Africa at a turning-point
The PenCom DG said that Africa is, indeed, at a critical turning point in its history.
According to Mrs. Anohu-Amazu, after a long period of faltering economic performance, there has been resurgent growth over the last decade, with the continent recording a five per cent increase in Gross Domestic Product (GDP).
She stated that this renaissance has been sustained by unique African entrepreneurial and innovative spirit; the success stories of emerging industries, and smaller innovative initiatives, such as the portable irrigation technology helping sub-Saharan small holder farmers grow crops out of season. These innovations undoubtedly provide the foundations for transforming the continent over the next decades.
Alluding to a recent World Bank report on Africa’s demographics which was published in 2015, the PenCom chief said: “It stated that countries in sub-Saharan Africa have experienced impressive and sustained economic growth and development over the past 15 years. Child mortality has dropped in most countries and infertility rates have reduced significantly for educated women living in urban areas.
“This has resulted in a rapidly growing population, with estimates showing that the region will become a much larger part of the global population with a projected 2.8 billion people by 2060.
“This exponential milestone is expected to translate to a population of healthy, educated and empowered labor force that would engender sustainable economic growth and poverty reduction.
“Africa would, therefore, need to address the issue of aging population that will emerge as the demographic transition comes to an end, by developing robust pension and social security systems to cater for old age income.”
The cutting-edge infrastructure, she noted, is critical for economic growth and social progress, noting that extant indices show that Africa’s infrastructure remains by far the most deficient and costly amongst developing countries.
Her words: “In many cities, the challenge of urbanisation and the need for modern infrastructure is already evident. One-third of urban residents in Sub-Saharan Africa are located in 36 cities, each with more than one million inhabitants.
“The United Nations (UN) estimated that by 2025, the population in Lagos and Kinshasha would reach 18.9 million and 14.5 million, respectively. To put this in context, it would be the equivalent of combining the current populations of London, Berlin and Madrid, which stand at 15.42 million based on 2015 population figures.
“Bridging Africa’s infrastructure deficit will require sustained spending of about $93 billion per annum, which translates to about 15 per cent of Africa’s GDP. “This huge challenge, I believe, can be surmounted by a coordinated, multifaceted approach to development and the integration of domestic funding sources such as pension funds, and foreign institutional investors.”
World pension report
World Pension Summit (WPS) Chief Executive Officer Chris Battaglia said that investing pension fund would drive economic growth.
He said: “If you have any doubts about the impact of pension fund investing on economic growth, consider this quote from Michael J. Clowes, the founding editor of Pensions & Investments, from his critically acclaimed book “The Money Flood, How Pension Funds Revolutionised Investing.
“Michael said, ‘in 1985 the U.S. economy was considered a basket case. U.S. executives were being urged to copy the German and Japanese corporate models….By the early 1990s however with the aid of pension fund capital, the U.S. economy had reinvented itself and was the most efficient, most resilient and strongest in the world…Without pension fund assets, the U.S. high-tech industry might not now lead the world, for many firms would have been starved for vital capital or might have paid too high a price for it to permit success.
“It is no great secret that changing global demographics are accelerating the need to address how best to provide pension investing and coverage, so, our aging populations can retire with security and dignity. Japan has more centenarians than any other country on the planet. They have 60,000 citizens over the age of 100!
“Keeping pace with constant change is not easy, and the global retirement landscape has certainly had more than its fair share of changes and challenges. These issues are now global, as our markets and economies become ever more interconnected and correlated.
“For example, recent news on UK’s Brexit has had an impact on Nigeria, as well as many developed economies, and there is no doubt events like these will be among the topics of conversation at our Africa Special.
“Outside Africa and along with Africa, global retirement assets are growing in size and importance. The shift to defined contribution from defined benefit continues in most developed and developing markets. Life expectancy has been steadily increasing. Long-term interest rates are at historical lows in all developed markets.
“These trends are having a profound impact on the future of retirement and pensions systems. In most developed countries, pension assets have grown in size and importance in relation to their economies. With great assets comes great responsibility.”
Battaglia disclosed that assets for the 300 largest global pension funds have reached nearly $15 trillion and in many developed countries such as the Netherlands, Switzerland and Iceland, assets are now more than 100 per cent of GDP.
