A pension is a lump sum or a periodic payment, often made by an employer or government, to a person upon retirement or after reaching a certain age. Pensions are specifically designed to provide an income in retirement in order to minimize poverty in old age.
Pensions fall into two broad categories:
- Pensions paid by the government out of current tax revenues, known as ‘pay-as-you-go’ schemes.
- Pensions that are prefunded from regular contributions made by employers and/or employees during a working career. These funds are invested to provide a regular pension payment during retirement and are known as ‘funded’ schemes.
Within this category, pensions may be offered by employers and linked to a person’s latest earnings prior to retirement, known as “defined benefit” or “final salary” schemes. Employers – both in the public and private sectors – will generally provide such schemes, whereby the employee is exposed to the same risks faced by the employer.
Alternatively, funded pension schemes are offered by employers or specialized providers (such as insurance companies) and paid out of the contributions and investment returns accumulated in a pension fund during a working life, known as “defined contribution” or “money purchase” schemes (including provident funds). In defined contribution schemes, no guarantee is given for the level of pension payable; the employee, therefore, assumes all market risk.
Universal pension coverage is a rare occurrence in Africa, as in most emerging markets, given the high percentage of people in the informal sector. Most pension funds in Africa provide pay-as-you-go schemes for the formal sector, with an emphasis on government employees, the military, and workers in state enterprises; larger private companies also provide pensions for their employees. The informal and self-employed sectors are mostly left out. According to HelpAge International, only five countries in sub-Saharan Africa provide universal non-contributory pensions: Botswana, Lesotho, Mauritius, Namibia and South Africa. South Africa is the only country in the continent to genuinely have a universal pension system, which provides basic-means-tested pension coverage to all men and women over 65 and 60 years of age, respectively. In many countries of francophone West Africa, the pressure on government finances have resulted in cessation of pension payments.
The North African countries of Algeria, Egypt, Libya, Morocco, and Tunisia generally have funded or partially funded schemes covering government employees, the military, and workers in state owned enterprises. Because of the predominance of employment in state sectors, these countries’ populations benefit from wider apparent coverage. Larger private sector employers may offer schemes to their workers, but once again the informal sectors and the self-employed are usually left out.
Many amongst countries' authorities point out that Africa benefits from a window of opportunity to address future pension needs: as birth rates fall, there will be a demographic ‘sweet spot’, as the bulge of present predominantly young population enters the work force and dependency ratios are still relatively low. Some countries have started to take advantage of this demographic phenomenon.