments have also established limits in offshore investments. Thus, in Nigeria, a pension fund may hold a portfolio of assets that over 25% of assets are not Nigerian. In South Africa, the continent’s largest market with $ 310 billion AUM end of 2013 or 80% of the continental total, it is the same, however it is possible to reach 30% if investments are made in other African nations. This kind of legal provisions favorable to intra-African investment enables encourage pension funds to invest in local rather than in government debt. This restriction seems to be a key to the performance of managers according to Jared Glansbeek fund, CEO of RisCura, a London consulting firm. In fact, as I explained it in my previous article on Private Equity and risk mitigation in Africa, investment returns on the continent are high and considerable gains generators for investors. These legal provisions should not be seen as restrictive, in fact, few local funds that reach the threshold limits. This cultural risk aversion really impacts the industry in both its upstream (low capitalization due to a distrust of banks) in its downstream (allocation of funds under administration). Thus bonds represent the most highly invested in in the investment portfolio of pension funds. The study by Sart Partners on the Nigerian pension funds shows that 85% of the RSA Active Funds portfolio consists of treasury bills, government bonds and T-Bills. Thus the legal limits allocation (5% for private equity funds, 5% for infrastructure funds and 20% for mutual funds) are far from being surpassed.
Governmental pension funds: investing for the good of the people
Traditionally, workers in the black economy or those of the rural economy (including agriculture) were excluded from pension systems. Demographic changes (rural migration, urbanization, reforms of the business environment) have favored the emergence of formal labor and savings and thus the development of the pension market. The states which held monopolies or near monopolies have therefore opened the industry to new private players. However, these public funds are most important in their business areas. Thus, the Fund of the Government Employees Pension is the largest pension fund in Africa with assets amounting to 85.5 billion dollars, which is only slightly surprising given the fact that South Africa is the country’s industry leader. The National Social Security Fund of Kenya is the largest investor, for example, the Nairobi Stock Exchange and the National Social Security Fund of Tanzania regularly invests in the construction of local infrastructure such as The Kigamboni Bridge, mentioned above, where it funded 60% of the construction.
Tanzania sets an example in the continent due to the massive investment of its pension fund in development. So in February 2015, six funds have joined the National Real Estate Society and created a fund of $195 million focused on real estate projects to spread to domestic demand for real estate, due to the emergence of a local middle class. The pension fund industry has a role to play in African development. In fact, the mode of capitalization which causes the existence of pension funds requires a long-term growth in order to be profitable and sustainable investment. The strategies of fund managers aim to finance a regular income to pay pensions to former contributors but also build up capital for future pensions. The development of this industry has an impact on the perception of investment in Africa because it is necessary to see the continent for what it is: a land of opportunities.
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The development of the sub-Saharan Africa pension fund industry is favored by the changing economic and social characteristics of African economies (rising living standards, growth, and consolidation of the regulatory environment). However, the impact of its funds on the development remains limited due to the low allocation of their capital in productive activities. Therefore foreign or local managers should invest further in local companies and projects to bring their stone to the edifice of development.
The Market Mogul