The COVID-19 pandemic’s impact on the global economy and the financial system has many significant implications for pension funds, particularly after the resurgent gains experienced by global pension funds during 2019. According to the OECD, assets in pension funds rebounded in 2019, following a decline in 2018, growing by 13.9% in the OECD area and by 11.3% in other reporting jurisdictions. Pension fund assets (for OECD countries) rose to US$32.3trn in 2019, however, the impact of the COVID-19 pandemic on global capital markets reversed some of these gains. Amongst OECD countries, the US remains the largest market, with assets in pension funds and all retirement vehicles at the end of 2019 at US$18.8trn. The United Kingdom was the second largest pensions market, at US$3.6trn. According to the 2019 annual report of the GIPF, Namibia’s largest pension fund, the fund’s long-term growth can be attributed to good investment returns due to a diversified investment strategy and a strong asset allocation process. Local asset requirements compel Namibian pension funds to hold 45% of contractual savings locally.

As there are very few opportunities to invest in the Namibian Stock Exchange (NSE), this regulation enables Namibian pension funds to seek viable long-term opportunities, while avoiding and limiting potentially bad investments in the process. The composition of African long-term assets mimics the global picture, where a few countries claim the largest proportion of long-term savings. In Africa, 95% of the assets are concentrated in South Africa, Nigeria, Kenya, Namibia, and Botswana. Within these countries, several large funds also tend to dominate. Examples include the GEPF in South Africa, the GIPF in Namibia, the Botswana Public Officers Pension Fund (BPOPF) in Botswana and the National Social Security Fund (NSSF) in Kenya. While in Nigeria assets are allocated across several Pension Fund Administrators (PFAs), there is a large concentration of pension assets with a few PFAs, with the top five PFAs accounting for 65% of pension fund assets.

Introduction

At first sight, pensions may not appear to be the most pressing issue for the African region. Whilst social security is to some extent discussed, private (or rather funded) pensions are rarely debated. One may well ask why address this topic at all, given more critical policy priorities for the region such as education, health, poverty alleviation or agricultural development, and given the lack of demographic pressure in general? The urgent issue for pension reform in Africa is not only the need to introduce social protection systems - to help alleviate demographic pressures, poverty amongst the elderly and provide support for households headed by grandparents following the HIV AIDS pandemic and regional conflicts. In addition there is a vital need for reform of existing pension systems in the region, the cost of which is often crowding out spending on other key areas (such as health and education). Coverage of these systems is low (under 10 or often under 5 percent of the population) and usually only for civil servants or a minority of relatively highly paid workers in formal sector employment, making for highly regressive systems, with cross-subsidies required from indirect taxes (usually VAT) as pension payments from these systems frequently exceed contributions. The need for efficient pension arrangements in the region is undoubted – though the challenges for introducing them remain great (notably the large informal sector of workers).

Pensions play an important role in poverty alleviation of the elderly - one of the most vulnerable groups in any society, particularly older women. Yet, according to the ILO, only one in five workers is covered by adequate social security schemes, whilst the World Bank (Holtzman, Hinz (2001)) point out that 85% of the world‘s population over 65 has no retirement benefit at all. In sub-Saharan Africa less than 10% of the older population has a contributory pension (Palacios, Pallares-Miralles (2000). Basic, social support can be implemented via public pension arrangements. Indeed social protection is increasingly considered as contributing to the development process in the same way as health and education (van Dullen (2007)). It is beyond the scope of this paper to enter the debate over which type of social pension is most appropriate contributory vs. non-contributory / universal vs. means tested etc. - (see referenced ILO and World Bank papers as an introduction to the topic). However, irrespective of the type of arrangement, in addition to reducing poverty amongst the elderly, providing pensions has also been shown to have implications for broader society, as benefits are shared with household members – for example via providing food, clothing and school materials for grandchildren.

Indeed, older persons can often act as de facto heads of household, caring for relatives infected with HIV/AIDS and looking after orphaned children. Around 30% of households in sub-Saharan Africa are headed by a person aged 55 and over, with over two-thirds of these households including at least one child under the age of 15 (Help Age International (2006a)). Over 60% of orphaned children in Namibia, South Africa and Zimbabwe, and 50% in Botswana, Malawi and Tanzania, live with their grandparents (United Nations (2007)). Receiving and sharing a pension cements intergeneration relationship and makes the elder more integrated into communities, rather than feeling like a burden on their families. The following examples of the positive social impact which pension can have are taken from Help Age International ‘s Social Protection Facts and Figures (Help Age International (2006b)): • Pensions reduce the poverty gap ratio by 13% in South Africa and increase the income of the poorest 5% of the population by 50%;
For Africa, the fiscal cost of providing a universal noncontributory social pension to all of the elderly has been estimated at 2 to3 percent of GDP, a level comparable to, or even higher, than the levels of total public spending on health care in some countries (Kakwani and Subbarao (2005)). However, such estimates depend on parameters such as benefit levels and entitlement ages that can be adjusted in order to keep the fiscal cost manageable. That said, the debate over whether cash payment based pensions are the best way to tackle the broader social challenges mentioned needs to be considered but is outside the scope of this paper.

