Why African Pension Funds Fail to Deliver High Returns

Pension funds are supposed to help you retire with a good amount of money. But in many African countries, pension funds fail to deliver high returns. Contributors expect their savings to grow, but often see only modest gains. In this article, we explore the reasons behind low performance, use examples from Nigeria, South Africa, Kenya, compare best practices, discuss pros and cons, and propose how to fix the problem.

This is for students, working class citizens, and anyone in Africa who cares about retirement. The language is simple. You will learn:

• What is a pension fund, and what “returns” mean

• Why returns are low in Africa

• Country‑by‑country examples

• How poor governance, regulation, markets, and inflation harm returns

• Strategies and reforms to improve returns

• A summary table

• FAQs

Let’s begin.

What Is a Pension Fund?

A pension fund is a pool of money collected from workers and employers during working life, invested over time, so that when people retire, they can receive regular income or lump sum payments.

In many countries, pension systems are contributory: both employee and employer put in a share of salary every month.

What Does “Return” Mean?

A return is the profit or gain an investment makes over time. If you put ₦100, and after 1 year you get ₦110, your return is 10%.

But for pension funds, returns must be net of fees and costs, and ideally above inflation so your money does not lose value (i.e., “real return”).

Expectations vs Reality

People expect moderate to high returns over decades. But many African pension funds fall short. Why?

Major Factors Why African Pension Funds Fail to Deliver High Returns

Here we list and explain the main causes. Each heading is detailed so you understand clearly.

Weak Investment Diversification and Heavy Reliance on Government Debt

One of the biggest reasons pension funds underperform is that they invest too much in government bonds or treasury bills, which often offer low yields, especially in stressed economies.

Overreliance on Government Securities

In countries like Nigeria, a large portion of pension assets is invested in government debt (T‑bills, bonds).

Why this is a weak strategy:

• Government securities often pay modest interest, especially under tight budgets.

• When governments are under financial stress, yields can be volatile or default risk emerges.

• Because many funds invest similarly, market demand pushes yields down.

Lack of Alternatives: Private Equity, Infrastructure, Real Estate

To get higher returns, funds need exposure to private equity, infrastructure, real estate, venture capital. But these are often small in many African pension portfolios.

Barriers include:

• Regulatory limits that restrict pension funds to safe assets.

• Lack of expertise to manage alternative assets.

• Illiquidity: assets like infrastructure are not easily sold quickly.

• Difficulty in valuing non‑public assets.

Poor Governance, Transparency, and Management Capacity

Even if opportunities exist, weak governance and poor management make it hard to capture them.

Inexperienced or Understaffed Management Teams

Many pension funds lack skilled professionals who can evaluate complex investments.

They may not have deep research teams or networks to find bold, high return deals.

Conflicts of Interest and Political Interference

In some cases, pension funds are pressured to invest in politically connected projects or low‑return state firms. This reduces return potential.

Lack of Accountability and Oversight

When fund managers are not monitored, costs creep up (high administrative fees, hidden expenses), and performance suffers.

Regulatory Constraints and Risk Aversion

Laws, rules, and risk policies often limit the freedom to chase higher returns.

Strict Rules on Asset Allocation

Many regulators enforce that pension funds must keep a large share in “safe” assets, limiting the share in riskier high-yield options.

For instance, in Nigeria, only small percentages may go into private equity with many conditions.

Prudential Rules That Favor Low Risk

Rules might require high liquidity, minimum credit ratings, and so on. This skews the asset mix towards low‑return assets.

Lack of Cross‑Border or Offshore Investment Permissions

Many funds cannot invest abroad freely due to capital controls or foreign exchange restrictions. They are “trapped” in local markets, which may be weak.

Market Constraints and Underdeveloped Capital Markets

Even if a fund has the freedom to invest, the market may not offer good options.

Shallow Equity Markets

Many African stock markets have low numbers of listed companies, low trading volumes, and volatility. This limits good stock investment opportunities.

Illiquidity and High Costs

Trading costs, spreads, and the cost to exit positions can be high relative to returns. Illiquid markets reduce ability to buy/sell when needed.

Currency Risk and Foreign Exchange Volatility

In countries like Nigeria, local currency depreciation erodes returns when measured in hard currency or real terms.

One news article says Nigeria’s pension assets dropped ~55% in dollar terms over two years because of currency devaluation.

Inflation Erosion

High inflation means that even “good” nominal returns may not beat inflation. The real value may stagnate or shrink.

Fragmentation and Small Fund Size

Smaller pension funds have special disadvantages.

Many Small Pension Schemes

In Kenya, there are ~1,300 pension funds—many too small to access big deals.

Small funds lack bargaining power, economies of scale, and access to alternative investments.

High Administrative Overhead Relative to Assets

Smaller funds spend proportionally more on administration, compliance, audits, governance, which cuts returns.

