There is a view that sub-Saharan African governments need to pay much more attention to social security by improving their savings systems and developing a sustainable pensions industry. aIn addition, with GDP growth of 6%, the prevailing view is that, even after net foreign direct investment (FDI) rose from $37bn (€28.4bn) in 2012 to $43bn in 2013, the region still needs a great deal of capital.

In the past decade, two of the continent’s major economies have updated their pension funds legislation. Nigeria passed its Pension Reform Act in 2004 and, in 2011, South Africa made important amendments to its Regulation 28.

South Africa wanted to improve the investment environment for these pools of capital.

“We have enabled our institutional investors to invest offshore since 2001, providing an additional allowance if pension funds seek to invest in sub-Saharan Africa,” says Olano Makhubela, chief director of the financial investments and savings unit at the South African Treasury. “These are what we call Prudential foreign exposure limits and is part of our initiative to have more of our institution investors investing more in sub-Saharan Africa, given the dire need for capital [in that region]”.

There is money to be made but there is also a broader, geo-political reason for encouraging South African institutional investors to look northwards, Makhubela suggests.

“We had and still have [a policy] that we call ‘Making South Africa a gateway into Africa’, which is part of a larger policy that asks how we can get Africa to make use of South African institutional investors in terms of raising and attracting capital,” he explains. “Arguably, we have a more sophisticated and deeper financial market [than our neighbours in Africa].”

Relaxation of the rules governing pension investments began in 1995 with the introduction of asset swaps to enable foreign exposure of up to 5% of total assets without moving any money offshore. This turned out to be somewhat insufficient, and in 1996 the authorities instead allowed institutions to invest up to 10% of their net inflows abroad. That allowance increased again in 1998 to 15%, before settling at the current level of 20%.

“We do not want to prescribe how pension funds should invest offshore,” says Makhubela. “That could have unintended consequences: one being, forcing pension funds to invest in assets which might not necessarily be viable. We’re fairly safe in the knowledge that we are not compelling any pension fund to invest in any particular country and so we cannot be used as a scapegoat if things go wrong. Regulation 28 subtly enables a prudential kind of thinking without having to be pedantic and prescriptive in terms of investments.”


The Nigerian context to pension fund legislation diverges from the South African one in the sense that the root cause of its introduction had more to do with addressing problems of misappropriation and mismanagement of pension funds.

The Pension Reform Act of 2004 established the Pension Commission (PenCom), which currently licenses 20 pension fund managers or pension fund administrators (PFAs) and five custodians. The Act brought an end to the existing defined benefit scheme for public servants because, according to PenCom, “in many cases, even where budgetary provisions were made, inadequate and untimely release of funds resulted in delays and arrears of payment of pension rights”.

In the private sector, matters were worse: “The management of pension funds was full of malpractices between the fund managers and the trustees of the pension fund.”

The Act aimed to establish a uniform set of rules, regulations and standards for the administration of pension funds as well as “stem the growth of pension liabilities”.

Under the current system, PFAs manage pension assets paid in through a contributory system where every working individual (and in the private sector, companies with five employees or more) is required by law to open a retirement savings account into which they contribute a certain percentage of salary.

The total sum of Nigerian pension fund assets stands at $22bn as a result of the new contributory system, according to Chinelo Anohu-Amazu, PenCom’s director general.

“The Pension Reform Act 2004 was enacted to solve the huge pension problem in Nigeria,” she says. “At the time, we had a NGN2trn [€8bn] deficit in pension fund liabilities and that was growing by the day. Pertinent is how these funds are going to take advantage of market opportunities. The funds already invest in capital markets in Nigeria. We are also working to make sure that the tenet of the pension fund regulation, which is the safety of the fund, is incorporated with the need to actually invest those funds.

Typically we are focusing on Nigeria. The law, as it is, allows investments outside the shores of Nigeria, whether in Africa or the rest of the world. We are interested in setting up Nigerian investment to begin with, and making sure that the funds are primarily invested in Nigeria and then, obviously, there will be a need for diversification.”

Nigeria is reviewing its pension legislation. Within the past year, a bill has been introduced that would repeal the ground-breaking 2004 Act. The rules are set to be even more stringent as Nigeria suffers from the very poor historical handling of its pension fund industry. There also appears to be a rethink about how to maximise the potential of a tightened, safer social security system by investing a greater portion of its reserves outside Nigeria. The review is a work in progress and one that, if current and future legislation translates to practice, could yield substantial benefits not only for Nigeria but for the rest of the sub-Saharan region.