The structure and challenges to the pension systems in each country differ, with countries correspondingly adopting different reform agendas. The pace of reform also differs from country to country, ranging from the introduction of individual DC accounts in Nigeria, to extending pension coverage to the informal sector in Botswana; exploring ways to overhaul the civil service pension scheme in Kenya; to improving pension fund governance and reforming taxation of retirement funds in South Africa. Many countries - including Botswana, Kenya, Zambia - are reviewing their national social security and severance schemes to make them less expensive to administrate and more sustainable for retirees in the long run. A major component of these announced reforms is the need to improve the quality and effectiveness of the supervisory oversight of the burgeoning pension system. In most countries pension and social security institutions are not regulated and supervision is fragmented and weak. Countries such as Zambia and Kenya continue to establish their pension fund regulation, whilst new supervisory authorities have been created in countries such as Botswana. The challenges of systemic reform, where there is a shift from unfunded to funded schemes and possibly the introduction of private management of assets, are particularly great in Sub-Saharan Africa. Reformers face three major obstacles: a) First and foremost, any diversion of contributions to a new funded scheme will force governments to find resources to covers the resulting gap. Since most of the countries depend heavily on foreign aid to supplement their budgets, there is little scope for financing the transition, at least not a rapid transition. b) Second, existing public pension institutions are generally not equipped to meet the recordkeeping requirements of a funded individual accounts scheme. c) Finally, few of the conditions that make a privately managed, funded system viable –investment opportunities, solid regulatory institutions, and potential participants in the private pension sector are present in most of the region.

In addition to social pensions being affordable for many emerging economies, developing funded pension systems can also reduce government expenditure, thereby releasing funds to direct to other key policy challenges and initiatives. The reform of unsustainable pay-as-you-go (PAYG) pension systems can help reduce the fiscal burden that such schemes place on the population, and indeed avoid burdening future generations. Such concerns are greatest in countries with high levels of labour market informality, as is the case in developing countries in Africa and elsewhere, as large groups of the population may not have access to the pension system but support it indirectly via the tax system. Spending of pensions (particularly on pensions for civil servants and other special schemes) has increased enormously in the region and is crowding out spending on other deserving programs. The potential for major fiscal imbalances and regressive distributional outcomes is compounded when the pension scheme is designed to cover only specific workers with a high degree of political power. In Africa this is often the case of civil servants pension arrangements. In all countries the formula used to calculate the pension for civil servants tends to be more generous than for private sector workers. The impact of a more generous formula and a more mature system along with a lack of reserves results in a build-up of large deficits that are ultimately a burden on the rest of the population, and the crowding out of other important expenditures.

Conclusion

An increasing number of African countries have recently initiated major parametric and systemic reform of their pension systems (often on the initiative of stakeholder, advisory committees and international organizations) and are beginning to adopt diversified approaches to pension provision in order to strengthen retirement security of their workforce. Many other authorities are in the process of formulating serious reform proposals and are exploring ways to encourage more saving over the long run. In Africa, although the problems of the schemes that cover private sector workers have become increasingly evident, the motivation for reform has come more frequently from the fiscal pressures of civil service pensions (usually much more generous systems). In several countries, the need to address this short-term fiscal issue has led policy makers to reconsider overall pension policy. In particular, the alternatives to the current arrangements for civil servants include a new system that replaces the dualism with one in which all formal sector workers participate. Although it is still politically very difficult, a few countries have already considered and even implemented 'integration' of their pension systems. Reform is also being driven by an increasing awareness of old age provision as an integral part of social policy, fixing unsustainable existing schemes and making them more efficient in terms of administrative costs and returns (following serious mismanagement in some countries), as well as the desire to increase savings and develop financial markets in the region.

References

https://brightafrica.riscura.com/pension industry; Africa’s pension fund assets
https://www.oecd.org/finance private pensions