For the legion of self-employed hairdressers that ply their trade in the markets and malls of Lagos, earning money for the here and now often takes precedence over saving for the long term.
From paying children’s school fees to covering business costs, immediate spending pressures mean that saving for a distant and uncertain retirement is a rarity among those tasked with styling Nigeria.
But as Africa looks to plug an infrastructure shortfall estimated at around $93bn, policymakers and financial institutions are beginning to turn their gaze towards ways of harnessing the savings potential of the vast, previously overlooked informal sector.
“We have about 40m people unaccounted for in the contributory pension system [in Nigeria],” says Chinelo Anohu-Amazu, director general of Nigeria’s National Pension Commission.
“What the Pension Commission is doing is not just waiting to finish with the formal sector, we’re actively trying to harness the informal sector. We have to bother about the largest segment of society.”
From textile to transport workers, the Nigerian Commission intends to convince informal sector employees to join the country’s contributory pension system – a programme that has revolutionised savings in Nigeria since extensive reforms starting in 2004 began to bring an end to decades of government mismanagement.
More broadly, the creation of private pension systems has been transformative on the continent. It has been estimated that Nigeria’s pension industry grew from $7bn in 2008 to $25bn in December 2013, while Ghana’s pension industry is expected to balloon by up to 400% from 2014 to 2018. That’s an expanding cash pile that policymakers are eager to see funnelled into roads, ports and communications systems.
But despite offering the promise of financial security in retirement, persuading would-be pensioners to sign up to schemes historically known across the continent for government corruption and the theft of deposits is not easy.
The difficulties of building large-scale pensions systems without the informal sector are evident throughout Africa. According to figures from the International Labour Organisation, only 33.2% of Kenya’s workers actively contribute to a pension scheme. Still, that figure dwarfs those of regional economies Rwanda (4.5%) and Uganda (2.6%). On the continent, only South Africa, Namibia, Nigeria and Egypt exceed 40% coverage, while most countries are considerably lower.
According to Investec Asset Management chief executive Hendrik du Toit, workable regulatory systems, along the Nigerian and South African lines, will need to be introduced more widely to encourage savers to park their earnings in pensions.
“I think it’s firstly creating a framework where the regulation is very clear and long term saving is encouraged. Governments need to stick to the rules because populations won’t [have the] trust to participate. We need to make sure from a regulation point of view it’s good enough,” he says.
But if the strong arm of an effective regulatory regime can encourage informal workers to join pension schemes, there are also concerns that tough rules could also undermine riskier investments – such as those in infrastructure.
Speaking at the Financing for Development Conference in Addis Ababa, Abdalla Hamdok, chief economist at the UN Economic Commission for Africa, said that a conservative investment strategy makes it harder for long-term infrastructure projects to attract pensions capital. “The interest to keep retirees’ money safe perhaps explains why there is not widespread pension money flowing into infrastructure projects across the African continent. Some financiers and pension fund regulators contend that pension funds are too risk averse to venture into mega infrastructure projects that could change Africa’s development trajectory,” he said.
Safe as houses
With a lack of bankable projects frequently cited as a concern by investors, pensions fund assets tend to be tilted towards ‘safer’ investments, including government and state bonds.
But Nigeria’s Anohu-Amazu believes that her regulator needs to be at the forefront of establishing “clear and investible outlets” for pension funds to invest in a wider variety of projects, such as the long term, transformative schemes that Africa will require to sustain future growth.
One idea posited by Anohu-Amazu is that of co-investing – convincing foreign investors to join local pension funds on projects.
“If you have foreign investors going where the pension funds go, what you have is a critical mass to now take up this infrastructure and establish it as the firm asset class it needs to be,” she told a Nigeria capital markets conference in London.
In the continent’s better-developed pensions markets, there are signs that this mission is beginning to filter through. For instance, Hamdok points to South African rules allowing 10% of pension fund assets to be invested in private equity, a rule change which led power utility Eskom’s Pension and Provident Fund to invest $30m with private equity infrastructure investor Abraaj Group.
Hamdok estimates that a further $30bn of funds held by government backed-schemes could be earmarked for African infrastructure.
As well as initiatives by individual states, development finance institutions are also beginning to catch on. Last year, the African Development Bank launched Africa50, a $3bn fund counting pension funds among other key investors. It is hoped that the initial allocation could be scaled up to some $10bn.
In the long term, it is hoped that the competence and transparency of the next generation of regulators will encourage investing that increases the value of pensioners’ savings and gives Africa the infrastructure boost it requires.
“These funds belong to individuals and at each point in time as the regulator we need to balance the need to actively develop the environment we operate in with the real liabilities that we have to meet at the end of someone’s working career,” said Anohu-Amazu.
But whether advising investors on the safest ways of backing infrastructure or textile workers on the importance of saving for retirement, the UN’s Hamdock believes that it comes down to more effective financial education.
“There is a need to promote financial literacy among citizens and transparency in terms of ensuring all players are disclosing how the pensions funds investments in infrastructure and other sectors of the economy are going to be deployed,” he said.
For Investec’s du Toit, that still remains a work in progress for many African countries.
“We’ve got many examples in Africa where it’s been done, but many countries are still lagging. If you look back to the development of South Africa 100 years ago, there was a great political movement to mobilise the capital of the people to build a country – I haven’t seen enough of that yet.”