AFRICA INVESTMENT-Africa woos domestic savers as a buffer against fickle foreign capital

Thu Jul 24, 2014 12:24pm EDT

* African workers traditionally took family as a pension

* Growing savings seen as fund pool for infrastructure

* 20 pct of Africans have formal pension savings-official

* Uganda latest country to set up pension scheme

By Chijioke Ohuocha

LAGOS, July 24 (Reuters) - Like many African workers Olalere Ojedokun's only pension plan was sending his kids to school so they could take care of him in old age, but that changed when Nigeria introduced a contributory pension scheme that it hopes will cover everyone.

"I won't have to look to my children for a pension," Ojedokun, 45, a father of four who works in marketing, said.

"Having something to fall back on at retirement is motivation to be part of the pension scheme," Ojedokun, who started contributing to his pension five years ago, added.

African economies seeking to diversify away from foreign aid or borrowing to fund urgent infrastructure needs are increasingly turning to their burgeoning pool of domestic savers.

The continent needs billions of dollars in financing to be able to build roads, bridges, airports and power in order to accelerate economic growth, currently hovering around 5.5 percent annually, and create jobs.

Long-term funds are scarce so pensions, long-term plays by nature, are seen by governments as potentially a major source of financing, although a lack of pensions' cover is for now a capital constraint.

"The contribution of African pension funds to the growth of African economies is still rather low. It's a low percent of GDP in many countries but it's improving," Nigerian Finance Minister, Ngozi Okonjo-Iweala, said at an Africa Pensions summit in Nigeria's capital Abuja this month.

The 2008 financial crisis, and market volatility in the past year on signs the U.S. Federal Reserve would start cutting back on the cheap dollars that have flooded emerging markets, served as a reminder to African governments: the continent badly needs more domestic savings if it wants to stop being beholden to the whims of faraway financial centres.

"There's general growth in savings ... around Africa and I think that the drive for infrastructure is making governments realise that we need to grow our own local savings," Edward Odundo, chief executive of Kenya's pension regulator, Retirement Benefits Authority, said on the sidelines of the Africa Pensions summit.

Savings are coming from a low base, compared with more mature economies, but growth rates are fast, especially as economic growth deepens and the continent's bulging youth population starts to enter the workforce.

Nigeria has pension assets of around 4.3 trillion naira ($25 billion) which make up only 5 percent of its recently rebased GDP and cover less than 15 percent of the workforce. Though the figure has grown from 1.6 percent of GDP in 2006.

Pension contributions make up around 20 percent of Africa's GDP, Odundo said, with Kenya itself seeing the same ratio.

Contrast with the West, where in 2012, pension assets were 155 percent of GDP in the Netherlands, 104 percent for Britain and 74.5 percent for the United States, Nigeria's Okonjo-Iweala told the summit.

"Coverage (in Africa) ... is still very low because most of the people are in the informal sector," Odundo, who also doubles as president of the International Organisation of Pension Supervisors (IOPS), an independent body involved in the supervision of private pensions, said.

Several African countries, including Nigeria, Kenya and Uganda have seen companies set up contributory schemes, moving away from government schemes, as part of reforms meant to boost savings in a bid to mobilise long-term funds for the economy.

Nigeria, Africa's biggest economy, reviewed its pension law this month to expand coverage to include companies that employ more than three people, to boost the savings' rate and deepen long-term investment. Those companies would include small proprietorships, many of which do not even pay tax.

"We need to capture a significant proportion of our workforce, especially those in the informal sector. We need to encourage countries to switch to contributory schemes," Okonjo-Iweala said.

Uganda announced plans last month to end a state pension monopoly and make civil servants contribute to private retirement funds.

INFORMAL ECONOMY

Foreign direct investment into Africa peaked in 2008 at $72 billion, according to a United Nations report, and then dropped to $59 billion the following year, when the financial crisis set in. It has started to pick up again but fickle portfolio investors buying equity, debt and commodities remain a much larger contributor to investment figures.

Hot money that can be whipped out in a flash is not the sort of thing African states can rely on for long-term infrastructure funding commitments.

"Pension savings are more reliable than foreign borrowing, more (reliable) than bank lending, and have the added benefit of providing security for workers when they reach retirement," Charles Robertson, chief economist at Renaissance Capital, said.

Nigeria rebased its gross domestic product to $510 billion in April to overtake South Africa as the continent's biggest economy. But that rebasing exposed the reality that more than half of its economy was in the informal sector, which does not generate tax revenues - and most of its participants save very little.

Odundo said growth in pension savings was coming from only 20 percent of Africa's workforce as the rest was employed in informal sector jobs. He added that Kenya was considering automatic enrolment for adults aged 18 years onwards.

Kenya's biggest pension fund, National Social Security Fund, expects annual contributions from members to surge by more than 10 times to 118 billion shillings ($1.35 billion) in five years, and plans to invest in new asset classes like private equity.

Fiona Stewart, a pension specialist at the World Bank, said long-term savings were rising in Africa, a continent still regarded as too dependent on foreign aid to fix drains or pave roads.

Nigeria has started to allow pension funds to invest in more asset classes but less than 2 percent of funds are invested in infrastructure. By the first quarter of 2014, 68 percent were invested in government bonds and 13 percent in equities.

There is a now an allowance for pension funds to invest up to 15 percent of their assets in infrastructure bonds, said Chinelo Anohu-Amazu, director general, Pension Commission of Nigeria.

"However, owing to a dearth of these instruments, pension funds have not been able to make significant investments."

That could be changing.

Nigeria's ARM Infrastructure is close to raising $250 million in the country's first infrastructure fund, to invest in transport, energy and utility sectors across West Africa, with much of the money coming from pension funds.

Pension managers will also have to develop expertise for deploying funds into longer-term investments that meet Africa's infrastructure challenge. But first they need more savers. (Additional reporting by Duncan Miriri in Kenya; Editing by Tim Cocks and Susan Fenton)

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