Poor Pooling of Resources

Funds rarely pool or cooperate to invest in larger projects. Some efforts (e.g., Kenya’s KEPFIC) try to pool across funds for infrastructure.

Costs, Fees, and Hidden Charges

Fees, commissions, and costs eat into returns.

High Management and Administrative Fees

Sometimes pension funds charge high fees for managing portfolios, especially in less competitive markets.

Transaction Costs and Taxes

Every trade, custody, brokerage, stamp duty, tax overhead—these all reduce net returns.

Underreporting and Hidden Costs

Lack of transparency may hide costs that beneficiaries don’t see.

Macroeconomic and Systemic Risks

Even well-managed funds struggle when the overall economy is fragile.

Government Default or Fiscal Strain

Governments may delay bond payments, restructure debt, or default partially. Funds holding huge government debt suffer.

Political Instability and Policy Shocks

Unexpected policy changes, currency devaluation, or expropriation fears reduce investor confidence and returns.

External Shocks, Global Crises

Global interest rate hikes, commodity price shocks, pandemics—all can hit returns negatively.

Limited Inclusion and Informal Sector

Many workers are informal and outside pension coverage. This limits the size of collections and growth of assets.

Without broad participation, the funds grow slower and can’t scale.

Examples and Country Cases: Nigeria, South Africa, Kenya

Let’s make these ideas concrete via real country stories.

Nigeria: Pension Returns, Challenges, and Currency Losses

Heavy Government Debt Exposure

In Nigeria, about 60% of pension fund assets are invested in government debt.

This limits the scope for higher-return assets.

Currency Depreciation Eroding Value

Over a two‑year span, pension fund assets in Nigeria lost ~55% of their dollar equivalent value due to Naira depreciation.

Even if returns in local currency looked okay, currency collapse erased gains for those measuring in foreign terms.

Regulatory Constraints on Diversification

The National Pension Commission (PenCom) has strict rules on how much can be in private equity or alternative assets, making it harder for funds to move into higher-yielding areas.

Strategic Shift in 2025

In 2025, PenCom announced plans to push pension funds toward infrastructure and private equity, reducing reliance on government debt.

This is a response to inflation and low real returns.

South Africa: More Mature, But Still Challenges

South Africa has one of the more advanced pension fund sectors in Africa, yet it still faces obstacles.

Better Access to Alternatives

South African funds are allowed to invest in private equity, real estate, infrastructure more freely.

However, returns are still constrained by economic conditions and governance.

Governance Failures and Political Pressure

Some pension investments in state‑owned enterprises have underperformed due to poor business models or political interference. For example, a government‑linked farm investment backed by the pension fund failed due to mismanagement.

Regulatory Reform Ongoing

South Africa passed a Pension Funds Amendment Act 2024 to modernize pension fund rules, improve governance, benefits, and protections.

This may improve accountability and returns over time.

Kenya: Fragmentation, Bond Dependence, and Pooling Efforts

Many Small Funds, Limited Scale

Kenya has ~1,300 pension funds. Most are tiny and invest largely in government bonds.

These small size constraints limit ability to access large investments.

Dependence on Government Bonds

Kenyan pension funds heavily invest in government bonds where yields may be moderate, but risk and inflation reduce net real gains.

Efforts to Pool via KEPFIC

Kenya created KEPFIC (Kenya Pension Funds Investment Consortium) to pool resources and invest in infrastructure or alternative assets.

But this model is still evolving and has challenges (currency risk, legal complexity).

Pros and Cons: Why Funds Still Prefer Conservative Paths

It’s important to see why pension funds often choose low return options. There are trade‑offs.

Pros of Conservative Investment Strategy

• Lower risk / less volatility: Government securities are safer (in theory).

• Liquidity: Bonds are easier to sell compared to illiquid assets.

• Regulatory compliance: Funds satisfy rules.

• Predictability: Easier to project income for pensions.

• Public confidence: Less chance of big losses that alarm contributors.

Cons (Why These Strategies Fail in Long Run)

• Low returns: Especially after fees and inflation, net returns are weak.

• Inflation erosion: Gains get wiped out if inflation is high.

• Opportunity cost: Missed gains from higher-return assets.

• Currency risk: For countries with depreciating currencies, holding local assets is risky.

• Unsustainable in growth economies: As economies grow, funds must capture opportunities or lose ground.

How to Fix and Improve Pension Fund Returns: A Roadmap

Knowing the problems helps. Here are detailed, strategic solutions.

Reform Regulation and Enable Flexibility

Loosen Asset Class Constraints

Regulators should allow pension funds to invest more in alternative assets (private equity, infrastructure, real estate) with proper risk controls.

Example: Nigeria’s PenCom is pushing new rules to allow more infrastructure investments.

Permit Cross‑Border and Offshore Investments

Allowing funds to invest abroad gives access to stronger markets and diversification.

This helps manage currency risk and tap global returns.

