EA countries race to form inclusive, affordable pension schemes for informal sector

East African Community partner states are in the process of creating micro-pension schemes for employees in the informal sector to address the low pension coverage in the region, estimated at less than 10 percent.

A new pension sector survey by global investment firm RisCura shows that Rwanda, Uganda and Kenya are among African countries racing to create affordable and all-inclusive old-age saving schemes for the informal sector workforce. Other countries are Nigeria, Ghana and South Africa.

The survey report dubbed Bright Africa 2020: Pension Industry shows that without progressive reform to the pensions and savings environment — particularly for those in the informal sector — governments across Africa are likely to face mounting pressure to provide appropriate social welfare.

Currently, the global population of 60 to 70 year-olds is slightly over one billion, with Africa constituting seven percent (74 million). By 2060, this global population (60 to 70 years) will be approximately 2.3 billion, with Africa contributing 13 percent (300 million) of the total of old people.

“The continent’s current youthful cohort will represent a sizeable number of individuals who need to draw on savings during their retirement. Without progressive reform to the pensions and savings environment, particularly for those in the informal sector, governments across Africa are likely to face mounting pressure to provide appropriate social welfare,” the report says.

“To avert fiscal and social stress, policy-making on pensions and social security in Africa needs to quickly move to enable affordable, convenient, and secure micro-pension products to be established.”

According to the report, the prospect of a seismic growth in the elderly population on the continent and the fact that over 85 percent of working Africans are employed informally pose unique challenges to its pension fund industry.

The report notes that most people in Africa lack social protection, with a common narrative across the continent being that social protection is only possible for a small number of those in formal employment.

However, a large informal sector has created a dual challenge since not only are workers in informal employment difficult to target, but they also only contribute slightly, if at all, to overall tax collection.

The report notes that while efforts are being made to address the challenge of informal sector pension schemes through reviews of pension regulations, creation of unique solutions such as micro-pensions, a high rate of mobile penetration and asset allocation towards long term growth, there is still much more to be done.

“The road ahead will be thorny, and no doubt full of delays, but awareness of the problems is there, coupled with firm intentions to solve them,” the report says.

According to the report, financial technology (fintech) is proving to be a key enabler of financial inclusion and pension provision in Africa, with countries such as Rwanda demonstrating that national projects incorporating national identification, technology and high mobile-phone penetration, can be harmonised towards financial inclusion and a broad-based adoption of savings products.

In Africa, it is estimated that 13.1 million people were aged 65 or more in 1975, which increased to 41.3 million people in 2015 and is expected to reach 150.6 million people in 2050 and 652.4 million people in 2100.

“It is critical for savings to take place for this cohort and more importantly, for savings to sustainably grow in tandem with this inevitable demographic transition,” according to the report

On the other hand, East African countries are working towards attaining a single regional market in the pension sector to allow greater mobility of the work force across the EAC region, deepening the investment opportunities for fund assets and allowing contributors a greater choice in providing for their retirement.

According to the EAC retirement Benefits Policy, the pension coverage in the EAC region is generally low — estimated at less than 10 percent of the total labour force — and mostly covers the formal sector leaving the larger part of the working population in the informal sector uncovered.

According to the police the pension system in the region favours the formal sector which enjoys access to the existing formal pension arrangements to the exclusion of the unemployed population and the ever increasing informal sector.

“Pension systems should aim to provide adequate benefits as well as enhancing coverage. They can also play a significant role in fulfilling the diverse financing needs of various sectors of an economy and thus contribute to the economic development of the EAC region,” according to the Policy.