He identified another major trend affecting the pension industry as the rapid extension of life expectancy, which has been increasing for the past 50 years.
Battaglia said: “The solutions for meeting these retirement challenges will likely include the need to save more for retirement, increased financial education and literacy, along with micro pension development, particularly here in Africa and many other developing countries. Around the globe, long-term interest rates have been dropping since the financial crisis due to unprecedented central bank intervention, including the United States’ quantitative easing.”
Acting Chief Executive, Financial Services Commission, Mauritius, Mr. P. K. Kuriachen, said retirement, as a social institution, has capacity to create opportunities for younger workers; reduce labour cost and size, tie workers to jobs, reward workers for long and loyal service; accommodate individual’s desires for retirement; and improve current worker morale by creating old age security.
Highlighting the sub-Saharan Africa challenges, he said there are increases in longevity while incomes tend to be lower and more volatile for rural and informal sector workers.
Speaking on investment challenges, he said that there is lack of local investment opportunities, need for greater diversification like by asset class, foreign; underdeveloped capital markets for equities and fixed income securities; need for continuous improvement of financial literacy; raise awareness about pension matters and cultural attitude to financial risks.
He said: “The reforms will ensure pension funds in Africa have a significant influence on the continent’s growth in future while underlying assets of the African pension funds should also increase tremendously.
“It will enforce portfolio diversification in terms of assets categories, local and foreign, emphasis on good governance -potential for improved investment performance; bring better management of risks and management of conflicts of interest among others.”
Former President Olusegun Obasanjo said that given the long-term nature of pension funds, it has become important to deploy pension assets as endogenous domestic capital for development in a region that has hitherto essentially depended on multilateral aid and foreign direct investment.
Obasanjo said: “We should thus learn to effectively utilise our resources in a manner that would generate employment for our unemployed youths and develop our infrastructure in addition to providing long term, affordable capital to the real sector of our economy.
“It is instructive to note that the size of African pension funds qualifies them as veritable sources of long-term capital that is critical for financing sustainable development within the continent. In a report jointly published in 2014 by the Commonwealth Secretariat, Emerging Markets Private Equity Association (EMPEA) and Making Finance Work for Africa (MFW4A), it was estimated that ten of the largest African pension markets held about $379 billion in assets. Given the growth projections, the assets were forecasted to hit $622 billion by the year 2020 in the six largest markets of the continent.
“The investment trajectory of African pension funds has so far been underscored by a focus of about 90 per cent of total assets under management on institutional equities, bonds and bills, and cash and deposits.
“The good news is that this compares to the practice by pension funds in the Organisation for Economic Co-operation and Development (OECD) Countries. Indeed, Africa’s infrastructure landscape offers pension funds great opportunities to diversify their investment portfolios. Interestingly, pension fund managers have already taken the initiative and made significant investments in infrastructure across the continent.
“In this context, six African pension funds have invested in a $630 million Fund that injected $30 million into the deployment of sub-sea fiber-optic laid along the Atlantic seabed from Europe to Lagos, Nigeria in 2009.
“Similarly, the OECD Report on Pension Fund Long-term Investment of 2014 showed that South Africa’s GEPF had invested $133.43 billion in transport, energy, water, telecommunications and sanitation infrastructure in 2013.
“In addition, Kenya is proposing to invest Sh800 billion of its retirement pension fund partly in funding the country’s huge annual infrastructure deficit estimated at $2.1 billion (circa Sh200.13 billion).”
Obasanjo stated that the summit highlighted the great strides taken by African countries in reforming their pension and social security systems and also demonstrated how pensions can be utilised as a critical tool for positive socio-economic development, especially in the provision of long term financial funds for the real sector and for the development of necessary Infrastructure and Housing.
He noted that the contribution of African pension funds to the growth of the African economies is still low.
The former president said: “Thus, while we note the fact that many African countries are still reforming their pension systems, it has become imperative for the continent to strengthen its savings systems in order to develop the capacity to provide sufficient domestic capital that would drive economic growth.
“We must consequently consolidate and undertake further reforms of our pension systems to expand coverage in order to generate more contributions, which in turn would provide the capital needed to finance infrastructure and economic development.
“However, for any pension reform to fully succeed, African governments must ensure that all relevant stakeholders work together to provide the right operating environment for pension fund portfolios to reflect the developmental aspirations of the continent.”
