Investments and Pension reforms around Africa: Wake up, domestic giants

Published on The Africa Report, by Tom Minney, October 31, 2012.

New reforms and stricter governance measures could bring billions of dollars in new investments into African stock markets and infrastructure projects … //

… Filling the funding gap:

If well-managed, pension funds and other domestic institutional investors could become important actors in developing capital markets and could help raise national savings rates. Pension funds can be key players in making markets more liquid, efficient and transparent by supporting innovation such as central depositories and automated trading systems. 

They can be active shareholders, pushing managers at investee companies for better performance. For now, African pensions are generally limited in how much of their portfolios they can invest internationally, but this could potentially protect against demographic and economic shocks, and improve portfolio quality when investment-grade assets are scarce at home.

Optimists believe long-term capital from pension funds could fill part of Africa’s estimated $45bn-per-year infrastructure funding gap. In January, Tanzania’s National Social Security Fund signed an agreement to finance 60% of the $137m cost of the Kigamboni Bridge.

“Investment guidelines allow for mortgage (bonds) and infrastructure projects in the form of project financing,” says SSRA’s Isaka.

The Kenyan government has issued infrastructure bonds since 2009 to fund road, energy and water projects. John Oliphant, head of actuarial and investments at South Africa’s $130bn Government Employees Pension Fund (GEPF), told the investment website that the fund represented around a third of South Africa’s GDP.

“Anything that you care to see when you arrive in South Africa – whether you arrive at the airport, whether you drive on the roads, whether you buy food in the shops or whether you stay in a hotel – we own a piece of it,” he said.

Developing the pension sector has hardly begun in many countries that are still in the process of formulating the regulatory and management structures. There, investments are sometimes still restricted to bank deposits and government debt securities.

Asset managers are not yet seeing a flood of pension fund money. “We haven’t yet seen significant progress in their equity investing,” says Graham Stock, chief strategist for UK-based Insparo Asset Management.

“They still have quite a high bias towards government security and real estate. They tend to move in a very herd-like way. You don’t see individual funds breaking that mould. I would expect the first stage to be a focus on listed equities and then small allocations to private equity and then eventually infrastructure,” he explains.

Stock is also wary of pinning too much hope on infrastructure investments from pension funds. He points to developed markets like the UK, where pension assets have traditionally failed to jump into infrastructure and public-private partnerships. In Africa, says Stock: “It’s going to be the same old patterns.”

Pension funds are beginning to be a regular port of call for private equity fundraisers. South Africa’s GEPF backs the Pan African Infrastructure Development Fund, which raised $625m in 2007 and is targeting $1bn on its second offering.

In 2009, [I]Côte d’Ivoire’s Caisse Nationale de Prévoyance Sociale[/I] helped to sponsor the West Africa Emerging Markets Fund alongside insurance companies and international development finance institutions.

In Nigeria, new pension fund administrators (PFAs) are finding it a challenge to invest their capital. “One of the things we have to realise is that first and foremost for the PFAs is safety,” says Rilwan Belo-Osagie, managing director of First Securities Discount House.

“\[If ] my money’s in a PFA, I don’t expect a PFA to be emotional or to be patriotic about any investment it makes.”

Legal changes:

Pension reforms have begun in Côte d’Ivoire, Gabon, Kenya, Nigeria, Senegal and Uganda. In 2008, Ghana created the National Pensions Regulatory Authority (NPRA), and it introduced mandatory contributions to Tier 2 schemes, whose funds are to be managed by independent licensed corporate trustees.

By late July, there were 14 trustees registered, but an estimated 300m-500m cedis ($150-250m) that had been put in a temporary government account since the law was enforced was still to be dispersed to the funds.

There are no signs that the money, when it is released, will be put to work funding private equity or infrastructure. “A lot of it will be put back to fund the government,” said Chris Hammond, deputy managing director of Petra Fund, which was licensed by the NPRA in March. He said 70% of their funds would be dedicated to government securities, with around 8-10% in equities and the rest in real estate and money-backed securities.

Reform in Kenya, including investment guidelines and a new regulator, resulted in strong growth and good investment returns, a better result than the unreformed government-run National Social Security Fund.

Tanzania passed the Social Security Regulatory Act in 2008 and Isaka said in July that changes include a “very comprehensive harmonisation of the legal and regulatory framework” that led to the publication of investment guidelines and the actuarial valuation of all social security schemes.

In April and June, angry Angolan war veterans chanted “Kill us, kill us” as they fought heavily-armed riot police while demonstrating for pension payouts. The pressure on Africa’s leaders should help speed up reforms and encourage pension savings.

That, in turn, could unleash investment that could fuel Africa’s fast-growing economies and ensure that some of the profits of the continent’s expected growth remain at home.
(full text).


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