Assessing the challenges and opportunities in East Africa’s pension sector

Pension funds and institutional investors are essential components of long-term finance, providing stable savings for investment. However, in East Africa, the pension sector faces unique challenges and opportunities that must be carefully navigated to ensure sustainable growth and support for retirees. Fred Nyakieka, a Regional Consultant for Pensions & Investments at Lyerson Group, shared insights on the current state of the pension sector in East Africa during an interview with CNBC Africa. One of the key challenges in the East African pension sector is the structure of pension schemes across different countries in the region. Each country has its own system, with a mix of state-provided first pillar schemes, occupational schemes, and public sector schemes. While first pillar schemes are mandated by the state and typically provide benefits in the form of lump sums, occupational schemes established by employers for their staff often face challenges related to funding and sustainability. In many cases, occupational schemes struggle to provide adequate benefits due to limited funding. This issue is particularly prevalent in non-funded public sector schemes, where pensions are paid directly from the government's coffers, leading to delays and financial strain. The debate around the future of pension liabilities in East Africa is centered on the need to transition these non-funded schemes into more sustainable, funded models. Privatization has been suggested as a potential solution by some pension funds seeking autonomy, but Nyakieka argues that it may not address the core challenges facing the sector. Instead, regulatory oversight and governance reforms have been crucial in improving the management and sustainability of pension schemes. Regulators such as the Retirement Benefits Authority in Kenya and the Uganda Retirement Benefits Regulatory Authority play a significant role in safeguarding the interests of pension scheme members and ensuring long-term viability. Looking ahead, addressing the future of pension liabilities will require transitioning public sector schemes to funded models to ensure sustainability and prevent strains on government finances. Additionally, enhancing the adequacy of pension benefits is essential to provide retirees with a meaningful replacement income. Governments in the region are exploring strategies to boost retirement savings and connect members to alternative savings arrangements to supplement pension benefits. When it comes to investment opportunities for pension funds, East Africa faces limitations due to legislation that restricts investments outside the region. This has led to a focus on local markets, which are still developing and offer limited opportunities for diversification. Stock exchanges in countries like Kenya, Tanzania, Rwanda, and Uganda are relatively young and lack depth, limiting the range of investment options for pension funds. As a result, fund managers often rely on traditional fixed income investments, such as bonds and shares, with lower returns. In conclusion, the pension sector in East Africa is at a critical juncture, with both challenges and opportunities on the horizon. By addressing issues of funding, sustainability, and investment diversification, stakeholders can work towards ensuring a robust and inclusive pension system that meets the needs of retirees in the region.