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The Impact of COVID-19 on the African Pension Industry

The Impact of COVID-19 on the African Pension Industry

Covid-19 has impacted and continues to impact the pension industry as members have reduced their contributions. On the other hand, others settled for early withdrawals because they no longer had a steady income, either due to layoffs or business closure. The pension industry has also experienced reduced investment from the funds. In Kenya, for instance, the stock market was really hit hard! So many of the schemes posted very low returns in 2020.

The Sub-Saharan African pension market has experienced growth from the privately managed, employer-based pension schemes. However, few large state-run schemes continue to predominate in some regions. According to a report by the World Bank Group, the pension industry in Africa had been growing rapidly for the last two decades; up until the Covid-19 pandemic hit. The impacts include:

Employers struggling to make contributions

Employers struggled to make their periodic contributions especially in the sectors that were hard hit. In Kenya for instance, the hospitality and tourism industry faced a big blow because the large percentage of their clients are international. Many employers suspended or reduced contributions while others reduced staff salaries, cutting contributions to pension funds. Furthermore, revenue drop and potential losses made employers struggle to make contributions.

Economic Impact

The impact of Covid-19 on the economy was evident and felt across the different countries in Africa. Members in some countries, began pressing governments to tap pension funds to help alleviate some of the immediate negative economic impact of Covid-19, on particular sectors. In Nigeria, for example, the government thought of requiring the contributory pension scheme (PFAs) to release some amount of their capital as “comfort” to help households cope.

Similar Article: Managing Pension Risk as an Individual or Organization

Lessons learnt from Covid-19 pandemic

Covid-19 has enlightened the pension industry, in terms of diversifying portfolios. This allows one to invest in a range of asset classes, as a way of risk management. Where pension funds diversify into alternative assets that tend to have lower correlations with equity or bond markets, they may gain some downside protection even in the short-to-medium term. By taking a more diversified portfolio approach, local institutional investors could provide some means of risk mitigation in the event of future negative shocks.

In summary

Covid-19 threatened to reverse the growth in the pension industry but lately there has been improvement. Employers have started making contributions and the investment funds are growing. Equally, Covid-19 has emphasized the need to give priority, to increasing the level of longer-term domestic savings, in African economies. Also, there has been need to encourage more participation, including those in the informal sector.

Covid-19 has impacted and continues to impact the pension industry as members have reduced their contributions. On the other hand, others settled for early withdrawals because they no longer had a steady income, either due to layoffs or business closure. The pension industry has also experienced reduced investment from the funds. In Kenya, for instance, the stock market was really hit hard! So many of the schemes posted very low returns in 2020.

The Sub-Saharan African pension market has experienced growth from the privately managed, employer-based pension schemes. However, few large state-run schemes continue to predominate in some regions. According to a report by the World Bank Group, the pension industry in Africa had been growing rapidly for the last two decades; up until the Covid-19 pandemic hit. The impacts include:

Employers struggling to make contributions

Employers struggled to make their periodic contributions especially in the sectors that were hard hit. In Kenya for instance, the hospitality and tourism industry faced a big blow because the large percentage of their clients are international. Many employers suspended or reduced contributions while others reduced staff salaries, cutting contributions to pension funds. Furthermore, revenue drop and potential losses made employers struggle to make contributions.

Economic Impact

The impact of Covid-19 on the economy was evident and felt across the different countries in Africa. Members in some countries, began pressing governments to tap pension funds to help alleviate some of the immediate negative economic impact of Covid-19, on particular sectors. In Nigeria, for example, the government thought of requiring the contributory pension scheme (PFAs) to release some amount of their capital as “comfort” to help households cope.

Similar Article: Managing Pension Risk as an Individual or Organization

Lessons learnt from Covid-19 pandemic

Covid-19 has enlightened the pension industry, in terms of diversifying portfolios. This allows one to invest in a range of asset classes, as a way of risk management. Where pension funds diversify into alternative assets that tend to have lower correlations with equity or bond markets, they may gain some downside protection even in the short-to-medium term. By taking a more diversified portfolio approach, local institutional investors could provide some means of risk mitigation in the event of future negative shocks.

In summary

Covid-19 threatened to reverse the growth in the pension industry but lately there has been improvement. Employers have started making contributions and the investment funds are growing. Equally, Covid-19 has emphasized the need to give priority, to increasing the level of longer-term domestic savings, in African economies. Also, there has been need to encourage more participation, including those in the informal sector.

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