There is near US$350bn of local capital sitting in the African pensions system, according to Rory Ord, head of RisCura’s private equity advisory division.
While around 75% of this is in its most developed pension market, South Africa – estimated at about $258bn – there is strong growth coming from other parts of the continent. These growing funds are being driven by regulatory changes that are bringing more people into the social security system.
“Probably the best example of this is in Nigeria, where regulatory change happened around 2006, and it has managed to accumulate around $30bn of assets since,” Ord noted.
During a recent webcast discussion concerning RisCura’s newly released Bright Africa 2015 report, Ord highlighted a number of interesting points about the growth of African pension funds.
1. In the ‘accumulative phase’
Outside of South Africa and Namibia, most African countries have very low levels of pension penetration rates. This means the strong growth seen in pension numbers is coming off a low base. However, these markets also have a very young population – with the average age across Africa only being around 20 years, compared to 40 in most of the developed world.
“So what that means for pensions is that it is very much in an accumulative phase. Most of the population in Africa is starting to enter the work force at this time. And we are expecting to see a lot more growth in this area,” explained Ord.
2. Focus on home markets
The majority of capital accumulated in African pension funds is invested in home markets. Some countries have legislation allowing investment outside of their home markets, but this is mostly the case in southern Africa.
“There is not much that is allowed outside of places like Nigeria, for example,” continued Ord. “But in South Africa 25% of assets can be invested outside the country, and in other southern African countries there are even greater percentages that can be invested outside. However, what we are really seeing is that most pension assets are actually invested in the home country, with a little bit regionally, and then quite small percentages invested outside of Africa.”
3. Early stage pensions choose government bonds
Asset allocation of pension funds also differs across the continent. Countries such as Tanzania, Uganda and Nigeria have a stronger focus on investing in fixed income assets, mostly government bonds. However, more southern African countries such as South Africa, Botswana, Namibia and Swaziland have a higher allocation of funds in equity investments.
According to Ord, this is partly due to the more risk-averse nature of early-stage, less-developed pension systems.
“For example, whereas [pension funds] in South Africa have a very high focus on listed equity today, if you went back 15-20 years, you would actually find that South Africa at that stage focused very much on government bonds, and has evolved over time to bring more equity into the equation.”
4. Investment in private equity still small
While Africa’s private equity space is being stimulated by pension fund investment, the reality is that only a small percentage of these funds are allocated to private equity investment.
In the chart below, investment in private equity is included as part of ‘other assets’. “In most of the continent outside of South Africa, the majority of those ‘other asset’ investments are actually in real estate, with very low levels currently allocated to private equity,” Ord explained.