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91% of sub-Saharan African workers don’t save for old age: why that’s a problem and how to fix it

A photograph of a pair of hands holding Nigerian banknotes in a small bottle.
Sub-Saharan Africa has the lowest level of pension savings in the world. Shutterstock

Less than 10% of the workers in sub-Saharan Africa save for old age, the lowest rate for any region in the world. That implies most of the breadwinners today won’t be able to afford basic items after retirement. A pension plan is meant to commit employers to make regular savings so that employees will continue to earn after retirement. The Conversation Africa asked Owen Nyang'oro, a financial economist, about Africa’s pensions and why they need to be fixed.


What’s the state of sub-Saharan Africa’s pension savings?

In a recent study of retirement savings in sub-Saharan Africa (other than the francophone countries), we established that the continent’s pension funds are diverse in architecture, coverage and performance. But they mostly lag behind in reforms compared to other regions. Pension savings are also low compared to other regions. Only 19.8% of people above statutory retirement age receive a pension in sub-Saharan Africa, and just 8.9% of the labour force is covered by pension schemes. This is much lower than the global average where 77.5% of people above statutory age and 53.7% of workers have pension coverage.

Pension schemes in sub-Saharan African countries are characterised by low contributions due to low earnings, high informality, high financial illiteracy levels and lack of proper information about the benefits of adequate contributions for future pension withdrawals.

Market data shows that South Africa, with pension fund assets valued at about US$330.3 billion in 2019 (latest country update), is the continent’s top performer in absolute terms. Nigeria, which had assets worth US$32.6 billion, Kenya with US$13.7 billion and Namibia with US$13.3 billion were the other top pension savers in 2021.

Countries with low pension savings at the end of 2021 included Mozambique with US$224 million, Zambia (US$745 million) and Angola (US$861 million).

But in proportion to the size of the economy, the best performers in 2019 included Namibia (95.4%), South Africa (82.6%) and Botswana (51.9%). Angola, Mozambique, Zambia, Nigeria and Ghana trailed with pension assets below 10% of their gross domestic product.

Generally, Africa’s pension assets are very small compared to the 2021 retirement funds of say, the United States (US$40.0 trillion) or the United Kingdom (US$3.8 trillion).

What’s peculiar about Africa’s population?

The majority of the population is young and fertility rates are high. The old-age dependency ratio (the number of elderly people for every economically active person) is low compared to other regions, averaging 5.5 in 2022, and the ageing population is small but increasing. The annual population growth rate in sub-Saharan Africa was 2.5% in 2022, which is more than three times the global annual average of 0.8%.

With much younger populations and relatively high population growth rates, the number of dependants in sub-Saharan African countries is increasing at a slightly faster rate, and over time the numbers of elderly people needing social support will also rise. It is projected that the number of elderly persons in the region will grow at annual rates above 3% between 2022 and 2050.

The concern is that only one in five people of pensionable age receives an old-age pension compared to over three in four people globally.

High levels of unemployment and the large size of the informal sector – which accounts for over 89.2% of the labour work force – mean that the elderly will continue to face income challenges. Households are also becoming smaller and changing from multi-generational (made up of grandparents, parents, children and grandchildren) which offer social support to the elderly, to skipped-generation (where grandparents live with grandchildren in the absence of parents) or one-generation (where the elderly live by themselves).

What are the benefits of a good pension system?

The primary goal of pension savings is to provide income and livelihood in old age. However, pension savings can also be mobilised to finance productive activities and improve living standards.

The continent’s annual infrastructure funding gap (the difference between resources required and what’s available) is estimated at between US$68 billion and US$108 billion. Resources to meet the infrastructure gap could be mobilised from pension funds. This requires good governance and removal of any regulatory obstacles. Pension funds can also support development of capital markets and improve ease of trade in the capital market through their investment activities.

Pension funds can also reduce public borrowing, and improve efficiency of the labour market by creating incentives for formalisation of businesses.

How should countries improve pension savings?

African governments can boost pension savings in four ways:

  • Increase pension participation and coverage by including the unemployed and those in the informal sector. This could be achieved through a targeted universal pension scheme and greater financial literacy. The countries should have a mix of universal schemes and schemes with payroll deductions and employer contributions.

  • Bundling pensions with other products. Bundling pensions with other products such as life insurance cover, and even matching contributions to encourage greater participation and long-term savings in pension funds. Favourable tax considerations can also enhance the growth of contributions and assets of pension funds.

  • Use of technology. Leverage innovations in digital technology to increase pension savings. The region accounts for 53% of active mobile money accounts in 2021. Use of digital technology could increase coverage, especially in the informal sector. It can make enrolment and contribution to pension funds easier.

  • Review regulatory frameworks of the pension sector to open it up to the unserved population. There is also a need to streamline management of pensions and minimise costs of administration, especially for private pensions. This will allow pension funds to extend investments to other assets, including foreign ones, to improve returns.

Sub-Saharan African countries are likely to gain from a well-developed pension system that provides adequate income to the elderly. This will in turn reduce the need for social protection, provide financing for infrastructure development, and support the development of capital markets.

All this calls for deliberate reforms to facilitate growth of pension savings. Countries should prioritise pensions within their development plans, address informality in the labour market and take advantage of technological advancements and the youthful population.

A well-developed pension system will improve the region’s financial stability through reduced budgetary strain as funds become available for development. It could also open up capital markets and improve the labour market, thus leading to growth.

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