Long-Term Finance and Capital Markets Back

Pension Funds

Section 1: Thematic Profile

Overview

Pension funds and other institutional investors play a critical role in long term finance and capital markets, through the mobilisation and allocation of stable, long term savings to support investment. PricewaterhouseCoopers (PwC) estimates Assets under Management (AuM) in 12 African markets will rise to around US$1.1 trillion by 2020, from US$293 billion in 2008. The growth of AuM is creating pressure for diversification, both from a risk management and return perspective. Yet pension assets remain heavily invested in government bonds and listed equities, despite recent regulatory reforms and Africa’s significant investment needs, contributing little to long-term funding for the real economy and economic growth – as well as delivering potentially lower investment returns.

Challenges

Recent regulatory reform has led to a significant growth in AuM across the continent. The Nigerian pension industry, for example, grew from USD 7 billion in December 2008 to USD 23 billion in October 2018. In Kenya AuM a grew from USD 7.7 billion in December 2014 to USD 11.6 billion in June 2018 according to the Retirements Benefits Authority (RBA).  AuM in Namibia and Botswana now respectively represent 99% and 48.2 % of their GDP.

Despite the growth across the continent, the markets remain fragmented with 90% of AuM concentrated in Nigeria, South Africa, Namibia and Botswana. Within these countries a few large funds also tend to dominate, such as the Government Employees Pension Fund (GEPF) in South Africa with USD 124 billion in AuM, Government Institutions Pension Fund (GIPF) in Namibia with USD 7.9 billion in AuM, Botswana Public Officers Pension Fund (BPOPF) in Botswana with USD 2.6 billion in AuM and a few larger vehicles in Nigeria.

The growth in AuM is putting pressure on pension fund managers and regulators alike to diversify away from traditional investments in government bonds and listed equities towards new asset classes and geographies. In Nigeria and East Africa asset allocation is dominated by local bonds, which is a reflexion of the current regulations in place as well as a lack of alternative local investment opportunities. One of the key challenges facing African pension funds relates to the portfolio diversification necessary to manage risk. The problem at hand is how to encourage diversification whilst ensuring that it does not become a source of risk as pension funds venture into previously unfamiliar asset classes and markets.

A number of countries including South Africa, Botswana, Nigeria and Namibia have led the way in allowing investment in alternative asset classes such as private equity. South African pension funds, for example, have been active in African private equity investment, both locally and across the continent, since 1962. In Nigeria, the National Pension Commission (PENCOM) prescribed a limit of 5%, for private equity in December 2010. Based on 2018 figures, this represents potential commitments of USD 1.15 billion, far more than the USD 150 millions currently invested by Nigerian pension funds in private equity funds. The Nigerian regulatory body also  prescribes additional requirements such as a minimum of 75% of the private equity fund to be invested in the country, registration with the national Security Exchange Commission (SEC), and a minimum 3% stake in the fund held by the General Partners (GP). A relaxation of these rules could support capital to better flow where opportunities are in the continent.

Opportunities

Unlocking the potential of African pension funds to invest in alternative assets means addressing factors that influence their willingness to do so.

First among these is the lack of awareness about these asset classes across the continent. Empowering pension funds, regulators and other stakeholders with the right information which enables them to assess if and how alternative assets fits within their overall investment strategies and objectives is of the utmost importance. Create national or regional online databases on investment performance and Benchmarks as well as online directories of assets could help address this information gap. 

Secondly, there is the issue of scarcity of investable assets and appropriate vehicles through which to invest. Until recently, there has been little effort to understand the specific risk appetite, regulatory regimes, and return expectations of African pension funds. The result is that many projects presented to African pension funds today are not investable from their point of view for a variety of reasons. It is therefore crucial to support the development of investable assets and recycle alternative assets to meet investor requirements. 

It is also essential to develop networks of credible active asset managers with well-established relationships with institutional investors and work closely with them to develop pipelines of investable infrastructure assets. Many institutional investors will only invest in infrastructure through their trusted existing network of asset managers. Also, some institutional investors require their asset manager to co-invest in the infrastructure asset to ensure aligned financial interests. Governments will therefore need to attract established asset managers.

Enabling actions must address both the supply and demand sides of pension fund investment. Potential solutions include targeted interventions in the development of investable infrastructure and housing projects and special purpose vehicles, risk sharing mechanisms and more traditional co-investment opportunities through investment platforms. To secure the investment required by African national and regional projects and leverage limited public funding, the public sector needs to aggressively support the scaling up of debt and equity investment vehicles that can credibly serve as intermediaries channelling capital to infrastructure projects. This is especially important for early-stage green led project investment. Partnerships with the private sector are critical in designing and operating such intermediation investment vehicles.

