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Addressing Africa’s impending pensions challenge

Addressing Africa’s impending pensions challenge

Africa’s youthful population and growing middle class are generally considered positive investment themes for the continent, but will African pension systems be able to serve this youthful cohort when they inevitably grow old?

Africa’s youth will not only age, but will also live longer. According to United Nations research, Africa is projected to gain nearly 11 years of life expectancy by 2050, reaching 71 years in 2045 – 2050.

“Developing more efficient pension systems across the continent is crucial and we need to increase ongoing savings contributions for the development of institutional investment and investors in Africa,” said Gerald Gondo, one of the authors of RisCura’s Bright Africa report for 2018.

“The symbiotic relationship between pension systems (suppliers of savings) and institutional investors (investors of savings) allows for the creation of assets that should safely and sustainably fund the retirement goals of African savers,” said Gondo.

Harnessing Africa’s informal savings

Roughly 70% of Africa’s workers are employed in the informal sector. This has limited the size of traditional pension funds – resulting in low levels of pension coverage. Formal pension funds are unable to cater for low incomes, which are irregular as many workers are seasonal and migrant.

“Stakeholders in African pensions systems, including policy-makers, pension practitioners, and development finance institutions, need to embrace this reality and enable savings for this group,” says Gondo.

The pension systems of Nigeria and Kenya are already embracing alternative forms of savings. In Nigeria, the Micro Pension Plan is designed to cover small-to-medium sized enterprises, self-employed Nigerians and the broader informal sector.

As at the end of 2016, there were an estimated 38 million potential contributors to Nigeria’s Micro Pension Plan. The Nigerian pension industry’s strategic objective is to cover 30% of the country’s working population by 2024, which will only be achievable by reaching out to the informal sector.

Kenya’s Mbao Pension Plan also targets workers in the informal sector, who run micro, small and medium sized enterprises in Kenya. Under Mbao, members must make a daily minimum contribution of KES. 20 (US$0,20) using their mobile phones. Members can make their payments through M-PESA and Airtel Money transfer services in real-time, 24 hours a day, and from anywhere within the mobile phone network coverage.

“These plans show the opportunities that mobile phone penetration offers for pension funds,” says Gondo. “They also reflect international trends, where digitally-integrated payment, administration and investment functions allow greater flexibility in participation as well as lower costs.”

Pension fund asset allocation

In most OECD and many non-OECD countries, bonds and equities remain the two predominant asset classes for pension funds. While globally there is a larger allocation to equities (45%), the picture in Africa is more disparate.

Asset allocation in sub-Saharan Africa has favoured equities, which have shown a steady increase enabled by the development of capital markets and regulatory change. In Nigeria and East Africa, asset allocation is dominated by fixed income allocations, which predominantly constitute local bonds.

When viewed alongside the high asset-growth in these regions, it reflects both regulation and a lack of alternative local investment opportunities. “This highlight’s one of the key challenges pension funds face: identifying enough appropriate, local investment opportunities to invest ever-increasing contributions,” said Gondo.

Local regulation remains one of the main drivers of asset allocation. “There are often significant differences between the regulatory allowances for pension funds, size of local capital markets and actual portfolio allocations between regions,” said Gondo.

This is due to several factors, including familiarity with alternative asset classes, such as private equity, development of local capital markets and the availability of investment opportunities.

“In many countries, assets are growing much faster than products are being brought to market, which limits investment opportunities if regulation does not allow for pension funds to invest outside of their own countries,” said Gondo.

Addressing the shortage of investment opportunities

One way for pension funds to address the shortage of investment opportunities is through investment into alternative assets classes. This kind of investment in Africa has historically come from developmental finance institutions (DFIs), but pension funds are slowly joining in. As pension assets continue to grow and international development assistance decreases, African pension funds have a pivotal role to play in facilitating inclusive growth and social stability.

“Local institutional investors lend credibility and often serve as a catalyst for greater external interest. Local investors also allow global peers to benefit from local knowledge and networks,” said Gondo.

South Africa, Botswana, Nigeria and Namibia have led the way in investing in alternative asset classes such as private equity. South African pension funds, for example, have been active in African private equity investment, both locally and across the continent, enabled by recent regulatory change.

“Regulatory changes are taking place across the continent and the deregulation of prescription will unlock capital to flow where needed in Africa,” said Gondo. “Looking specifically at private equity, if African pension funds are to take the lead from DFIs in further deepening the private equity industry, capital must be allowed to seek the most compelling investment opportunities.”


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Sanlam 2018 Annual Results

7 March 2019

 

Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at www.sanlam.com.