Incentivize Long-Term, Illiquid Investments

Provide tax incentives, matching, or favorable capital treatment for pension funds making long-term commitments to infrastructure or development projects.

Encourage Pooling and Scale

Create National or Regional Investment Vehicles

For example, Kenya’s KEPFIC is a consortium that helps small funds access large projects.

Regional pooling (across countries) might also help, though currency risk must be managed.

Merge Small Pension Schemes

Reduce fragmentation by merging smaller funds into larger ones to reduce costs and improve bargaining power.

Strengthen Governance, Transparency, and Capacity

Professionalize Fund Management

Hire, train, and retain professional investment and risk teams. Use global best practices for portfolio management.

Improve Oversight and Accountability

Have independent boards, regular audit, disclosure of performance and costs. Let contributors see how funds perform.

Reduce Fees and Cut Hidden Costs

Benchmark fees, negotiate lower costs, reduce waste, and foster competition among managers.

Develop Capital Markets and Local Investment Opportunities

Deepen Equity and Bond Markets

Governments and regulators should promote issuance of quality corporate bonds, new listings, and mechanisms for private capital flows.

Promote Infrastructure and Project Finance

Develop public-private partnerships, regulated infrastructure projects that pension funds can safely invest in.

Use PPPs (Public-Private Partnerships)

The government can structure PPPs where pension funds are one of the investors, sharing risk and return.

Hedge and Manage Inflation & Currency Risk

Use Hedging Instruments and FX Derivatives

Funds can use hedges to protect against currency risk or inflation, where viable.

Allocate Some Part to Hard Currency Assets

A portion of portfolio in dollars, euros, or global equities can reduce domestic currency risk.

Widen Participation and Increase Asset Base

Include Informal Sector Workers

Design pension products for self-employed, gig economy, informal workers (e.g., micro pension plans).

Nigeria’s micro pension initiative is a good example.

Use Mobile and Digital Platforms for Contributions

Mobile money, USSD, apps, fintech integration can help widen contributor base.

Government Matching or Incentives

Governments can match part of contributions to encourage more saving.

Summary Table Before Conclusion

Frequently Asked Questions

1: Why do pension funds in Africa give low returns compared to other regions?

Because of overdependence on government bonds, weak diversification, regulatory limits, poor governance, currency risk, and underdeveloped markets.

2: Can pension funds invest internationally?

In many African countries, this is restricted or heavily regulated. Permitting certain levels of foreign investment would help diversify and improve returns.

3: What is “real return” and why is it important?

Real return = (nominal return) minus (inflation). If inflation is 10% and returns are 12%, your real return is only ~2%. Many pension funds fail to achieve good real return.

4: How does currency depreciation hurt returns?

If the local currency loses value, gains in local currency may be wiped out when measured in dollars or other hard currencies.

5: Why are small pension funds at a disadvantage?

They pay proportionally more in fees, have little access to large investments, and have limited bargaining power.

6: Is regulation the enemy of returns?

Not always, but overly strict or outdated regulation can prevent funds from reaching higher-return investments.

7: What reforms are most urgent?

• Loosen allocation rules

• Promote pooling and merging

• Expand access to alternatives

• Strengthen governance

• Allow cross-border investment

• Digital inclusion of informal sector

8: Will taking more risk always yield better returns?

No. The goal is optimal risk with reward. Too much risk (especially in speculative or poorly understood areas) can lead to losses.

9: How soon can reforms improve returns?

It depends. Some changes (governance, fee cuts) can yield improvement within a few years. Infrastructure or market development may take longer.

10: What role do pension regulators play?

They set rules, limits, oversight. They must balance protection of contributors with enabling growth. Effective regulators can allow innovation while managing risk.

11: Can pension funds now invest in infrastructure projects?

In some countries yes or increasingly yes. Nigeria is pushing toward more infrastructure investment. Kenya’s regulations allow some allocation to infrastructure.

12: How can ordinary workers influence higher returns?

By demanding transparency, low fees, accountability; choosing good pension administrators; and advocating regulatory reform.

Conclusion

African pension funds have a crucial mission: provide sufficient income to retirees who counted on steady growth. But in reality, many fail to deliver high returns, largely because of a mix of structural, regulatory, governance, market, and macroeconomic constraints.

Some key takeaways:

1. Overreliance on government debt and weak diversification is common.

2. Currency depreciation and inflation erode gains.

3. Small fund size, fragmentation, and high costs drag performance.

4. Poor governance, lack of professional capacity, and limited accountability make matters worse.

5. Regulatory constraints often prevent funds from accessing better returns.

6. Market underdevelopment limits investment options.

7. Reforms—such as more flexibility, pooling, governance strengthening, infrastructure investment, and inclusion of informal sector—are critical.

If reforms succeed, pension funds can become engines of long-term growth, making better returns for retirees and channeling capital into infrastructure and development.