A full-throated strategy needs to be developed and implemented to develop the local capacity in Africa to develop investable assets, assess their creditworthiness, and invest. Key unlocking actions include the following:

  • Set up training programmes to train pension fund managers, local asset managers, investment consultants, government of officials, and other stakeholders. The lack of the needed skills and knowledge is reported as a major constraint to institutional investment in infrastructure. Training programmes need to be designed and implemented that enable the development and execution of prudent and diversified investment strategies, and the capacity to license new investable products.
  • Proactively encourage the scaling up of credit ratings for infrastructure projects and investment products. Institutional investors require solid documentation of infrastructure risks and often require the assessments and credit ratings provided by rating agencies. Therefore a key means of facilitating institutional investment is by supporting the expansion of credit ratings for infrastructure assets.

Overall, fostering exchange of knowledge and sharing of experiences among industry stakeholders (pension funds, regulators, asset managers, etc.) through working groups and asset managers networks is key to unlocking institutional capital for alternative assets finance in Africa from both domestic and international investors.

Section 2: Highlights of our activities

MFW4A plays a catalytic role in unlocking domestic institutional capital for long-term investment on the continent. We support the development of products adapted to the needs of African institutional investors across all sectors (infrastructure, housing, enterprise finance) and asset classes (bonds, private equity, etc.). 

MFW4A established the African Pension Funds Network (APFN) in 2014 as part of its role to unlock domestic institutional capital. The APFN provides a platform for exchange of knowledge and expertise amongst industry participants across the continent.

In 2019 – 2020, the APFN’s activities will focus on key markets (Nigeria, Kenya, Southern Africa), where AuM are growing rapidly and the regulation permits investment in alternative assets. Priorities will include:

  1. Establish and drive capacity building initiatives to help pension funds to understand the opportunities and challenges of investing in alternative assets, including infrastructure, housing etc.;
  2. Support the creation of co-investment platforms at both country and pan-African level;
  3. Work with development partners and local institutional investors to identify and structure co-investment opportunities, and
  4. Advocate for regulatory regimes which support investment in alternative assets. 

Knowledge Management and Research

Webinars, Knowledge Briefs, Case Studies

Toolbox Date
Toolbox Date
Toolbox Description

Webinar Series - African Pension Funds and Housing - in Partnership with CAHF

Toolbox Date
Toolbox Date

Networking and Advocacy Networks

High-Level Conferences and Roundtables

Toolbox Date
-
Toolbox Description

MFW4A’s Pension Funds Roundtable Series in Abidjan (Côte d'ivoire) and Accra (Ghana)

Toolbox Date
Toolbox Description

MFW4A joined Pension Funds from Francophone Africa at the 26th CIPRES Conference

Project Support and Capacity Building

Trainings and Marketplaces

Toolbox Date
Toolbox Description

Workshop - Introduction to Infrastructure and PPPs for Kenyan Pension Funds

Toolbox Date
-
Toolbox Description

MFW4A co-led the Institutional Investors workstream of the Africa Investment Forum (AIF), which involved the design and delivery of 3 sessions:

  • Institutional Investor’s Dialogue
  • Conversation with Institutional Investors
  • De-risking to Attract Institutional Investors

NEWS & EVENTS

News
Aug 20, 2019
Commercial banks will not adjust the interest rates on loans already taken after the law capping interest rates is repealed.
News
Aug 14, 2019
Insurance companies in the Interafrican Insurance Market Area (CIMA) are more than determined to support African SMEs / SMIs in the face of insolvency risk.
News
Aug 13, 2019
New TymeBank CEO Tauriq Keraan wants the new digital bank to diversify into personal and business lending, a market dominated by Ca
News
Jul 19, 2019
Global credit rating agency Moody's has projected a drop in Kenyan banks' non-performing loans (NPLs) owing to lenders stepping up
Jul
29
Event
Jul 29, 2019
Making Finance Work for Africa (MFW4A) and the African Development Bank (AfDB) brought together government officials, representatives of central banks,…
News
Jul 29, 2019
The Making Finance Work for Africa Secretariat (MFW4A) and the African Development Bank (AfDB) organized during the second half of 2018 and the first quarter…
Jul
29
Event
Jul 29, 2019
In 2018, the six countries (Egypt, Libya, Tunisia, Algeria, Morocco and Mauritania) comprising North Africa accounted for 26% of Africa’s GDP. These countries…
Jul
22
Event
Jul 22, 2019 - Jul 26, 2019
Addis Ababa, Ethiopia
Making Finance Work for Africa (MFW4A), the African Development Bank (AfDB) and the Trade and Development Bank (TDB) are pleased to organize a Regional Banking…
Oct
27
Event
Oct 27, 2019 - Oct 29, 2019
Abidjan, Côte d'Ivoire
"Regulating and Supervizing Cross-border Transactions Towards an Integrated Capital Market in the ECOWAS Zone" Organized by the West African Securities…

Blog

This blog benefited from the comments of the MFW4A Coordinator, David Ashiagbor. New figures from the African Development Bank estimates that…
Investments into private firms in Africa are funded by a relatively low proportion of debt compared to equity, especially in contrast to…

Strategic Partners