In the current challenging global economic environment, Africa is one of the areas where potential for growth is among the strongest in the world. In fact, there is increasing interest among multinationals to grow their businesses in Africa. However, expansion in Africa will require multinationals to think carefully about each country’s unique cultural behaviors – one of the biggest challenges they must address in order to be successful. One of the major “special” characteristics of the African workforce is the significant proportion of informal employment ⁽¹⁾ (between 30% and 60%), which is itself difficult, if not impossible, to measure.

The current status

The current social security systems in African countries generally do not provide retirement benefits coverage to the whole population. Most of these systems are based on employment contracts and years of contributions to the mandatory state system. Consequently, mandatory systems would not benefit the significant part of the population working in the informal sector. Better coverage will come when governments redefine their labor legislation to allow for a more formal employment structure across the entire workforce. Such policies would significantly widen the basic retirement coverage across the population and provide a better foundation before any mandatory private pension systems are set up or enhanced to further address retirement needs.

Formulate specific criteria

In order to do this, African governments should focus on their particular demographic profiles and cultures, rather than simply duplicate the models of developed countries, as has often been the case in the past. For instance, instead of being based on employment contracts, mandatory social security systems could instead be based on contributions paid within a participation criteria and be open to informal workers who are willing to pay and need to prepare for their retirement.

Mandatory national social security retirement plans are mainly earnings-related systems financed by payroll tax contributions from employees, employers or both. Examples of exceptions are: 

• Nigeria, with individual retirement plans under which employees, and potentially employers, must contribute to an individual account

• South Africa has a means-tested pension system that provides low pension amounts - pension reform is ongoing to address issues raised by the current system, which is inefficient for the majority of the population who are also the poorest

To capture the largest range of participants, mandatory private systems should be in the form of long-term savings plans or life-insured contracts, with provisions for retirement and death-in-service benefits. The African population manages its financials in a pragmatically short-term way (perhaps Africans’ life expectancies and trends affect economics more widely), and workers typically would not be keen to participate in a system that doesn't provide coverage to their dependents both during service and at retirement. A retirement vehicle that can be transferred or used more immediately has greater appeal. This short-term view is not compatible with defined benefit (DB) solutions under which pensions are paid upon retirement. In such plans, the time when accrued benefits are payable is too far in the future to be attractive to workers. Moreover, for the most part, African workers do not feel secure enough in their employment prospects to consider a DB plan as a tangible advantage. Such DB plans may only be interesting and efficient for top executives or other better-paid, more specialist employees.

In addition to this, and in order to address the income gap issue, which is critical in Africa, we can imagine the following:

• Mandatory contributions for all employees

• Voluntary employee contributions on top of mandatory contributions, with employer matching for high earners to enhance their replacement ratio

South Africa’s pension reform is already proposing to implement the above measures.

Insurance mechanisms needed

Implementing these types of plans will require the cooperation of insurance companies. As in many other areas, the African insurance market is in its early stages compared with that of developed countries, and it is mainly dominated by non-life insurance products. However, there is a growth trend in life insurance in Africa, which now represents 1.2% of the global market. Total life insurance annual premiums almost doubled between 2000 and 2009 to reach $33 billion at an average 7.9% increase per year compared with 6.2% at a global level over the same period. South Africa largely dominates the continental life insurance market, with annual premiums representing $25 billion. Moreover, South Africa is one of the largest markets in the world for pension assets under management. The potential for growth in pension assets under management is huge, if governments succeed in including the informal workers in public and private systems.

One retirement solution for Africa?

Looking at the overall problem of retirement provision and also considering expatriates in Europe and in Africa, it is possible to entertain the idea of pan-African retirement plans. However, at this stage, this may be too ambitious!

But in analyzing the various countries in Africa a little more closely, we can identify three different zones where adopting specific regional approaches could work:

• South Africa – This is a mature retirement market, with a significant amount of pension assets under management through its widely provided DC plans.

• North African countries – The population in these countries is older than in other parts of Africa, with higher life expectancy and good statutory coverage. Pension reforms (for example, moving to three-pillar systems, increasing retirement age, etc.) are also aligning this region with developed countries’ retirement plans.

• Sub-Saharan African countries – These countries have very specific demographics showing a young and dynamic population, with life expectancy between 45 and 60 years of age and less than 5% of the population more than 65 years old.

Even though we can identify some characteristics of regional markets, current trends and forecasts also show a fast-growing middle class in several African countries. These middle classes will have access to better housing, health care and education and enjoy more leisure time. Consequently, they will live longer and therefore will need to maintain their standards of living during their retirement period. In other words, retirement solutions in Africa will need to be dynamic to anticipate this coming change.

Development in Africa is changing fast and different approaches should be used to address the current and future retirement challenges. Mercer believes that one of the key elements is to understand the cultural behaviors and build retirement vehicles to meet these specific needs.

Note:

1. Informal employment is mainly in the agricultural sector but also includes many other areas of employment where individuals work without any formal contract of employment.