Pension funds in sub-Saharan Africa

Abstract

The population structure the world over is going through a demographic shift, and the elderly proportion is projected to increase with population growth. This change is a matter of concern for sub-Saharan African (SSA) countries, where the majority of the people are young and the rates of both population growth and unemployment are high. A good pension system provides elderly assistance and is a source of savings for long-term investment. The pension systems in SSA, however, are characterized by low coverage and participation rates, and they therefore fail to guarantee a basic income to the elderly. The contributory nature of most private pension schemes is also not favourable in SSA due to high levels of informality and low levels of income, which limit contributions, and because such schemes do not promote risk-sharing and redistribution. Pension reforms in regions such as Latin America have not been overly successful, and this offers lessons for SSA countries. The pension sector in SSA is characterized by low assets under management, investment in short-term assets (mainly government securities), low returns on investment, and restrictive regulatory frameworks. The way out for SSA is to move towards a targeted universal pension system financed through public resources; however, the shift to such a system should be gradual so as not to lead to fiscal strain.

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