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November 11, 2012 5:47 am
If a nation’s greatness is measured by how it treats its weakest members, its economic capacity to care may be measured by its pensions system. Retirement planning is a luxury. Increasingly, it is a luxury some sub-Saharan African nations feel they can and should afford.
Outside South Africa, the main countries in the region with sizeable pension fund assets are Botswana, Ghana, Kenya and Nigeria. According to a 2010 report from African investment bank BGL Group, Situating Nigeria in the global pension industry, Botswana has the highest pension assets per head of the major nations in the region and one of the highest figures for pension assets as a percentage of gross domestic product, at 17 per cent. This compares with 5 per cent in Nigeria, 7 per cent in Ghana and 23 per cent in Kenya.
Botswana – and neighbouring Namibia – benefited from an early start. “They followed South Africa in adopting compulsory occupational savings 20 to 30 years ago,” says Thabo Khojane, a managing director at Investec Asset Management.
Other countries have introduced or reformed their pension infrastructure more recently. Nigeria is a case in point. A 2004 reform changed the Nigerian pensions system from a sometimes chaotic defined benefit model to a defined contribution system.
“In the past, you had a situation where people were queuing and sometimes didn’t get their pension for days,” says Funmi Akinluyi, investment director for sub-Saharan Africa at Silk Invest. “Now my mother, a former government employee, gets her pension paid into her account.”
Nigeria adopted the Chilean model with compulsory contributions by employers and employees. After the reform, pension fund assets jumped from $1.77bn in 2006 to $8.67bn in 2009, according to BGL Group, and registered contributors rose from 932,435 to 3.9m. At the end of September 2012, PenCom, the national insurance commission of Nigeria, put pension assets at $18.6bn and registered contributors at 5.3m.
However, the reformed system is not without its critics. It covers only the formal sector, reaching about 10 per cent of Nigeria’s working population. In a 2010 paper, Jörg Michael Dostal, assistant professor at Seoul National University’s Graduate School of Public Administration, noted that the number of contributors in 2009 was still below pre-reform levels. Mr Dostal also questioned the usefulness of the system – and one of its declared goals: to improve the functioning of Nigerian financial markets – in a country where many people are poor.
“In the context of lack of basic social security in the present, any forced saving for the future might not be rational or desirable both at the level of individuals and society at large,” he wrote. “Using funded pensions to develop the Nigerian financial market ... is an experiment rather than a precondition for development in the present.”
BGL Group, meanwhile, has criticised the “regulatory restriction of asset allocation and investing limits” in the Nigerian system, a consequence of which is a high level of uninvested cash due to a lack of investible assets. In 2009, about 37 per cent of assets were held in money market instruments, and things have not changed much since.
“Pension funds invest about 8 per cent in equities,” says Ms Akinluyi. “They can go up to 30 per cent but they have stayed away because of the crash in 2008 to 2009. They invest a lot in money market instruments and government debt.”
These issues are common to other African pension systems too. In Kenya, those with access to pensions are “a small sector of middle to upper-class people,” says Vimal Parmar, head of research at Kestrel Capital, a Kenyan investment bank. Coverage is higher than in Nigeria, however, with around 15 per cent of the Kenyan workforce either covered by the state-run National Social Security Fund or by occupational and individual pension schemes, according to BGL Group.
Tax incentives are in place – pension funds are tax-exempt up to about $2,820 a year and investment income in registered funds is also tax-exempt – and the sector has expanded fairly rapidly. Total assets under management in pension funds are currently about $6bn. Mr Parmar says: “Contributions have been growing at about 10 per cent year-on-year owing to the growing middle class population.”
But the investment profile is again conservative. “Historically, the average split has been about 25-30 per cent in equities, including offshore, with the rest in fixed income,” says Mr Parmar.
Offshore means greater east Africa and is limited to about 5 per cent of assets under management. The fixed income portion is invested mainly in Kenyan government and corporate bonds, with the former dominating.
A couple of forthcoming developments may boost choice. A “growth enterprise market segment” is due to be introduced on the Nairobi Stock Exchange before the end of 2012, while the development of real estate investment trusts and a commodities market is at an initial stage. Meanwhile, the NSSF is to be converted from a provident fund to a pension scheme.
“This may help to boost the capital markets but the timing of it happening is still anyone’s guess,” says Mr Parmar.
The most sophisticated pensions markets in terms of investment are Botswana and Namibia. Two-thirds of assets are invested in listed equities, says Mr Khojane, with considerable international exposure. Typically, funds are managed by local fund managers. They handle all the investments themselves if they have the capacity and outsource the international part if they do not.
These countries are also likely to lead the way in expanding coverage and improving cost-effectiveness and governance.
“What you see in South Africa is a very clear push for better coverage,” says Mr Khojane. “The government is also encouraging consolidation of funds, and so we will see bigger funds with lower costs and better governance. These trends will push out into Namibia and Botswana.”
How quickly they will spread into other sub-Saharan African countries is harder to say.
However, Ms Akinluyi believes the solution will come with an improved economic climate.
“We will see more assets coming through when the macroeconomic environment gets better for small enterprises,” she says.
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