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Pressure on pensions: How to successfully fund Africa over time

19 August 2021 Gerald Gondo, Business Development Executive (Africa) at RisCura
Gerald Gondo, Business Development Executive (Africa) at RisCura

Gerald Gondo, Business Development Executive (Africa) at RisCura

With an estimated 85% of Africa’s population informally employed, the traditional pension fund model faces a growing challenge. Innovative long-term savings products for this ever-increasing cohort of informal but economically active citizens are urgently required. Products like micro-pensions or other affordable solutions must be brought to market and soon.

It is estimated that Africa had 13 million people aged 65 and over in 1975. Nearly 50 years later, this figure has increased and is expected to reach 150 million people by 2050. Africa’s young population benefits from improved medicines and healthcare, which enormously increases the likelihood of Africans living for much longer. With increased longevity, the necessity for improving the outlook for long-term savings in Africa is critical.

Nigeria nudges closer, sets an excellent example for the continent

According to the latest Bright Africa pensions research from global investment firm, RisCura, just over 10% of the Nigerian workforce is formally employed, precipitating the National Pension Commission (PenComm) launching the micro pension scheme in 2019. The micro pension scheme seeks explicitly to cater to the informal sector and companies with less than three employees. Innovation of this nature can be adopted by other African countries that face similar demographics and economic constraints.

Fintech for the future

Harnessing fintech could foster financial inclusion while boosting African savings. Rwanda provides anecdotal evidence of latent savings potential through combining mobile telephony and fintech. Active mobile penetration in Rwanda now averages 75% of the population. By embedding fintech-enabled savings within active mobile telephony, micro-savings products can be accessible to the average mobile user.

A collective change

By design, pension funds are long-term institutional investors. In Africa, this institutional investor base now holds approximately US$ 350bn in long-term savings. The Covid-19 pandemic brought to light the need for capital to respond quickly to the urgent funding needs of African economies. A proportion of this savings base can meaningfully support and help reduce Africa’s infrastructure deficit. Regulators have been alert to this and progressively changing regulations to allow for meaningful pension fund participation in innovation and the real economy. Concepts such as regulatory sandboxes are being adopted to ignite and curate innovative financial products and services that may not meet all current regulatory requirements.

Pensions can be part of the solution development of Africa’s problems. Through aligned and proactive regulatory reform and leveraging digital and mobile technology, Africa’s institutional investors can direct their savings towards the sustainable development of African economies.

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